## cr1790 ## Source details **Canonical URL:** [cr1790](https://www.imf.org/-/media/files/publications/cr/2017/cr1790.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr1790.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr1790.pdf.json) --- ### Introduction and Dutch financial system structure - Financial system assets: over 7.7 times GDP. - Banking sector: about half of system assets. - Major banks: - One G-SIB: ING Bank. - Three D-SIBs: ABN AMRO Bank, Rabobank, SNS Bank. - These four hold about 72 percent of banking system assets. - Government ownership following crisis interventions: - 70 percent of ABN AMRO. - 100 percent of SNS. - Institutional framework: - Twin Peaks model: De Nederlandsche Bank N.V. (DNB) for prudential supervision and Autoriteit Financiële Markten (AFM) for conduct supervision. - DNB functions: national resolution authority (NRA); may commence special emergency or insolvency proceedings; administers the DGS; provides emergency liquidity assistance (subject to ECB rules). - Banking Union (BU) allocation: - Four largest Dutch banks and three other banks (RBS Dutch subsidiary, BNG, NWB) designated “significant institutions” (SIs) and directly supervised by the ECB under the SSM; within SRB jurisdiction for resolution. - Remaining 29 banks designated “less significant institutions” (LSIs) and directly supervised by DNB; DNB serves as resolution authority for LSIs except NIBC Bank N.V., which is under SRB for resolution activities. - Four LSIs are ranked “high-priority” by the ECB, requiring full scope recovery and resolution plan requirements. - Mission dates: findings from mission during September 20–October 4, 2016. ### Recovery planning and early intervention under the SSM - Regulatory scope: - All banks in the EU, no matter their size, are subject to recovery planning requirements; most LSIs may do so under simplified obligations. - Recovery plans prepared by banks and assessed by the ECB or the NCA, and shared with the relevant resolution authority. - DNB actions and timeline: - Systemically important banks: first recovery plans submitted in 2011 (ING, ABN AMRO, Rabobank); SNS submitted a plan in 2013; plans iterated annually thereafter. - Plans for BNG and NWB first submitted in 2015. - DNB typically made two onsite visits per bank to assess plans; formal comments on first drafts; second drafts usually deemed sufficient. - 2015 recovery plans were first reviewed by the ECB as part of SSM transition; ECB sent feedback letters for 2016 updates. - Since 2011 there is steady improvement in plan quality and embedding recovery planning into day-to-day risk management. - LSI phasing: - By year-end 2016, all LSIs will have prepared recovery plans. - DNB adopted a risk-based approach to phasing in LSI requirements; the two smallest LSIs were last to submit plans by year-end 2016. - By end-2016, roughly one-half the recovery plans submitted by LSIs will have been assessed using ECB standards; remaining institutions’ plans assessed in 2017. - Main weaknesses identified: - Activation triggers set at too low a level. - Insufficiently severe stress scenarios. - Recovery options not realistic on impact or executability. - Additional improvements needed in: identification of core businesses and critical economic functions; internal and external interconnectedness data; documentation of preparatory measures; broader range of indicators; clarity on escalation procedures; external and internal communication plans. - Early intervention powers and institutions: - DNB created an Enforcement and Intervention Department in 2011. - Examples of DNB powers: - Direct an LSI to change business strategy or implement recovery plan elements where prudential requirements are or likely to be breached. - Remove or replace senior management or management body members. - Appoint a ‘temporary administrator’ to carry out management functions. - ECB intervention powers: - ECB can exercise powers deriving from SSM Regulation and powers available to the DNB under Dutch law. - Any exercise of power by the ECB against a private party requires approval of the ECB’s Governing Council following approval of the ECB’s Supervisory Board. - Key test: ECB’s ability and willingness to exercise such powers in a timely fashion. - Write-down/conversion powers: - Resolution authority may write down or convert capital instruments (CET1, AT1, or T2) to prevent bank failure. - Write-down/conversion may be required independently of resolution when: - (i) Competent authority has determined that, unless exercised, the bank/group will no longer be viable. - (ii) Extraordinary public financial support (other than support to mitigate a systemic crisis) is required by the bank/group. ### Orderly and effective resolution under the SRM and SRB interaction - SRM/SRB role and operational progress: - SRB assumed resolution responsibilities in January 2016; start-up mode with substantial DNB support for Dutch banks. - SRB hiring: approximately 110 staff during 2016, nearly doubling staff from January 2016; further increases envisioned in 2017. - SRB concluded MoU with the ECB and cooperation agreement with the European Commission; developed cooperation framework with NRAs and established IRTs led by SRB staff. - SRB rehearsed decision procedures but has not carried out a full simulation exercise with NRAs. - Entry into resolution under SRM—procedural steps and timings: - Condition 1: ECB, after consultation with SRB, determines whether entity is failing or likely to fail. SRB may act if ECB fails to act within three days’ notice. - Condition 2: SRB and ECB determine no reasonable prospect that private sector or supervisory actions would prevent failure. - Condition 3: SRB determines resolution action is necessary and in the public interest. - Discretionary aspects (e.g., adoption of a resolution scheme) subject to validation by the European Commission (EC). - Once SRB determines conditions met, it prepares a resolution scheme; EC must validate within 24 hours; Commission may involve European Council in first 12 hours on exceptional basis. - Resolution scheme enters into force 24 hours from SRB transmission to EC if no objection; cannot be implemented by NRAs until Commission adopts a positive or conditional decision on internal market compatibility and state aid. - SRB and NRA implementation roles: - SRB centralizes resolution decision-making and relies on joint SRB/NRA IRTs for planning. - Resolution implementation primarily responsibility of the NRA; SRB retains back-up authority to intervene and directly implement resolution if necessary. - Identified SRM challenges: - Complex SRB decision-making structure may impede timely resolution decisions; avenues for accelerated decision-making should be explored. - SRB independence limited by EC validation and potential EC/European Council involvement. ### Resolution planning, strategies, and restraints - Scope and responsibilities: - SRB responsible for resolution planning for seven Dutch SIs (ING, ABN AMRO, Rabobank, SNS, RBS, BNG, NWB) and the one LSI with cross-border operations (NIBC); much work jointly undertaken by DNB and SRB. - DNB submitted transitional resolution plans in December 2015 for ING, ABN AMRO and Rabobank; subsequent phase two plan submissions: ING July 2016; ABN AMRO, Rabobank and SNS September 2016. - Transitional plan submissions for BNG and NIBC expected December 2016; NWB in 2017. - DNB expects to finalize resolution plans for two high-priority LSIs (including NIBC) in 2016 and other high-priority LSIs and three additional LSIs in 2017. - Three primary resolution strategies (Preferred Resolution Strategies, PRS) and fallback approaches: - Insolvency procedures for most banks: - Prompt payout or transfer of insured deposits essential. - Dutch DGS aims for seven-day payouts by 2019 (sooner than DGSD 2024 deadline). - Authorities exploring legislative changes permitting the DGS to finance deposit transfers in insolvency. - Given limited ex ante funding, timely access to back-up funding is essential. - Whole bank bail-in for largest and most complex banks as PRS: - Key impediment: lack of debt that can be feasibly and credibly bailed-in to absorb losses and recapitalize a bank. - Meeting MREL may take years, creating transition risk for executing bail-in as a PRS. - Dutch authorities and SRB prefer a uniform, European-wide solution for remedies. - Transfer of critical functions to a private purchaser or a bridge bank where neither insolvency nor bail-in appropriate: - Constraints from BRRD (strict interpretation limiting DGS use in resolution; uncertainty about departing from pari passu treatment of creditors) need addressing. - DNB taking steps to operationalize a bridge bank on short notice. - Resolvability impediments and mitigation: - Ensuring adequate liquidity funding following resolution action is a significant challenge, particularly for whole bank bail-in and transfers of critical functions. - Fallback resolution strategies should be envisioned during transitional periods where adequate MREL may not be in place. - MREL: - Set by SRB or DNB on a case-by-case basis; components: loss absorption, recapitalization, market confidence. - Dutch SIs anticipated to receive “indicative” MREL targets by year-end 2016; more granular guidance expected from SRB in 2017. - For banks where insolvency would apply, recapitalization and market confidence components of MREL might be set to zero. - DNB collecting data and assessing options for mid-sized LSIs; MREL determinations may need to reflect bridge bank fallback. ### Resolution tools, bail-in constraints, and sale/bridge issues - BRRD resolution tools: - Sale of business tool. - Bridge institution tool. - Asset separation tool. - Bail-in tool (write down/convert liabilities, including before entry into resolution under certain conditions). - Bail-in constraints in the Netherlands: - Dutch creditor hierarchy: senior unsecured bonds sit on par with other senior claims (e.g., uncovered corporate deposits, unsecured derivative claims) that may need exclusion from bail-in. - BRRD allows limited exclusions and limited departures from strict pari passu treatment for operational reasons or to prevent contagion. - “No Creditor Worse