## cr1796

## Source details

**Canonical URL:** [cr1796](https://www.imf.org/-/media/files/publications/cr/2017/cr1796.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2017/cr1796.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2017/cr1796.pdf.json)

---

### Banking sector resilience and outlook
- The financial resilience of banks has been strengthened in recent years and banks are benefiting from continuing economic recovery.
- Broad-based economic recovery is helping to stimulate demand for credit, although credit growth remains slow, and unemployment continues to fall.
- Housing markets have started to recover since 2013 with prices and transaction volumes picking up.
- There has been an improvement in the financial position of Dutch banks: cost efficiency has improved and profitability has recovered.
- The banks' migration to the new Basel III standards is also well under way for capital adequacy and liquidity.
- Outlook challenges: greater competition, a low interest rate environment, and potential pressure on capital buffers from future regulatory changes.

### Single Supervisory Mechanism (SSM): effects and operational issues
- The introduction of the Single Supervisory Mechanism (SSM) has significantly strengthened banking supervision.
- The ECB is directly responsible for six of the largest Dutch banks comprising the majority of the banking system; the SSM transformed banking supervision in the euro area (EA).
- SSM effects:
  - Greater frequency and intensity of engagement with banks, particularly through on-site examinations leveraging thematic exercises.
  - Operational frictions affecting ECB day-to-day supervision:
    - The ECB must execute tasks (e.g., licensing and fit-and-proper assessments) according to national legislation transposing CRD IV.
    - All supervisory decisions need approval by the ECB’s Governing Council, creating a time-consuming decision-making process.
    - The decision-making process allows for speedy adoption of decisions in case of an emergency.

### DNB operational independence: concerns
- Operational independence of the DNB needs to be strengthened.
- Legislative and policy features raising concerns:
  - Ministerial control over the budget.
  - Authority of the Ministry of Finance (MoF) to set aside rules enacted by the supervisors.
  - Proposed cap on staff salaries (Wet normering topinkomens/Law on Standards for Remuneration for Senior Officials in the Public and Semi-Public Sector (WNT-3)) unless the MoF gives exemptions to individual staff, which may limit hiring and retention.
  - Authority in legislation for removal of the executive or supervisory boards is open to wide interpretation and is not based on specific objective cause for removal.
- Even if not used in practice, these features may create a perception of lack of independence that could damage public confidence.

### Supervisory approach: asset quality, provisioning, models, data and governance
- Supervisory priorities and gaps:
  - Need for more active supervisory role in assessing loan classification for Significant Institutions (SIs) to underscore prudent provisioning practices.
  - Recent AQRs and EBA stress testing confirm generally low levels of asset impairment of SIs.
  - Supervisory focus should provide bank management with prudential considerations when setting loan classification parameters (e.g., conservative valuations of realizable net values).
  - Continued development of supervisors’ capacity to challenge bank management valuation of loans.
- FSAP priorities for SIs and LSIs:
  - Prioritize assessment of banks’ business models and strategies.
  - Focus on adequacy of risk management as banks seek higher-yielding assets and reduce costs.
  - Strengthen corporate governance, with more progress needed in SB oversight of implementation of risk management frameworks and internal models.
  - Greater attention to ongoing model monitoring; responsibility rests with JSTs; ECB TRIM project will provide longer-term rigor.
  - Data quality and aggregation: weaknesses across banks from aging IT infrastructure and legacy systems; supervisors need to work closely with banks.
  - Implement harmonized definition of default and forborne loans.
  - Undertake a cross-sectoral review (including sampling loan files) of credit underwriting standards of mortgages originated for banking, insurance, and pension sectors.

### Key statistics on SSM coverage
- ECB directly supervises: 127 banking groups in 19 countries, which include 1,108 banks representing €21.4 trillion of aggregated assets.
- NCAs supervise less significant ones under ECB oversight: more than 3,400 banks, representing €4.9 trillion of aggregated assets.

