Financial Stability Committee examines financial sector's resilience to cyberattacks

On a global scale, we have seen seen targeted cyberattacks on financial institutions increase in number. There is a risk that attackers may disrupt vital systems, with far-reaching consequences for the institutions themselves and, in a worst-case scenario, for the financial system as a whole. Prevention alone is not enough. It is increasingly important for financial institutions to be able to recover quickly after a successful attack, for example by using fall-back systems, ensuring that vital processes – such as payments – can continue. Given the possible impact of cyberthreats, they must be discussed and managed at board level. 

While the primary responsibility for introducing risk-mitigating measures rests with the financial sector, public authorities play a role in removing any legal or institutional obstacles, and organising collaboration. In this light, the committee's members welcome the private sector's plan to set up a trusted internet system that would become available if the regular system is infected. In 2015, the tripartite crisis management body  – comprising DNB, the Netherlands Authority for the Financial Markets and the Dutch Ministry of Finance – will coordinate the organisation of a comprehensive exercise to test the resilience of systems and the coordination among parties. In addition, the committee will have a proposal drafted to further test the resilience of financial institutions in practice. 

Derivatives market reforms
The derivatives market played an important role in spreading and amplifying the financial crisis. The derivatives market reforms initiated in Europe aim to make the system more resilient by requiring settlement of standard contracts through central counterparties, and imposing stricter collateral and capital requirements for bilateral transactions. The committee observes that new legislation and regulations may have side effects that could spark disruption in the future. The growing use of collateral results in new liquidity risks as the volatility in collateral needs increases, which in adverse scenarios may result in a lack of high-quality collateral instruments. Beyond that, a market infrastructure with compulsory central clearing poses a concentration risk. Because of economies of scale, market parties have to resort to a limited number of central counterparties and clearing members. 

The committee endorses the upcoming European proposal to draft resolution plans for central counterparties. The committee emphasises the importance of non-procyclical prudential margin requirements. The committee members agreed on strengthening their dialogue in this area in order to better reflect on the risk and arrive at a clearer joint position for discussion at the European level. The strengthened collaboration can also be used to develop stress scenarios for a concrete assessment of the nature and size of the risks to the system. This would supplement market parties' internal stress tests. 

Tax rules
The committee also brainstormed about the question to what extent taxation rules and regulations create perverse incentives to financial stability, particularly where they encourage debt financing. Tax incentives have an impact on the debt-equity ratio, and while they do not result in acute risks to financial stability, they do raise pressure on prudential policy. That is why the committee finds that tax incentives which raise leverage are not without risk. The committee discussed that various countries have taken measures to reduce the tax treatment difference between debt and equity, for instance by introducing a standard relief for equity or by limiting the interest tax relief for debt. Furthermore, the committee discussed the risks of private equity investors financing takeovers with large sums of borrowed money. The tax rules topic will continue to be a point for attention for the longer term. 

The committee briefly discussed the current risks, such as those resulting from the ECB's recently announced quantitative easing policy and the developments in Greece.

The committee will discuss the LTV limit for mortgage loans in May, and the non-regulated financial sector and the impact of the low interest rates in November. 

The Financial Stability Committee
The meeting of the Financial Stability Committee was held on Tuesday 3 February 2015. On this committee, representatives of De Nederlandsche Bank (DNB), the Netherlands Authority for the Financial Markets (AFM) and the Dutch Ministry of Finance meet at least twice a year to discuss developments relating to the stability of the Dutch financial system, under the chairmanship of the President of DNB. The Netherlands Bureau for Economic Policy Analysis (CPB) takes part in the meetings as an external expert.