Off” (NCWO) principle applies; successful NCWO claims from bail-in may be satisfied by SRF subject to conditions. - SRF conditions for covering costs from departures from pari passu: - (i) Shareholders and creditors must have collectively contributed at least 8 percent of total liabilities and own funds. - (ii) Amount provided by SRF limited to the lesser of 5 percent of the bank’s total liabilities and own funds or the means available to the SRF plus any amounts raised through ex post contributions in the following three years. - EC approval under state aid rules required. - Sale of business impediments: - Heterogeneous, difficult-to-value assets impede transfers to private acquirers. - Increasing transferred assets to induce acquirers could risk breaching NCWO. - “Topping up” transfers using deposit insurance fund may not be possible; target balance of DGS is 0.8 percent of covered deposits. - SRF might be available but access is conditional and subject to state aid rules. - Bridge bank as fallback: - Existing law provides basis to establish a bridge institution (Royal Decree amending Decree on Prudential Regulations (2015 433) details framework). - DNB should prepare constituent documents, operating policies, and staffing plan to enable rapid operationalization. - Flexibility on limiting transferred liabilities: - Neither EU nor Dutch legislation explicitly allow departures from pari passu other than in bail-in resolutions; lack of express authority may give rise to legal challenges and require European-level action. ### Financial safety nets: SRF, DGS/DGF, and ELA - Single Resolution Fund (SRF): - Target: initially estimated €55 billion over eight years (1 percent of covered deposits of all banks in SRM member states). - Structure: national compartments progressively mutualized over eight years. - Permitted uses include guaranteeing assets/liabilities, purchasing assets, capital contributions to bridge institutions or asset management vehicles, loans, paying NCWO compensation, and subject to conditions, contributions in lieu of write-down/conversion. - As of second half of 2016, potential funding for Dutch bank resolution included: - Dutch funded SRF compartment: €956 million. - €3.9 billion from mutualized compartments. - €4.2 billion Loan Facility Agreement (LFA) from the Dutch state for the unfunded portion of the Dutch compartment. - If insufficient: SRB can seek ex post contributions from Dutch banks (up to annual limit of about €1.5 billion), borrow from market, and if necessary access Dutch LFA. - Waterfall sequencing examples (2016/2017 percentages noted in text): national compartment resources, mutualized resources, remaining national compartment means, ex-post contributions, external borrowings/temporary transfers, drawing on jurisdiction’s LFA. - Dutch bridge financing arrangement: LFA loan duration 24 months, extendable additional 12 months on SRB request; further extensions possible but can be blocked by MoF. - Recommendation: permanent, common public back-stop funding arrangements for the SRF should be agreed; candidate backstop: ESM credit line or member states collectively, fully operational by the end of transitional period when SRF fully mutualized at end of 2023/beginning 2024. - Deposit Guarantee Scheme / Deposit Guarantee Fund (DGS / DGF): - DGSD harmonized coverage and introduced faster payouts and ex ante funding; maintained protection at €100,000; target: by July 3, 2024 each DGS must reach 0.8 percent of covered deposits. - Dutch DGF: - Established late 2015; pay box operated by DNB; legal entity under public law. - Three-person board appointed by DNB board: two DNB staff, one MoF staff (personal capacities). - DGF board determines investment policy, can levy extraordinary premiums, arrange for/backstop funding. - AFS requires DNB support for DGF execution; DNB staff execute DGF functions; DNB empowered to determine when DGS triggered. - Current limitation: DGS may only make payouts for covered deposits and may contribute to financing of resolution subject to limitations; cannot finance a covered deposit transfer. - Funding and targets: - Risk-based premiums determined quarterly by DNB; risk-based component approximates 50 percent of total. - First contributions Q1 2016. - Balance as of September 30, 2016: €217 million. - Annual premiums about €450 million. - Covered deposits on June 30, 2016: €460 billion. - Per DGSD, target level 0.8 percent of covered deposits to be reached in 2024; at present that target would be €3.4 billion. - DGF board can require extraordinary contributions up to 0.5 percent of covered deposits each year if resources insufficient. - DGF may enter agreements with third parties for financing; pursuing lines of credit with largest Dutch banks; last resort: line of credit with MoF with adaptable amount. - Payout process and timing: - DNB working to pay covered depositors within seven working days by 2019; banks must be able by January 1, 2019 to generate their own single customer view and deliver it to DNB within 24 hours. - DNB anticipates being able to achieve seven-day payout target in 2019. - Legal constraints: - Article 109 of the BRRD: “in all cases the liability of the deposit guarantee shall not be greater than the amount of losses that it would have had to bear had the institution been wound up under normal insolvency proceedings.” - Strict interpretation could constrain DGS’s ability to provide gross, upfront support for a resolution greater than estimated liquidation cost. - Recommendation: reconsider strict interpretation to allow DGS to disburse greater funds upfront in a resolution if estimated final net cost to DGS would be lower than estimated net liquidation costs (example illustrating net outcome provided in text). - European Deposit Insurance Scheme (EDIS): - EC proposed EDIS for Banking Union members by 2024 with three stages: reinsurance, co-insurance after three years, and full mutualization by 2024. - DNB has recommendations to enhance proposed EDIS design; recommendation: prompt implementation of EDIS should be pursued. - Emergency Liquidity Assistance (ELA): - ELA responsibility of national central banks, subject to potential ECB objection. - Dutch banks have access to Eurosystem single monetary policy credit operations; collateral requirements under Eurosystem framework. - Provision of ELA is discretionary for DNB, which bears risk of loss. - In practice, DNB ELA would involve lending to a solvent bank whose eligibility for monetary policy credit suspended or lending against collateral outside Eurosystem framework. - Eligibility: bank must be “solvent” (not defined by law); DNB judges solvency with ECB input where relevant. - ELA should be sufficiently collateralized; provided at penalty rate set by formal policy. - ECB’s Governing Council can object to DNB-provided ELA; procedures for ex ante and ex post notification exist. - Resolution planning cannot assume ELA availability; DNB emphasizes ensuring largest banks can meet operational requirements for pledging collateral. - If ELA and SRF funding insufficient, Dutch state can lend subject to state aid rules (example: lending in 2013 in SNS Reaal resolution). ### Transparency, legal transposition issues, and domestic legacy frameworks - BRRD transposition: - BRRD is a Directive and must be transposed into national legislation; SRM Regulation became part of national law automatically. - Dutch transposition approach: - Transposed only BRRD provisions not covered by SRM; many transposed provisions are mere cross-references to BRRD. - Result: patchwork of legislation difficult to follow; lack of transparency may hamper practitioners’ ability to implement or challenge resolution. - Judicial review: - SRB decisions are subject to review by the European Court of Justice (ECJ) (Article 86 SRM Regulation). - ECJ reviews legality (not substance) but may declare SRB decisions void, order suspension, or reverse resolution action. - Practical implication: if ECJ declares SRB decision void, DNB may lack legal authority to act unless ECJ decision provides otherwise. - Coexistence of national legacy options creating legal uncertainty: - Multiple national options remain alongside BRRD/SRM (Intervention Act, Emergency Rule, Bankruptcy Code), producing overlapping triggers, tools, and responsibilities and legal uncertainty about applicable rules and timing. - Recommendation: clarify legal framework; update and enhance transparency of transposition. - Overview of legacy frameworks: - Intervention Act: - MoF powers to assume control and expropriate assets/shares if grave and immediate threat to financial stability. - Used in SNS Reaal resolution. - BRRD provides narrowly defined “precautionary recapitalization” conditions and stabilization tools in resolution subject to state aid and mandatory 8 percent loss absorption contribution. - Emergency Rule (AFS): - DNB may petition court for Emergency Rule where “dangerous development” in capital, solvency or liquidity is foreseeable and irreversible. - Court appoints administrators; administrators can transfer assets/liabilities, wind up or both; application entails moratorium on payment of liabilities and activation of DGS. - Practice: application often leads to bankruptcy proceedings within weeks. - Authorities should continue plans to repeal Emergency Rule due to interaction complexity with SRM. - Bankruptcy Code: - Recent amendments align insolvency law with SRM; DNB can request court commence bankruptcy where bank is failing or likely to fail and alternative measures unlikely to prevent failure. - Amendments align triggers with first two resolution triggers (absence of public interest trigger). - Preferential treatment provided to insured and uninsured depositors; Section 11AA includes DNB opinion requirement and implementation of Winding-up Directive. ### Systemic crisis management and coordination - Gaps and recommendations: - Gaps at European-level and in the Netherlands could undermine coping with a systemic crisis; Banking Union architecture designed for individual banks, not multiple small- to medium-sized bank failures. - Roles and responsibilities of ECB and SRB in planning for/managing systemic crisis relative to national authorities should be better