### Selected policy recommendations (summary)
- Enhance DNB powers to introduce technical regulations for LSIs consistent with SSM approach.
  - Timeframe: I
  - Authorities Responsible: MoF
- Exclude the DNB from WNT-3 (salary cap) and give greater autonomy in setting supervisory budget.
  - Timeframe: I
  - Authorities Responsible: MoF
- Implement a more active supervisory role in assessing loan classification.
  - Timeframe: NT
  - Authorities Responsible: SSM
- Encourage more active SB role by ongoing engagement with the SB.
  - Timeframe: NT
  - Authorities Responsible: SSM
- Strengthen supervisory practices for ongoing model monitoring (IRB and AMA).
  - Timeframe: I
  - Authorities Responsible: SSM
- Emphasize confirmation that operational risk management systems are effectively implemented.
  - Timeframe: NT
  - Authorities Responsible: SSM
- Clarify expectations for prior notification for material outsourcing arrangements.
  - Timeframe: NT
  - Authorities Responsible: SSM
- Prioritize work on data aggregation to raise standards.
  - Timeframe: I
  - Authorities Responsible: SSM
- Implement harmonized definition of default and forborne loans.
  - Timeframe: NT
  - Authorities Responsible: SSM
- Undertake cross-sectoral review of mortgage underwriting standards (including sampling loan files).
  - Timeframe: NT
  - Authorities Responsible: DNB
- (I: immediate: within one year; NT: near term: one–three years.)

*Source: EXECUTIVE SUMMARY, Technical Note (cr1796) — IMF Financial Sector Assessment Program for the Kingdom of the Netherlands.*

### Supervision structure and Joint Supervisory Teams (JSTs)
- Day-to-day supervision of significant groups is conducted by JSTs, supported by ECB and NCA horizontal and specialized divisions (e.g., Internal Models, On-site Inspections, Authorizations, Crisis Management).
- Each JST led by a Coordinator at the ECB (generally not from the supervised institution’s home country).
- DNB is the prudential supervisor in the Netherlands and the NCA.
- ECB supervises directly seven SIs and DNB has responsibility for LSIs, comprising 28 banks.

### Framework for financial stability policy formulation
- Since 2014, promoting financial stability included as a DNB task in the Bank Act.
- Act on Financial Supervision: financial stability is one of the main goals of microprudential supervision.
- Main authorities: MoF (legislation), DNB (setting macroprudential tools, prudential supervision), AFM (conduct and markets supervision).
- Financial Stability Committee (FSC):
  - Membership includes MoF (nonvoting).
  - Meets at least every six months.
  - Chaired by the president of the DNB.
  - Role: discuss and identify risks to financial stability and mitigation.
  - FSC may issue macroprudential warnings and recommendations, but cannot exercise statutory powers assigned to DNB and MoF.

### DNB tools and responsibilities for financial stability
- Instruments at DNB’s disposal:
  - Macroprudential tools included in Dutch and European legislation (examples: systemic risk buffer and countercyclical capital buffer); DNB is the designated authority for the Netherlands.
  - Prudential supervision aimed at financial stability and individual institutions’ resilience.
  - Powers to collect information specifically for financial stability task (included in Bank Act since 2015).
  - Advisory role in FSC, including recommendations regarding LTV and LTI limits (set by government) and ad hoc issues.

### Public infrastructure and legal framework
- Credit institutions must apply either IFRS or provisions in Title 9 Book 2 of the Dutch Civil Code; accounts legally required to be validated by independent auditors.
- DNB participates in TARGET2 and operates “TARGET2.NL.”
- DNB can provide Emergency Liquidity Assistance (ELA) for temporary short-term liquidity needs against sufficient collateral and under premise that institution is solvent; decisions must be consistent with ESCB framework.
- Work ongoing at FSB and Banking Union level on funding in resolution and use of resolution fund to catalyze temporary liquidity provision.

### Market discipline and conduct supervision (AFM)
- AFM responsibilities:
  - Conduct of business of financial undertakings and securities market supervision.
  - Supervises trading systems, collective investment schemes, investment firms, market intermediaries, issuers of securities, auditors, financial service providers (and pension administrators).
  - Licenses investment managers, financial service providers, asset managers, and other investment undertakings.
- Cooperation: robust cooperation and coordination between DNB and AFM with clear leadership and veto roles; covenant facilitates legal framework for supervisory cooperation and designation of lead supervisor under Wft.

