Dutch financial institutions must “look beyond” the countries in which they are invested as they are “vulnerable” to geo-economic fragmentation through the value chains of the firms in which they invest, according to De Nederlandsche Bank (DNB) director of monetary affairs and financial stability, Olaf Sleijpen.

Speaking at the Institute of International Finance (IIF) International Accounting and Reporting Forum today, 12 November, Sleijpen talked about the risks to financial stability caused by the rise in geopolitical tensions and geoeconomic fragmentation.

He began by mentioning the outcome of last week’s US presidential election, in which Republican candidate Donald Trump secured a second term in the White House, albeit with a four-year break.

Sleijpen commented on current geopolitical tensions and that eyes would be on the President-elect’s foreign policy in a “world where geopolitical tensions have risen sharply” and have “fuelled geo-economic fragmentation”.

Moving on, he said deglobalisation has been an ongoing trend ever since the global financial crisis. As an open economy with a large financial sector, the Netherlands is particularly sensitive to geo-economic fragmentation, he said, adding that it also holds true for the rest of the EU.

“Both geopolitical tensions and geo-economic fragmentation can affect financial stability, and those effects can follow different channels. For instance, geopolitical tensions are associated with a higher number of cyberattacks worldwide. Also, financial institutions are affected by geo-economic fragmentation through their lending and investment portfolio, the so-called real economy channel,” he said.

For financial institutions the effect of fragmentation and tensions depends on their portfolio composition, he explained.

“Overall Dutch financial institutions have relatively few corporate loans and investments in countries that are geopolitically remote from the Netherlands. But they are more vulnerable to fragmentation through the value chains of the firms they lend to or invest in.

“Financial institutions may also be indirectly affected by trade disruptions via corporates whose production depends on so-called opposing countries. Since 1995 imports such as commodities, services or components from these countries have increased fourfold to 12 per cent in 2020.”

Therefore, it is important that financial institutions “look beyond” the country in which they invest when monitoring their investment portfolios, he said.

“They should also consider how vulnerable it may be through its value chains. This is because dependence on foreign imports may differ significantly between firms,” Sleijpen said.

In addition, he noted that increased geopolitical tensions have led to a growing cyber risk.

“Growing geopolitical tensions are accompanied by higher cyber risks. This was underscored in the recent warning issued by the National Cyber Security Centre (NCSC) in the Netherlands. The NCSC warns against the significant risk of cyber threats, including the growing presence of nation-state actors,” Sleijpen said.

He listed three vulnerabilities that increase the risk of disruption to the financial system from a cyberattack: artificial intelligence (AI), outsourcing and telecommunications and energy supply.

On the topic of AI, Sleijpen said the technology “enables more frequent and more sophisticated cyberattacks”. In terms of outsourcing, he noted that financial institutions outsource certain tasks or rely on the structure of third parties, such as cloud storage services or cybersecurity.

“As only a small group of parties provide these digital services, concentration risk arises. Given that the financial sector is traditionally highly concentrated in the Netherlands, this concentration risk from outsourcing is amplified here. Issues affecting a single service provider can thus hit multiple financial institutions, creating ripple effects throughout the system and society,” he warned.

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