defined. - Recommendation: develop a formal coordination arrangement between SRB, ECB, and Dutch authorities and periodically test it. - Domestic preparedness recommendations: - Ensure crisis management arrangements are up-to-date and appropriate to new institutional environment. - Ensure arrangements are known within relevant authorities. - Test arrangements periodically and at some stage with SRB and ECB involvement. - Historical context: 2007 MoF/DNB MoU not updated; tri-partite crisis management protocol exists but not well known among working-level authorities. - AFM role: emerged without criticism in 2012 inquiry due to limited role; role likely to become more prominent in future crises because of bail-in responsibilities; coordination aided by bail-in manual prepared jointly. ### Key numeric and timing facts (selected) - Financial system assets: over 7.7 times GDP. - Banking system concentration: about 72 percent of assets in four major banks. - Mission dates: September 20–October 4, 2016. - DNB staff for Resolution Division at time of mission: 18 filled out of 32 positions; remaining 14 expected to be filled by summer 2017, including 7 staff added for DGS responsibilities. - SRF target: initially estimated €55 billion over eight years (1 percent of covered deposits). - Dutch funded SRF compartment as of second half 2016: €956 million. - Mutualized compartments available: €3.9 billion. - Dutch LFA: €4.2 billion. - DGF balance as of September 30, 2016: €217 million. - Annual premiums: about €450 million. - Covered deposits on June 30, 2016: €460 billion. - DGSD target level: 0.8 percent of covered deposits to be reached by July 3, 2024 (presently €3.4 billion). - DGF extraordinary contribution authority: up to 0.5 percent of covered deposits each year. - DGF payout target: seven working days by 2019; banks must be able by January 1, 2019 to generate single customer view and deliver within 24 hours. - SRB decision timing: EC validation required within 24 hours; Commission may involve European Council within first 12 hours in exceptional cases. - State aid / bail-in minimum: as of January 1, 2016, state aid that triggers resolution under BRRD can be approved subject to bail-in of at least 8 percent of total liabilities. - SRF NCWO exceptional limit: SRF amount limited to lesser of 5 percent of bank’s total liabilities and own funds or means available plus potential ex post contributions over next three years. - SNS Reaal facts (2012): - SNS Bank total assets: €83 billion. - Reaal total assets: €55 billion (6 million policyholders). - Bank deposits: roughly €36 billion from nearly 1 million clients (almost all insured). - Prior support 2008: €750 million capital injection; €5.7 billion in credit guarantees. - Nationalization date: February 1, 2013. - Recapitalization: €1.2 billion equity injection; earlier capital injection repayment waived. - Government imposed €1 billion tax on banking industry to partially recoup outlays. ### Key recommendations (selected and verbatim where provided) - Streamline SRB decision-making to ensure timely resolution action. Timeframe: MT. Authorities: BU. - Implement an SRM-wide deposit insurance scheme. Timeframe: MT. Authorities: BU. - Establish a permanent standing and joint public back-stop for the SRF. Timeframe: MT. Authorities: BU. - Increase transparency and legal certainty under the resolution framework. Timeframe: NT. Authorities: NLD. - Ensure domestic crisis management arrangements are known, up-to-date, appropriate, and periodically tested. Timeframe: I. Authorities: NLD. - Define the role of the SRB and the ECB in planning for and managing a systemic crisis relative to national authorities; establish—and periodically test—a formal coordination arrangement between SRB, ECB and Dutch authorities. Timeframe: NT. Authorities: NLD/BU. - Commit publicly to seven-day DGS payout by 2019. Timeframe: NT. Authorities: NLD. - Allow the DGS to finance deposit transfers both in resolution and in insolvency. Timeframe: NT. Authorities: NLD. - Ensure the DGS has timely access to back-up funding. Timeframe: NT. Authorities: NLD. - Continue to pursue remedies to identified impediments to resolution, including by providing guidance to banks on amount and structure of MREL requirements. Timeframe: I. Authorities: NLD/BU. - Consider fallback resolution strategies if the PRS cannot be implemented, such as during the transitional period where adequate MREL may not be in place. Timeframe: NT. Authorities: NLD/BU. - Continue efforts to operationalize a bridge bank on short notice. Timeframe: NT. Authorities: NLD. - Clarify that the BRRD allows for departure from pari passu treatment of creditors with respect to all resolution tools. Timeframe: I. Authorities: NLD/BU. - Take steps to ensure access to adequate liquidity funding in resolution. Timeframe: NT. Authorities: NLD/BU. *Italic: IMF staff report excerpt (cr1790 - 47).* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 8 ### EXECUTIVE SUMMARY ### INTRODUCTION - The Dutch financial system comprises assets of over 7.7 times GDP, half of which are in the banking sector. - The banking sector includes one G-SIB (ING Bank) and three D-SIBs (ABN AMRO Bank, Rabobank, SNS Bank), which together hold about 72 percent of banking system assets. - The government owns 70 percent of ABN AMRO and 100 percent of SNS following crisis interventions. - Core financial stability tasks are concentrated within De Nederlandsche Bank N.V. (DNB) under the Twin Peaks model: DNB for prudential supervision and Autoriteit Financiële Markten (AFM) for conduct supervision. - DNB is the national resolution authority (NRA), may commence special emergency or insolvency proceedings, administers the DGS, and provides emergency liquidity assistance (subject to ECB rules). - As part of the Banking Union (BU), the Netherlands shares prudential supervision and resolution competence with the ECB and the Single Resolution Board (SRB): - Four largest Dutch banks and three other banks (RBS Dutch subsidiary, BNG, NWB) designated as “significant institutions” (SIs) and directly supervised by the ECB under the SSM; within SRB jurisdiction for resolution. - The remaining 29 banks designated as “less significant institutions” (LSIs) and directly supervised by DNB; DNB serves as resolution authority for LSIs except NIBC Bank N.V., which is under SRB for resolution activities. - Four LSIs are ranked “high-priority” by the ECB, requiring full scope recovery and resolution plan requirements. - This note summarizes findings from the mission during September 20–October 4, 2016, focusing on early intervention, recovery and resolution planning, bank resolution, financial safety nets, and systemic crisis management. ### RECOVERY PLANNING AND EARLY INTERVENTION UNDER THE SSM - The Single Supervisory Mechanism (SSM) placed prudential supervision, early intervention, and recovery planning for euro area banks under ECB oversight as of end-2014. - Supervision of LSIs is primarily the responsibility of the national competent authority (NCA), but the ECB may decide to directly supervise an LSI where necessary. - Joint Supervisory Teams (JSTs) are led by ECB coordinators with NCA staff; SIs and LSIs are supervised under a common legal framework (CRD IV, CRR, BRRD, and EBA guidelines/binding technical standards). - Recovery planning progress: - DNB required systemically important banks to prepare recovery plans early; three largest banks submitted initial plans in 2011 and have iterated them annually. - For the largest banks, recovery planning is now primarily the responsibility of the ECB. - DNB maintains primary responsibility for smaller banks; the last few submitted initial plans in 2016. ### ORDERLY AND EFFECTIVE RESOLUTION UNDER THE SRM - The Single Resolution Mechanism (SRM) and the Single Resolution Board (SRB) assumed resolution responsibilities; SRB assumed responsibilities in January 2016 but remains in start-up mode with substantial DNB support for Dutch banks. - Challenges identified: - Complex decision-making structure of the SRB may impede timely resolution decision-making. - Adequacy of financial safety nets remains a concern; lack of agreement on a euro area deposit guarantee scheme (DGS/EDIS). - The Single Resolution Fund (SRF) is in progress: national compartments will be progressively mutualized into a single fund. A common fiscal backstop is needed despite national fiscal backstops. - Legal and institutional underpinnings in the Netherlands need further attention: EU legislation has been incorporated into Dutch law in a manner that impedes transparency and creates coexistence with pre-existing legislation, generating legal uncertainty about applicable rules and timing. - Domestic crisis management arrangements are not widely known and have not been updated to reflect the new environment. - Roles of SRB and ECB in planning for and managing a systemic banking crisis relative to domestic authorities are yet to be defined; a formal coordination framework should be developed and periodically tested with Dutch authorities, SRB, and ECB. - Resolution planning progress: - DNB submitted initial resolution plans to the SRB for the largest four banks at the end of 2015 and a second annual iteration in 2016. - Initial resolution planning for the fifth and sixth largest banks is underway. - Three primary envisioned resolution strategies: - Insolvency procedures for most banks: - Prompt payout or transfer of insured deposits to another bank is essential to viability. - Dutch DGS aims for seven-day payouts by 2019, sooner than the 2024 deadline in the DGSD. - Authorities exploring legislative changes permitting the DGS to finance deposit transfers in insolvency. - Given limited ex ante funding, ensuring timely access to back-up funding is essential. - Whole bank bail-in for largest and most complex banks as the preferred resolution strategy (PRS): - Key impediment: lack of debt that can be feasibly and credibly bailed-in to absorb losses and recapitalize a bank in resolution. - Dutch authorities and SRB have identified options to remedy this but prefer a uniform, European-wide solution. - Meeting MREL (minimum requirements for own funds and eligible liabilities) that can be bailed in