### Market structure and banking sector size
- Banking system composition:
  - 55 banks and 43 branches of credit institutions established in EU countries.
  - Total banks assets are €2.585 trillion, down about a quarter since 2008.
  - As a percentage of GDP, the banking system is approximately four times the value of GDP, down from over 540 percent in 2008.
- Concentration:
  - Three largest banks represent over 72 percent of total banking system assets.
  - Rabobank, ING and ABN Amro control 60 to 80 percent of the banking markets for mortgages, business loans, and savings.
- Herfindahl Index: 21.16 for 2015Q3.

### Key financial indicators (selected figures preserved)
- Dutch Banks: Key Financial Indicators (All figures as at December 31; ratios calculated as weighted averages for ING, Rabo and ABN Amro)
  - Return on equity: 2011: 8.3; 2012: 6.7; 2013: 6.9; 2014: 4.5; 2015: 7.8
  - Return on assets: 2011: 0.4; 2012: 0.3; 2013: 0.3; 2014: 0.2; 2015: 0.4
  - Net interest margin: 2011: 1.4; 2012: 1.3; 2013: 1.3; 2014: 1.5; 2015: 1.5
  - Cost-to-income ratio: 2011: 57.0; 2012: 60.0; 2013: 60.0; 2014: 64.0; 2015: 58.0
  - CET1 ratio (CET1-ratio-transitional): 2011: 8.9; 2012: 9.6; 2013: 9.8; 2014: 13.6; 2015: 13.6
  - Leverage ratio (Total exposure only available for 2014 and 2015 weighted average): 2011: 3.3; 2012: 3.6; 2013: 3.6; 2014: 4.1; 2015: 4.4
  - NPL ratio (Problem loans as a percentage of gross loans): 2011: 2.9; 2012: 3.2; 2013: 3.3; 2014: 3.5; 2015: 3.0
  - RWA density: 2011: 39.2; 2012: 40.8; 2013: 41.8; 2014: 32.6; 2015: 33.8
  - Loan to deposit ratio: 2011: 127.3; 2012: 127.7; 2013: 121; 2014: 119.7; 2015: 116.4

- Key Financial Ratios (All figures average and as at 2015Q4)
  - Dutch SIs vs SSM SIs:
    - RoA: 0.4 vs 0.3
    - RoE: 7.4 vs 4.8
    - Coverage Ratio: 37.7 vs 45.4
    - NPL ratio: 2.7 vs 7.0
    - Cost of Risk: 0.2 vs 0.5
    - LDR: 130.1 vs 124.7
    - CET1: 14.3 vs 13.5
    - LCR: 125.4 vs 129.1

### Asset composition and mortgage exposure
- Asset composition (proportion of balance sheet total):
  - Mortgages: 36 percent
  - Loans to large enterprises: 16 percent
  - Loans to small businesses: 9 percent
  - Derivatives and the investment portfolio together: 16 percent
- Liability structure:
  - Customer deposits: 55 percent
  - Wholesale funding: 45 percent
- Cross-border activities: approximately 40 percent of consolidated banking system assets (reduced since 2007 peak).
- Mortgages:
  - Banks heavily exposed to residential mortgages characterized by high LTVs, nonamortizing loans and pockets of negative equity.
  - About 21 percent of residential mortgages are underwater, especially among young households.
  - Housing prices declined 21 percent over 2008–2013, then rose by 7 percent since mid-2013; prices remain about 17½ percent below 2008 peak levels.
  - Government introduced an LTV limit of 106 percent in 2011 to reduce by 1 percentage point each year with a target of 100 percent by 2018.

