Today the Dutch central bank Executive Board Member Steven Maijoor asked ‘financial institutions such as banks, insurers and pension funds to proactively identify geopolitical risks and strengthen their operational resilience. In addition, it is important for financial institutions to maintain adequate buffers and be prepared should geopolitical developments cause financial risks to materialise.’ Press reports expanded the official release, including the quote: “Such stress tests should be based on extreme but plausible scenarios, such as a further escalation of tensions between China and Taiwan”, – an explicit reference not included in the central bank’s release.
Three points:
How does the Dutch financial industry prepare for such a calamitous conflict? Home bias in Dutch institutions is necessarily low, and huge savings are necessarily held in international investments by the large Dutch pension funds. The kind of risks highlighted would be very difficult to include without exposing serious capital and/or liquidity risks. This looks like a rehearsal for central bank intervention. It is not hard for the central bank itself to realise that what will be needed is instant central bank liquidity.
The timing reflects major concern about the direction of travel under the new US administration. President Trump may be about to reduce or remove defence support for Ukraine. And that may be followed by the disassembly of the post-war defence umbrella provided to Europe by the United States. There is also an implicit fragmentation to global financial system attached.
The explicit reference to a clear geopolitical flashpoint of enormous consequence implies a logic within the central bank about the direction of travel. As above, such a shock would almost certainly require central bank interventions.
The Dutch macro-economic settings for that country are generally outstanding, including low government debt, comfortable coverage metrics for banks and pension funds. The regulator does not need to be subtle.
But it is difficult not to regard this announcement as preparation for the next round of central bank interventions. The Dutch financial sector has huge exposure to other countries, via investments and lending. The banks and pension funds are big holders of non-Dutch government bonds. Trade finance is important for the highly open Dutch economy, which acts as a major entrepôt for the European continent. What is absolutely clear is if such a cataclysm were to arrive, intervention by central banks is all but guaranteed and it would not be from the DNB alone.