may take years, creating transition risk for executing bail-in as a PRS. - Transfer of critical functions to a private purchaser or a bridge bank where neither insolvency nor bail-in are appropriate: - Constraints arising from the BRRD (strict interpretation limiting DGS use in resolution, uncertainty about departing from pari passu treatment of creditors) need to be addressed. - DNB is taking steps to ensure a bridge bank can be operationalized on short notice. - Resolvability impediments and mitigation: - Ensuring adequate liquidity funding following resolution action is a significant challenge, particularly for whole bank bail-in and transfers of critical functions. - Fallback resolution strategies should be envisioned during transitional periods where adequate MREL may not be in place. ### OTHER OPTIONS FOR MANAGING FAILING BANKS - Existing national options remain alongside BRRD/SRM arrangements, contributing to legal uncertainty about which rules apply and when (e.g., Intervention Act, Emergency Rule, Bankruptcy Code noted elsewhere in the full text). - Authorities are considering legislative and operational measures to allow DGS financing of deposit transfers both in resolution and in insolvency, and to ensure DGS access to back-up funding. ### FINANCIAL SAFETY NETS - Deposit Guarantee Scheme (DGS): - DGSD requires EU member states to have an ex ante funded deposit insurance scheme, but there is no agreement on a euro area DGS. - Dutch DGS aims to achieve seven-day payouts by 2019 (commitment recommended). - Allowing the DGS to finance deposit transfers in resolution and insolvency and ensuring timely access to back-up funding are recommended near-term actions. - Single Resolution Fund (SRF): - National compartments will be progressively mutualized into a single fund available across the Banking Union. - A permanent standing and joint public back-stop for the SRF is recommended. - Emergency Liquidity Assistance (ELA): - ELA remains a national responsibility subject to ECB rules; access to adequate liquidity funding in resolution needs to be ensured. ### SYSTEMIC CRISIS MANAGEMENT - Domestic crisis management arrangements should be: - Known and up-to-date. - Appropriate to the new institutional environment. - Periodically tested (nationally and ultimately with SRB and ECB involvement). - Define and periodically test a formal coordination arrangement between SRB, ECB, and Dutch authorities for planning and managing a systemic crisis. ### KEY RECOMMENDATIONS (Table 1 highlights) - Streamline SRB decision-making to ensure timely resolution action. Timeframe: MT. Authorities: BU. - Implement an SRM-wide deposit insurance scheme. Timeframe: MT. Authorities: BU. - Establish a permanent standing and joint public back-stop for the SRF. Timeframe: MT. Authorities: BU. - Increase transparency and legal certainty under the resolution framework. Timeframe: NT. Authorities: NLD. - Ensure domestic crisis management arrangements are known, up-to-date, appropriate, and periodically tested. Timeframe: I. Authorities: NLD. - Define the role of the SRB and the ECB in planning for and managing a systemic crisis relative to national authorities; establish—and periodically test—a formal coordination arrangement between SRB, ECB and Dutch authorities. Timeframe: NT. Authorities: NLD/BU. - Commit publicly to seven-day DGS payout by 2019. Timeframe: NT. Authorities: NLD. - Allow the DGS to finance deposit transfers both in resolution and in insolvency. Timeframe: NT. Authorities: NLD. - Ensure the DGS has timely access to back-up funding. Timeframe: NT. Authorities: NLD. - Continue to pursue remedies to identified impediments to resolution, including by providing guidance to banks on amount and structure of MREL requirements. Timeframe: I. Authorities: NLD/BU. - Consider fallback resolution strategies if the PRS cannot be implemented, such as during the transitional period where adequate MREL may not be in place. Timeframe: NT. Authorities: NLD/BU. - Continue efforts to operationalize a bridge bank on short notice. Timeframe: NT. Authorities: NLD. - Clarify that the BRRD allows for departure from pari passu treatment of creditors with respect to all resolution tools. Timeframe: I. Authorities: NLD/BU. - Take steps to ensure access to adequate liquidity funding in resolution. Timeframe: NT. Authorities: NLD/BU. I (immediate): within one year; NT (near term): one–three years; MT (medium term): three–five years. *Source: IMF staff report (mission during September 20–October 4, 2016) contained in "EXECUTIVE SUMMARY".* ### 6. All banks in the EU, no matter their size, are subject to recovery planning requirements, ### cr1790 - 6. All banks in the EU, no matter their size, are subject to recovery planning requirements, ### Recovery planning framework and implementation - All banks in the EU, no matter their size, are subject to recovery planning requirements; most LSIs may do so under simplified obligations. - Recovery plans are prepared by banks and assessed by the ECB or the NCA, as appropriate, and are shared with the relevant resolution authority which may identify actions that could adversely affect resolvability and make recommendations to the relevant supervisory authority. - DNB timeline and actions: - DNB required systemically important banks to prepare recovery plans early; first plans for ING, ABN AMRO and Rabobank were submitted in 2011; SNS submitted a plan in 2013 and plans have been iterated annually thereafter. - Plans for BNG and NWB were first submitted in 2015. - DNB supervisors typically made two onsite visits to each bank to assess and support management’s preparation of plans; formal comments were provided on first drafts and second drafts were usually deemed of sufficient quality. - The 2015 recovery plans were the first to be reviewed by the ECB as part of the transition to the SSM; the ECB sent feedback letters including matters to be addressed in 2016 plan updates. - Since 2011 there is steady improvement in plan quality and in embedding recovery planning into day-to-day risk management and strategic capital planning in banks. ### Coverage and phasing for LSIs - By year-end 2016, all LSIs will have prepared recovery plans. - DNB adopted a risk-based approach to phasing-in recovery planning requirements for LSIs; the two smallest LSIs were the last to submit plans by year-end 2016. - LSIs remain primarily supervised by the DNB but are subject to recovery planning standards developed by the ECB based on the BRRD. - By end-2016, roughly one-half the recovery plans submitted by LSIs will have been assessed using the ECB’s standards; the remaining institutions’ plans will be assessed under these standards in 2017. ### Main weaknesses identified and required remedies - ECB and DNB identified remaining weaknesses and are requiring banks to address them; main weaknesses overall: - Recovery plan activation triggers set at too low a level. - Insufficiently severe stress scenarios. - Recovery options not realistic regarding expected impact or executability. - Additional scope for improvement for some SIs and LSIs: - (i) Identification of core businesses and critical economic functions. - (ii) Provision of data and analysis on internal and external interconnectedness. - (iii) Documentation of preparatory measures supporting implementation of recovery measures. - (iv) Use of an increased range of indicators. - (v) Greater clarity on escalation procedures. - (vi) Improvement in external and internal communication plans. - These weaknesses are expected to be addressed in subsequent iterations of recovery plans. ### Early intervention powers and institutional arrangements - DNB strengthened early intervention powers and institutional structure; in 2011 DNB created an Enforcement and Intervention Department to coordinate supervisory approach to troubled institutions and advise on formal measures. - CRD IV and the BRRD introduced broader and increasingly intrusive powers that become available as thresholds are crossed. - Examples of DNB powers: - Direct an LSI to change business strategy or implement elements of its recovery plan where prudential requirements under CRD IV or the CRR are or are likely to be breached. - Remove or replace one or more members of an LSI’s senior management or management body where powers are insufficient to reverse deterioration. - Appoint a ‘temporary administrator’ to carry out all or part of management functions of an LSI when removal or replacement would be insufficient. - Cautionary note on temporary administration: relative risks and benefits are uncertain, particularly its impact on creditor confidence. ### ECB intervention powers and constraints - ECB can exercise powers deriving from SSM Regulation, powers available to the DNB as NCA under Dutch law, and any other power available to DNB under Dutch law; in practice ECB could exercise any power under the Dutch Act on Financial Supervision (AFS) that applies to a bank. - Any exercise of power by the ECB against a private party requires approval of the ECB’s Governing Council following approval of the ECB’s Supervisory Board; each body comprises representatives of the 19 euro-area member states and six other members. - Key test for SSM framework: ECB’s ability and willingness to exercise such powers in a timely fashion. ### Write-down and conversion powers for resolution authorities - Resolution authority may write down or convert relevant capital instruments (common equity Tier 1, additional Tier 1 or Tier 2 instruments) to prevent bank failure. - A resolution authority may require write-down or conversion independently of resolution action and before entry into resolution when one or more of the following apply: - (i) Competent authority has determined that, unless the write-down or conversion power is exercised, the bank, other entity or the group will no longer be viable. - (ii) Extraordinary public financial support (other than support available to mitigate a systemic crisis) is required by the bank or other entity in the group below. ### Single Resolution Mechanism (SRM) and SRB role - SRM complements the SSM; under the SRM Regulation a new agency, the SRB, is established with direct responsibility for resolution planning and