### Asset quality, NPLs, and provisioning
- NPLs:
  - NPL ratio to total gross loans has remained at about the 3 percent level since 2013Q2.
  - As at 2015Q4, NPL ratio for Dutch SI banks: 2.7 percent vs 7 percent for SSM SIs.
- Coverage ratios:
  - Dutch banks: approximately 37.7 percent vs 45.4 percent for SSM cohort (2015Q4).
  - Lower coverage reflects strong foreclosure and insolvency regime causing actual losses to be low.
- Loan impairment charges peaked in 2013Q4 and fell each quarter to 2015, with largest improvements in domestic mortgage and SME portfolios.
- System average problem loans for 2015: 3.08 percent of gross loans for 2015.

### Funding, liquidity, and market funding reliance
- Household debt outstanding balance: €740 billion at end-2014, about 275 percent of disposable income and 111 percent of GDP.
- DNB notes 61 percent of homeowners between age 30–40 were in negative equity at end-2015Q1 (DNB 2015).
- Local pension companies capture more than 70 percent of Dutch household wealth.
- High loan-to-deposit ratio and funding gap financed by wholesale markets; banks sensitive to adverse changes in financing conditions.
- Mitigations: increasing deposits, lengthening maturity of wholesale funding, building up HQLA.
- Liquidity metrics:
  - SIs met 100 percent LCR threshold since monitoring commenced in June 2012.
  - Average LCR for SI banks: 125.4 percent as at 2015Q4.
  - NSFR for SIs is above the 100 percent threshold.
- Credit ratings for ING, Rabo and ABN-AMRO respectively:
  - S&P: A-, A+ and a
  - Moody’s: Baa1, Aa2 and A1

### Profitability, capital generation, and leverage
- Economic backdrop:
  - GDP growth reached 2 percent in 2015, up from 2 percent in 2014.
  - Average return on equity for three largest Dutch banks: 7.4 percent as at 2015Q4 vs EA average of 4.8 percent.
- Profitability drivers in 2015: lower interest expense, lower impairment charges, aggressive cost management.
- Capital:
  - Average T1 ratio stood at over 16 percent at the end of 2015.
  - Low dividend pay-out ratios helped build CET1.
  - Leverage (capital-to-asset ratio) of 5.3 percent as at 2015Q3.
- Stress test (FSAP team) adverse scenario:
  - System leverage ratio (six largest banks) would decline from 3.8 percent to 3.2 percent.
  - The ratio for one of the largest banks would fall below the minimum 3 percent hurdle.
  - Outcome reflects relatively low RWA density in Dutch banking system.

### Macro-financial outlook and near-term challenges
- Supportive conditions: recovering domestic economy, falling unemployment, low inflation, housing market recovery since 2013, falling corporate bankruptcies.
- Near-term challenges to profitability:
  - Intensifying competition in mortgage market reducing interest income and fees.
  - Competition from nonbank lenders: over 50 percent of new mortgage loans underwritten by nonbanks in 2015.
  - Interest rates expected to remain ‘low for longer,’ affecting front and back book pricing.
  - Profitability benefited from materially lower loan-loss provisions in 2015.

### Operational independence and accountability (DNB)
- DNB largely has the power and authority to carry out tasks, but aspects of operational independence are of concern.
- MoF influence concerns:
  - Ministerial approval of supervisory budget could limit ability to attract and retain staff.
  - Proposed salary cap (WNT-3) could limit recruitment/retention.
  - Limited ability to introduce technical regulations for LSIs may reduce effectiveness.
  - MoF authority to set aside supervisor rules could reduce effectiveness.
  - Removal authority for DNB boards open to interpretation.
- FSAP recommendations:
  - Give DNB greater autonomy in deciding budget and exclude DNB from salary cap.
  - Give DNB greater flexibility to develop technical standards where needed (e.g., fit-and-proper, corrective measures and sanctions).
  - Increase dialogue with Supervisory Board on supervisory results to strengthen corporate governance.
  - SB oversight of internal models needs greater attention: ensure banks comply with standards, Boards understand model limitations, and banks perform regular independent validation and testing.

