April 18 (Bloomberg) -- A renewed escalation of the European debt crisis remains a threat to financial stability in the Netherlands, the Dutch central bank said.
“A downward adjustment of European growth perspectives, postponement of structural reforms or unexpected losses in the banking sector could quickly lead to a change in market sentiment,” the Amsterdam-based central bank, led by Klaas Knot, said in its semi-annual financial stability report published today.
While financial markets calmed after European Central Bank President Mario Draghi pledged in July to do whatever it takes to safeguard the euro, the region’s economy has contracted for five quarters, battered by a fiscal crisis that’s forced five of its 17 members to seek bailouts. The Dutch economy will probably contract 0.5 percent this year, the International Monetary Fund said on April 16.
“When market stress is increasing strongly the stability of the Dutch financial sector can be pressured because of its dependence on market funding,” Knot said in the report, adding that the low market value of bank shares shows the lack of trust in European banks.
Investors may “still think banks have hidden losses,” the central bank said. An effective European banking union can increase market confidence in the region’s lenders, it said.
Dutch banks are on track to fulfill their Basel III capital requirements by 2019, mainly by retaining profits, the central bank said. Still, increased credit risk and investments in real estate pose a threat, it said.
“Financing of commercial real estate is in general a risky activity,” according to the central bank.
The Dutch government took control of SNS Reaal NV on Feb. 1 after losses on real estate loans brought the lender to the brink of collapse. Still, the problems at the country’s fourth-largest bank are not representative for the situation at other lenders, the central bank said.
“This institution invested a considerably larger part of its means in commercial real estate than banks did on average,” it said in the report. “There is no other bank where the quality as well as the structure of the commercial real-estate portfolio is as problematic.”
To contact the reporter on this story: Corina Ruhe in Amsterdam at email@example.com
To contact the editor responsible for this story: Craig Stirling at firstname.lastname@example.org