decision-making for: - All SIs directly supervised by the ECB. - All cross-border banks established in the euro area (one bank in the case of the Netherlands). - Any other LSI where resolution requires use of the SRF. - SSM centralizes prudential supervision decision-making at the ECB and relies on joint ECB/NCA supervisory teams; SRM centralizes resolution decision-making at the SRB and relies on joint SRB/NRA internal resolution teams (IRTs) for planning. - Resolution implementation is primarily the responsibility of the NRA; NRA also responsible for resolution planning, decision-making and implementation for LSIs not covered by SRB. - SRB maintains back-up authority to intervene and directly implement a resolution if necessary to ensure high resolution standards or objectives are met. ### DNB as National Resolution Authority (NRA) - DNB was designated NRA for the Netherlands effective January 2015; this resulted in governance and organizational changes: - Bank Act 1998 amended to provide for an Executive Director for Resolution among members of DNB’s Executive Board. - Executive Director for Resolution has a supervote on certain resolution matters that outweighs votes of all other Executive Board Members combined. - A Resolution Council chaired by the Executive Director for Resolution meets bi-weekly (or more often) to prepare items for the Board; Resolution Division carries out day-to-day work with a staff complement of 32. - At the time of the mission 18 staff positions had been filled; the remaining 14 positions are expected to be filled by summer 2017, including 7 staff added as a result of integration of DGS responsibilities into the Resolution Division. - Planned resources appear adequate; DNB is evaluating whether it can utilize private sector experts used by SRB for local resolutions. ### SRB operational progress and interaction with ECB and NRAs - SRB assumed responsibilities in January 2016 and is in process of becoming fully operational; it is hiring approximately 110 staff during 2016, nearly doubling its staff complement from January 2016, with further increases envisioned in 2017. - SRB has: - Concluded an MoU with the ECB for representation as observer in each other’s meetings and cooperation in early intervention, recovery and resolution planning and resolution actions; in CMGs for globally systemically important banks the SRB and ECB will coordinate tasks. - Concluded a cooperation agreement with the European Commission (EC); EC has established a permanent task force to engage with the SRB. - Developed a cooperation framework with NRAs including establishing IRTs led by SRB staff to coordinate activities with respect to individual countries or banking groups. - In 2016 SRB prioritized resolution plans for large banks and 2 of the 15 cross-border LSIs under its remit; in 2017 resolution plans for the other cross-border LSIs will be developed and additional policy initiatives pursued. - SRB has rehearsed procedures for taking decisions on resolution but has not carried out a full simulation exercise with one or more NRAs; complexity of SRB-directed resolution entry makes such exercises important. - Avenues for accelerated decision-making for entry into resolution and resolution actions under SRM Regulation should be explored. ### Entry into resolution under the SRM (procedural steps and timings) - Condition 1: ECB, after consultation with SRB, determines whether entity is failing or likely to fail. SRB may make determination on its own initiative if ECB fails to act within three days’ notice by SRB of its intention to act. - Condition 2: SRB, in close cooperation with ECB, determines that there is no reasonable prospect that private sector measures or supervisory actions would prevent failure. - Condition 3: SRB determines whether resolution action is necessary and in the public interest. - Limitation on SRB independence: discretionary aspects (in particular adoption of a resolution scheme) are subject to validation by the EC. - Once SRB determines conditions met, it prepares a resolution scheme specifying appropriate resolution tool(s) and use of the SRF, which must be validated by the Commission in the following 24 hours. - The Commission may, on an exceptions basis, in the first 12 hours involve the European Council for decisions regarding use of the SRF or to challenge the public interest determination. - The resolution scheme enters into force 24 hours from transmission by SRB to EC if no objection expressed by Council or Commission. - The resolution scheme cannot be implemented by NRAs until Commission adopts a positive or conditional decision on compatibility with the internal market and state aid regulation. ### State aid framework and BRRD implications - EU law broadly defines “state aid” and requires notification to the EC of measures that may constitute state aid; EC determines compatibility with EU law and may impose conditions. - In bank failures, state aid examples include use of a DGS or resolution fund (may be considered state aid if resources are under public control and decision attributable to the state), state guarantees, capital injections, or acquisitions by an AMC. - Netherlands examples: state interventions with respect to ABN AMRO, ING, and SNS Reaal were approved under the state aid framework with restructuring plans imposed. - As of January 1, 2016, any state aid notified to the Commission that triggers resolution under the BRRD can only be approved subject to bail-in of at least 8 percent of the bank's total liabilities; the rule does not apply to "precautionary recapitalizations" occurring outside resolution in narrowly defined circumstances. *International Monetary Fund — cr1790 PDF chapter content* ### 17. For all banks within the Banking Union and the broader EU, resolution planning and ### cr1790 - 17. For all banks within the Banking Union and the broader EU, resolution planning and ### Resolution tools introduced by the BRRD - Four principal resolution tools: - Sale of business tool: sale of the shares of the failing bank, or its assets, rights and liabilities, to a private sector purchaser; consent of shareholders or third parties (except the acquirer) is not required. - Bridge institution tool: sale of the shares of the failing bank or its assets, rights and liabilities to a government-sponsored, temporary bridge institution rather than a private sector purchaser. - Asset separation tool: transfer of assets, rights and liabilities from the failing bank to a separate asset management vehicle that must manage or liquidate the assets with a view to maximizing their value; may only be used in combination with other resolution tools to minimize implications under the state aid framework. - Bail-in tool: write down of certain liabilities of the bank and/or their conversion into equity; includes power to write down or convert capital instruments both during early intervention and in resolution; can recapitalize the bank and continue/restructure operations or support other resolution tools (e.g., generating capital for a bridge bank). - Supporting powers include appointment of a special manager and imposing stays on rights to terminate contracts or execute collateral. - The BRRD-based resolution framework is broadly consistent with the Key Attributes. ### Resolution planning: scope, responsibilities, and timelines - All banks in the EU, no matter their size, are subject to resolution planning requirements. - SRB responsibility and DNB participation: - SRB is responsible for resolution planning for the seven Dutch SIs (ING, ABN AMRO, Rabobank, SNS, RBS, BNG and NWB) and the one LSI with cross-border operations (NIBC); in practice much work undertaken jointly by the DNB and SRB. - DNB submitted “transitional resolution plans” to the SRB in December 2015 for the ING, ABN AMRO and Rabobank groups. - DNB prepared “phase two” plans under SRB guidance: ING plan submitted July 2016; ABN AMRO, Rabobank and SNS plans submitted September 2016. - Transitional resolution plan for BNG and NIBC to be submitted December 2016; NWB plan to be submitted in 2017. - DNB expects to finalize resolution plans for two high-priority LSIs (including NIBC) in 2016 and the other two high-priority LSIs and three additional LSIs in 2017. - Cross-border cooperation: DNB participates in IRTs for Dutch SIs and undertakes much of required work; DNB does not actively participate as member of IRTs for cross-border groups that are less material in the Netherlands. ### Preferred strategies and fallback approaches - Three primary strategies envisaged: - Insolvency procedures with rapid payout or transfer of insured deposits for most LSIs (consistent with SRB guidance). - Whole bank bail-in for the largest and most complex banks. - Transfer of critical operations to a private purchaser or to a bridge bank where neither insolvency nor bail-in are appropriate. - Authorities discuss preferred strategies and fallback resolution strategies with SIs, cross-border LSI, and larger LSIs. ### MREL: objectives, components, and timing - MREL set by SRB or DNB on a case-by-case basis; objective to protect public funds by minimizing reliance on extraordinary public financial support. - Conceptual components of MREL: - Loss absorption component (to bring capital to zero). - Recapitalization component (to meet the regulatory capital requirement). - Market confidence component (additional buffer to promote confidence and restore access to market funding). - Timing and expectations: - Dutch SIs anticipated to receive “indicative” MREL targets by year-end 2016; more granular guidance expected from SRB in 2017, partly based on specific resolution strategy. - For banks where insolvency would apply, the recapitalization and market confidence components of MREL might be set to zero. - DNB collecting data and assessing options for mid-sized LSIs whose PRS might involve transfer of assets and liabilities associated with critical functions; MREL determinations may need to reflect fallback option of a bridge bank. ### Resolvability assessments and impediments - Resolution plans include formal resolvability assessments to identify impediments to implementing resolution measures. - Authorities empowered to take actions against a bank to ensure resolvability and to encourage steps to remedy or mitigate impediments. - Many impediments are common across Banking Union jurisdictions; guidance from the EC and SRB is particularly relevant. ### Need for additional European-level guidance - DNB would benefit from SRB guidance on: - Resolution planning for state banks (BNG, NWB) and cooperative banks (Rabobank). - Mapping and standardizing data requirements for management information systems (e.g., data quality and time period banks must be able to produce relevant data). - Expectations regarding planning for operational continuity (availability of key staff, information and communications platforms, continuation of access to payment and clearing systems). - Requirements for information and analysis banks must deliver on funding and liquidity in resolution, and related collateral management requirements. - EC proposal issues related to MREL may address: - Integration of MREL and TLAC requirements (for example, possibility of establishing “internal” MREL). - Ensuring enforceability of MREL requirements. - Harmonizing approaches to subordination of liabilities for purposes of MREL. ### Resolution implementation: operationalization and practical challenges - DNB operational work: - Developed a manual for implementation of a sale of business resolution. - Issued a public consultation paper on how the bail-in tool would work in the Netherlands. - Established a working group with AFM to develop a bail-in implementation manual detailing steps each authority must take. - Established a separate working group with AFM and relevant CSDs to ensure timely instructions and CSD preparedness. - Some operational challenges require European-level action to resolve. ### Bail-in tool: constraints and conditions - Creditor hierarchy and EU legislative constraints hamper feasibility and credibility of bail-in in the Netherlands: - Under Dutch creditor hierarchy, senior unsecured bonds sit on par with other senior claims that may need exclusion from bail-in (e.g., uncovered corporate deposits, unsecured derivative claims). - BRRD allows limited exclusions (e.g., material trade creditors) and limited departures from strict pari passu treatment for operational reasons or to prevent contagion. - “No Creditor Worse Off” (NCWO) principle: no creditor should be worse off than in insolvency; successful NCWO claims from bail-in would be satisfied by the SRF subject to conditions. - SRF conditions for covering costs resulting from departures from pari passu in a bail-in: - (i) Shareholders and creditors must have collectively first contributed to loss absorption and recapitalization to at least 8 percent of total liabilities and own funds. - (ii) Amount provided by SRF is limited to the lesser of 5 percent of the bank’s total liabilities and own funds or the means available to the SRF plus any amounts that could be raised through ex post contributions in the following three years. - Approval from the EC under state aid rules is also required. - EU-level divergence on subordination quality for MREL; Dutch authorities seek a common European approach and have invited EC proposal on subordination of liabilities for MREL no later than end-2016. ### Transition risks and fallback strategies - PRS based on bail-in is subject to transition risks because amounts and location of MREL needed to support a bail-in may not yet be in place; fallback strategies should be developed. ### Sale of business tool: impediments and mitigants - Impediments to sale of business in the Netherlands: - Heterogeneous and difficult-to-value assets (e.g., large, complex corporate loans, relationships with unlisted and family-owned firms) impede negotiating and executing transfers to private acquirers. - Increasing transferred assets to induce acquirers could risk breaching the NCWO principle. - “Topping up” transfers using the deposit insurance fund (DGF) may not be possible; small target balance of DGS may be insufficient for topping up in larger LSIs. - Target balance is 0.8 percent of covered deposits. - SRF might be available but access is conditional and subject to state aid rules; unclear whether SRF access should be considered in resolution planning. - Use of bridge bank as fallback: - Bridge bank can receive critical functions and subsequently sell them to private sector if private sale not feasible within required timeframe. - Existing law provides clear basis to establish a bridge institution (Royal Decree amending Decree on Prudential Regulations (2015 433) details framework for establishing “bridge undertakings” and “bridge foundation”). - DNB should prepare constituent documents, basic operating policies and procedures, and a staffing plan to enable rapid operationalization. - Flexibility to limit transferred liabilities: - Neither EU nor Dutch legislation explicitly allow departures from pari passu principle other than in bail-in resolutions; authorities should have flexibility to depart from equal treatment of creditors of same class if necessary to contain systemic impact or maximize resolution value. - Lack of express authority may give rise to legal challenges; changes need European-level action or risk that transfers involving departures from pari passu would not receive automatic recognition and enforcement under the Winding-Up Directive. *International Monetary Fund — Kingdom of the Netherlands—Netherlands (chapter excerpt)* ### 33. The manner in which the Dutch authorities transposed the BRRD impedes transparency ### 33. The manner in which the Dutch authorities transposed the BRRD impedes transparency ### Transparency of the legal framework and transposition issues - The BRRD is an EU Directive and is not directly applicable in member states; it must be transposed into national legislation. The SRM Regulation, by contrast, became part of national law in all euro area member states without further action by national authorities. - The BRRD is broader than the SRM Regulation (for example, the BRRD also applies to certain investment firms). - The SRM Regulation assigns BRRD powers with respect to banks to the SRB and NRAs in euro area member states, but the BRRD and SRM overlap without being coextensive. - Dutch authorities transposed only those BRRD provisions not covered by the SRM and, as a space saving measure, many transposed provisions are mere cross-references to the BRRD. - Resulting structure: - A patchwork of legislation that is difficult to follow. - Lack of transparency could hamper local practitioners’ ability to develop necessary expertise to implement—or challenge—resolution. ### Judicial review of SRB decisions and national remedies - National legislation appropriately limits remedies available for judicial review; however, this is not the case for SRB decisions. - SRB decisions are subject to review by the European Court of Justice (ECJ) (Article 86 of the SRM Regulation). - Scope of ECJ review: - The ECJ will review the legality of the SRB decision (and not the substance). - There appears to be no limitation on the nature of actions the ECJ may take: the ECJ may declare SRB decisions void, order suspension of implementation, or reverse the resolution action. - Practical implication: - If an SRB decision/instruction to the DNB were declared void, there would be no legal authority for the DNB to act (unless the ECJ’s decision provides otherwise). ### Other options for managing failing banks — overview and legal uncertainty - The SRM legislation does not fully replace national law; national law remains determinative for resolution implementation (e.g., hierarchy of claims, role of national courts). - The BRRD and SRM contemplate national insolvency regimes as alternatives to resolution when resolution criteria are not met, or to wind down residual parts of a bank. - In the Netherlands the SRM framework exists side-by-side with legacy frameworks not fully aligned with the SRM, producing: - Multiple options for managing failing banks with overlapping triggers and tools. - Responsibility allocated across a range of actors. - Lack of legal certainty about which rules apply and under what circumstances. - Recommendation: Steps should be taken to clarify the legal framework. ### A. The Intervention Act - The Ministry of Finance (MoF) has legacy powers to take control of a bank and to expropriate its assets and shares under the Intervention Act (adopted in 2012). - The Intervention Act contained resolution-like tools: the DNB could transfer a failing institution’s assets, liabilities or shares to a private party. - Two special powers assigned to the Minister of Finance under the Intervention Act: - Power to assume control of a financial institution. - Power to expropriate assets and/or liabilities or securities. - Conditions for Ministerial use: - Only if there is a grave and immediate threat to the stability of the financial system. - Consultation with the DNB and agreement with the Prime Minister and Minister of General Affairs is required. - Historical use: These powers were used to address the failure of SNS Reaal (Annex I). - Relationship with BRRD: - BRRD contemplates similar but distinct powers for state interventions, including “extraordinary public financial support” that could be provided without triggering resolution, subject to conditions: - (i) “shall be of a precautionary and temporary nature and shall be proportionate to remedy the consequences of the serious disturbance and shall not be used to offset losses that the institution has incurred or is likely to incur in the near future;” and - (ii) may only be provided to solvent entities (BRRD Article 32(4)(d)). - Condition for precautionary recapitalization: potential capital shortfall must be determined based upon a forward-looking stress test or asset quality review conducted by the ECB, EBA or national authorities. - When such support is provided outside of resolution, the resolution authority has the power to write down or convert the recipient institution’s capital instruments. - BRRD also provides two types of government financial stabilization tools available as a last resort within resolution: the public equity support tool and the temporary public ownership tool (BRRD Articles 56–58), subject to state aid rules and a mandatory contribution to loss absorption by the bank’s shareholders and creditors of 8 percent of total liabilities and own funds. ### B. The Emergency Rule - Authorities should continue plans to repeal the Emergency Rule. - The Emergency Rule in the AFS predates the SRM and reflects a hybrid between resolution and insolvency proceedings. - Key features: - DNB may petition the court to apply the Emergency Rule to any bank incorporated in the Netherlands if the DNB finds a “dangerous development” in capital, solvency or liquidity that is reasonably foreseeable not to be reversed. - The court must rule on an expedited basis at a closed hearing where the affected bank may be heard. - If applicable, the court appoints one or more administrators (who assume the powers of management bodies) and a delegated judge to oversee administrators. - Administrators, acting in the interest of creditors as a whole, are authorized to: - (a) transfer all or part of assets and liabilities to another bank; - (b) wind up all or part of the bank’s business; or - (c) carry out both a transfer and a winding up. - DNB may nominate administrators and offer its opinion on the appropriate restructuring option. - Application entails a moratorium on payment of liabilities, including deposit liabilities, and leads to activation of the DGS. - Practice and concerns: - In practice, application has yielded mixed results; typically the bank has ended up in bankruptcy proceedings within a few weeks of applying the Emergency Rule. - Interaction with SRM adds complexity: triggers for the Emergency Rule resemble those for resolution but powers may be exercised by different actors, especially problematic for an SI where the ECB and SRB (rather than the DNB) have decision-making tasks leading to resolution powers. - Note: AFS Articles 3:160-3:201. ### C. The Bankruptcy Code - Recent amendments align Dutch insolvency law with the SRM legislation. - Key provisions: - The Bankruptcy Code allows the DNB to request the court commence bankruptcy proceedings against a bank where the DNB finds that: - (i) the bank is failing or is likely to fail; and - (ii) considering timing and other circumstances, there is no reasonable prospect that alternative private sector measures, including early intervention measures, would prevent failure within a reasonable timeframe. - Alignment of triggers with the first two resolution triggers (absence of the public interest trigger) reinforces the BRRD/SRM premise that a bank should be subject to insolvency proceedings unless resolution is in the public interest. - Amendments provide preferential treatment to both insured and uninsured depositors under the hierarchy of claims. - A special section dedicated to bankruptcy of a bank (Section 11AA) includes: - Requirement that the court seek the opinion of the DNB prior to commencing bankruptcy proceedings against a bank. - Implementation of the Winding-up Directive. ### Financial safety nets — A. The Single Resolution Fund (SRF) - The SRM Regulation establishes a Single Resolution Fund (SRF) owned and administered by the SRB and funded by regular ex ante and potentially extraordinary ex post contributions by banks. - Target: The fund will be built up to an initially estimated target amount of €55 billion over eight years (1 percent of covered deposits of all banks within the member states participating in the SRM). - Structure: - The Fund consists of national compartments, usable to fund resolution measures with respect to banks in the contributing jurisdiction. - Contributions will be progressively mutualized over eight years; mutualized compartments are available to fund resolution measures in any SRM jurisdiction. - Permitted uses of the SRF (examples): - To guarantee the assets or liabilities of, or make loans to, an institution under resolution, a bridge institution, or asset management vehicle. - To purchase assets of the institution under resolution. - To make capital contributions to a bridge institution and an asset management vehicle. - To make loans to the institution under resolution, a bridge institution or an asset management vehicle. - To pay compensation to shareholders or creditors who suffered greater losses than they would have if the bank had been wound up under normal insolvency (NCWO claims). - To make contributions to the institution under resolution in lieu of the write-down or conversion of certain liabilities and/or creditors under exceptional circumstances and subject to certain conditions (SRM Regulation Articles 27 and 76). - As of the second half of 2016, potential funding available for Dutch bank resolution measures included: - Dutch funded SRF compartment of €956 million. - €3.9 billion from the mutualized compartments. - €4.2 billion Loan Facility Agreement (LFA) from the Dutch state for the unfunded portion of the Dutch compartment. - If the Dutch compartment and mutualized compartments are insufficient: - The SRB can first seek ex post contributions from Dutch banks (up to an annual limit of about €1.5 billion). - Secondly, the SRB can seek to borrow from the market. - If timely market financing on reasonable terms/amount is not available, the SRB can access the Dutch LFA. - Notes on sequencing (waterfall) of funding availability: - i) available means in jurisdiction’s national compartment according to an agreed percentage (in 2016: 100%; 2017: 60% etc.) - ii) available mutualized financial means in all compartments (in 2016: maximum of 40% of the compartments) - iii) remaining means of the jurisdiction’s national compartment - iv) potentially, ex-post contributions from institutions in the jurisdiction - v) potentially, external borrowings by the SRF or temporary transfers between compartments - vi) drawing on the jurisdiction’s LFA - All financing obtained under items (i-v) would be deducted from the €4.2 billion Dutch LFA; the remainder is available for resolution measures for Dutch banks. - Dutch bridge financing arrangement: - Set out in the LFA with the SRB as a credit line approved by the Dutch Parliament callable by the SRB. - If called, a loan is granted and the MoF confidentially informs Parliament. - Loan duration: 24 months. - Upon SRB request, the duration will be extended an additional 12 months. - Further extensions possible but can be blocked by the MoF. - Recommendation: Permanent, common public back-stop funding arrangements for the SRF should be agreed. - Member states plan to negotiate arrangements for a common backstop to the SRF, to be fully operational at the latest by the end of the transitional period when the SRF is fully mutualized at the end of 2023/beginning 2024. - Such a backstop could take the form of a credit line from the European Stability Mechanism (ESM) (or from member states collectively), drawable in a systemic crisis as a last resort, with borrowings reimbursed from extraordinary ex-post contributions on banks in the medium term. ### Financial safety nets — B. Deposit Insurance - The DGSD harmonized deposit insurance coverage across the EU and was transposed into Dutch legislation in 2015. - Key changes under the DGSD: - Extended coverage to deposits of large nonfinancial companies. - Introduced faster pay-outs and ex ante funding arrangements. - Maintained the level of protection at €100,000. - Requires that, by July 3, 2024, each DGS shall reach a target level of at least 0.8 percent of the amount of covered deposits. - The Dutch Deposit Guarantee Fund (DGF): - Established in late 2015 and is essentially a pay box operated by the DNB. - The DGF is a legal entity under public law. - Its three-person board is appointed by the DNB board and composed of two DNB staff and one MoF staff who serve in their personal capacities. - The DGF board determines investment policy, decides whether to levy extraordinary premiums on banks, and arranges for/backstop funding. - The AFS requires that the DNB support the DGF in execution of its tasks and provide financial resources required for its duties; in practice DNB staff execute all DGF functions. - The DNB is empowered to determine when the DGS is triggered. - Current limitations: The DGS may only make payouts for covered deposits and may contribute to financing of resolution subject to certain limitations; it cannot finance a covered deposit transfer. - Recommendation: Authorities should continue plans to adopt legislative reforms that would allow the DGS to finance covered deposit transfers in insolvency. *cr1790 - 33. The manner in which the Dutch authorities transposed the BRRD impedes transparency* ### 47. The DGF is financed through ex ante contributions imposed on participating banks. The ### The DGF is financed through ex ante contributions imposed on participating banks. ### Funding, targets, and extraordinary measures - Risk-based premiums are determined on a quarterly basis by the DNB, with the risk-based component approximating 50 percent of the total. - The first contributions were made in the Q1 2016. - As of September 30, 2016, the balance of the Fund was €217 million. - Annual premiums amount to about €450 million. - Covered deposits on June 30, 2016, were €460 billion. - Per the DGSD, the target level for the fund of 0.8 percent of covered deposits needs to be reached in 2024, which at present would be €3.4 billion. - At that level, the DGF could finance the payout or transfer of covered deposits in the median LSI. - There has been no formal discussion of raising the target beyond 0.8 percent. - The DGF board can require banks to make extraordinary contributions in an amount up to 0.5 percent of covered deposits each year in case the resources in the fund are insufficient. - The DGF may enter into agreements with third parties to obtain financing in case the extraordinary contributions from the participating institutions are not available immediately or insufficient in amount. - The DGF board is pursuing establishing lines of credit with the largest Dutch banks. - As a last resort, the DGF has a formally documented line of credit with the MoF with an adaptable amount. - Recommendation: Efforts to ensure that the DGS has timely access to back-up funding should be continued. *Credit ranking and DGF claims* - The Netherlands has transposed the BRRD requirements regarding the ranking of depositors and the status of DGF claims in the creditor hierarchy. - DGF-covered deposits are senior to uncovered DGF deposits of natural persons and SMEs, which in turn are senior to ordinary unsecured non-preferred creditors. - Deposits of natural persons and SMEs booked in branches outside the EU rank only on par with the uncovered eligible deposits of natural persons and SMEs booked inside the EU. - In the case of a covered deposit payout, DGF assumes the rights and obligations of the depositor in liquidation, and thus is in effect the first creditor to be repaid from liquidation proceeds. - Subordination: subordinate to tax and employee claims and the administrative costs of the insolvency proceedings. ### Payout process and timing - The DNB is working to ensure it complies with paying out covered depositors within seven working days by 2019 and should commit publicly to doing so. - Current payout process: - Banks deliver customer data to the DNB. - DNB composes a single customer view and determines depositor eligibility and the covered amount. - Depositors can login on the web portal of the deposit guarantee scheme using their personal electronic identification and specify the bank account into which the covered deposit can be paid. - DNB requirement: banks must be able by January 1, 2019 to generate their own single customer view and deliver it to the DNB within 24 hours. - DNB anticipates being able to achieve the seven-day payout target in that year. ### Legal constraints on DGS contributions to resolution - Article 109 of the BRRD states that “in all cases the liability of the deposit guarantee shall not be greater than the amount of losses that it would have had to bear had the institution been wound up under normal insolvency proceedings.” - Strict interpretation implication: - The DGF may not provide gross, upfront support for a resolution in an amount greater than its estimated cost (net of recoveries) in liquidation. - This could unduly constrain the DGS’s ability to support resolution powers (e.g., by injecting cash to back a deposit transfer) given the super preference for covered deposits and high expected recovery rate in liquidation. - Recommendation: Reconsider the strict interpretation to allow the DGS to disburse greater funds upfront in a resolution if the estimated final cost to the DGS, net of recoveries, would be lower than its estimated net liquidation costs. - Rationale example from text: - If liquidation net cost to DGS is estimated at €10 million, but a resolution requires DGS injection of €20 million (difference after asset interest), and expected recovery on bankruptcy estate is €15 million, net resolution cost would be €5 million—i.e., a better outcome for DGS. ### European Deposit Insurance Scheme (EDIS) - Discussions are ongoing on a common euro-wide deposit insurance scheme. - The EC announced in 2015 a proposal to implement a European Deposit Insurance Scheme (EDIS) for Banking Union members by 2024. - Proposed design (three stages): - Reinsurance stage: scheme provides support (financed by contributions from national DGS) to a national DGS that has first exhausted its national fund. - After three years, move to co-insurance: contribution to the scheme would progressively increase over time. - Full mutualization to be reached in 2024. - The DNB has formally articulated recommendations to enhance the current proposed design of the EDIS. - Recommendation: Prompt implementation of EDIS should be pursued. ### Emergency Liquidity Assistance (ELA) - In the euro area, provision of ELA is the responsibility of the national central banks, subject to potential objection by the ECB. - Dutch banks have access to the Eurosystem’s single monetary policy credit operations (including an overnight marginal lending facility and fixed-rate full-allotment tenders for one-week and three-month funds). - Collateral requirements are established under the Eurosystem framework. - Eligibility for single monetary policy credit is decided by the ECB’s Governing Council; the DNB assesses financial soundness first, with ECB input where relevant. - Provision of ELA to Dutch banks is a discretionary decision for the DNB, which bears the risk of any loss. - In practice, DNB ELA would involve: - Lending to a solvent bank whose eligibility for monetary policy credit has been suspended by the Governing Council, and/or - Lending against collateral falling outside the established Eurosystem framework. - No ELA has been provided to a Dutch bank since the prior FSAP in 2011. - Dutch law allows the DNB to provide ELA in euros or other currencies. - Eligibility: bank must be “solvent” (not defined by law or formal policy); DNB judges solvency with input from the ECB where relevant. - ELA must be sufficiently collateralized; DNB values, sets haircuts for, and perfects liens on each collateral instrument. - ELA will in principle be provided only at a penalty rate, and that rate has been set by formal policy. - DNB governance: arrangements ensure participation of Monetary Operations, Risk Management, Legal, Supervision, Financial Stability, and Resolution in ELA decisions. - The ECB’s Governing Council can object to DNB-provided ELA if it conflicts with ESBC objectives or constitutes monetary financing; procedures for ex post and ex ante notification to the Governing Council exist. - Any outstanding ELA is reviewed by the Governing Council regularly. - Resolution planning cannot assume ELA will be made available; DNB emphasizes ensuring largest banks can meet operational requirements for pledging collateral as a pre-condition for accessing ELA. - Should ELA and SRF funding not be available or sufficient, the Dutch state can lend, subject to state aid rules; government can lend, including unsecured, to a bank in resolution (example: lending provided in 2013 in the context of the SNS Reaal resolution). ### Systemic crisis management and institutional coordination - Significant attention has been paid to institutional arrangements in SSM and SRM design and implementation, with explicit interagency coordination requirements and soft law instruments (e.g., MoU between SRB and ECB, cooperation framework between SRB and NRAs). - Gaps remain at European-level and in the Netherlands that could undermine the ability to cope with a systemic crisis. - Banking Union architecture is designed for supervision and resolution of individual banks/groups; multiple failures of small- to medium-sized banks across member states may warrant a more comprehensive strategy, but responsibility for design, implementation, and public communication in such cases is unclear. - Recommendation: Roles and responsibilities of the ECB and SRB in planning for and managing a systemic crisis relative to national authorities should be better defined, and a formal coordination framework should be put in place. - Dutch preparedness recommendations: - Ensure crisis management arrangements are up-to-date and appropriate to the new institutional environment. - Ensure arrangements are known within relevant authorities. - Test arrangements periodically, and at some stage with involvement from the SRB and ECB. - Historical context: Committee on Parliamentary Inquiry into the Financial Crisis (final report issued in 2012) was highly critical of cooperation between the MoF and the DNB and their failure to adhere to the 2007 MoF/DNB MoU; the 2007 MoU has not been updated and a tri-partite crisis management protocol exists but is not well known among working-level authorities. - Note: The AFM emerged from the inquiry without criticism due to its limited role in crisis interventions; AFM’s role likely to become more prominent in any future crisis because of bail-in tool responsibilities. Coordination between AFM and DNB would be facilitated by the bail-in manual being prepared jointly. ### Annex I — Resolution of SNS Reaal (summary of facts and outcomes) - SNS Reaal profile (2012): - SNS Bank: fourth largest bank in the Netherlands (total assets €83billion). - Reaal: Netherlands’ second largest life and fifth largest non-life insurer (total assets €55 billion; 6 million policyholders). - Bank held roughly €36billion in deposits from nearly 1 million clients, almost all insured by the DGS. - Problems: rapid expansion (including acquisitions), fragile financing structure including double-leverage, troubled commercial property lending. - Prior support during global financial crisis: - 2008: €750 million capital injection from the government. - Obtained €5.7 billion in credit guarantees under a government program offered to all banks. - Series of liquidity loans. - Obligations and maturities: - Obliged to repay €848 million under the capital injection by end-2013. - Obliged to repay €2.75billion under the guarantee by end-2014. - €550 million in external debt coming due in March 2013. - Due to downgrades and reduced market access, holding company borrowed from subsidiaries; DNB would no longer accept that. Bank incurred operating losses and likely capital shortfall from commercial property losses; concerns about depositor run. - Nationalization: - Nationalized on February 1, 2013. - Nationalization effected under Intervention Act amendments to the Financial Services Act. - MoF powers used to write-off (expropriate) the shares and approximately €1 billion in subordinated debt and loans of the holding company and the bank. - Bank recapitalized by the state with a €1.2 billion equity injection and repayment of the earlier capital injection was waived. - Unsecured loans of €1.1 billion were granted over 2013 to ensure liquidity in resolution and were eventually written-off. - Government imposed a €1 billion tax on the banking industry to partially recoup outlays. - Post-resolution: - Insurance operations and problem property portfolio were sold. - Holding company and subsidiary bank remain 100 percent state owned. - Alternative plans for sale debated in Parliament and among authorities. - Legal challenges to MoF’s treatment of shareholders and creditors have been filed; to date the state has prevailed in those proceedings. *Italic: IMF staff report excerpt (cr1790 - 47).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1790.pdf_