### Capital adequacy, credit risk and problem assets (highlights)
- Capital:
  - Banks significantly increased quality and amount of regulatory capital over five years through capital raisings, internal revenue generation, and lower dividends.
  - RWA density for Dutch banks is low, particularly for IRB users.
  - Further regulatory changes could require additional regulatory capital (examples: TLAC, CRDIV, amendments to standardized approaches).
  - DNB imposed additional buffer requirements on larger Dutch banks (O-SII Buffer and SRB values specified for ING Bank NV, Rabo Bank, ABN Amro Bank NV, SNS Bank NV, NV Bank Nederlandse Gemeenten).
- Credit risk:
  - Household debt high: approximately 112 percent of GDP; debt-to-income ratio: 275 percent.
  - Net financial assets equivalent to 209 percent of GDP as at end-2015.
  - Approximately 21 percent of households had negative equity as at June 2016; mortgage arrears 1.6 percent at 2015Q4.
  - A substantial share of mortgage value (55 percent) are IO mortgages; 21 percent of borrowers have a full IO loan.
  - New legislation banned beneficial tax treatment of mortgage interest payments for non-amortizing loans from January 2014.
  - Mortgage investments by insurers and pension funds: pension fund exposure to Dutch home loans €15 billion at end-2015; insurance mortgage portfolio €46 billion.
- Provisioning and supervisory role:
  - Banks follow IFRS; prudential standards for provisioning are not issued by DNB.
  - Supervisors cannot require reclassification or increase provisioning for financial statement purposes; can apply a capital add-on under Pillar 2 if provisioning deemed inadequate.
  - Supervisory strengthening recommendations:
    - Consultation with banks and accounting firms on prudential guidelines;
    - Training for supervisors on valuing loans and challenging collateral assumptions;
    - Development of market data to gauge reasonableness of collateral valuations.

### Liquidity risk (highlights)
- LCR and NSFR adoption strengthened liquidity requirements and reduced maturity mismatches.
- DNB introduced monitoring rules and a survival period requirement with minimum one month.
- DNB rule limiting non-Member State investments: product of proportion of guaranteed liabilities and proportion of loans/investments in non-Member States must not exceed 0.25 percent.
- ILAAP established for Dutch SIs; first assessments in 2012, SSM-guided ILAAPs for SIs started in 2015.
- Foreign currency liquidity and trapped liquidity require ongoing scrutiny and rigorous stress testing.
- Supervisory monitoring activities: meetings with treasury, observing ALCO, verifying policies, analyzing prudential and additional liquidity ratios, confirming board engagement.
- System reliance on market funding: approximately a third of the system funded by market financing; banks have implemented strategies to mitigate reliance and lengthen maturities.
- SREP enhancements in 2016: more robust stress testing tools and proxies to challenge banks’ assumptions; use of SREP results to impose requirements on significant currencies.

### Operational risk and outsourcing
- Regulatory framework for operational risk is generally comprehensive and based on BCBS standards.
- Findings:
  - Dutch SIs large, integrated, cross-border, with product complexity and heavy technology reliance.
  - Exposure to moderate operational risk mainly in legal risks; cost-cutting programs may raise inherent operational risk.
  - Heavy reliance on IT outsourcing; mapping shows exposure to off-shore service providers/cloud providers.
- Supervisory actions:
  - Increased on-site work on operational risk topics (IT infrastructure, AMA model reviews, outsourcing, data quality, legal issues).
  - Supervisors hold regular meetings with key control functions.
- Recommendations:
  - Greater attention to ongoing model monitoring for AMA banks.
  - More verification/testing of banks’ processes to manage and monitor outsourcing risks; apply prior notification across all material outsourcing arrangements.
  - Need for guidelines for banks and supervisors on outsourcing risk management.

### Cyber risk and fintech
- New technologies and fintech reshape financial services; example: ING partnering with more than 40 fintechs and participation in R3 distributed ledger project.
- Cybercrime is now the second most-reported economic crime; average damage to organizations up 14 percent year-on-year.
- Dutch arrangements:
  - IT-related operational risk standards under Wft; ISO/IEC 27 standards expected.
  - Prior notification required for cloud computing outsourcing; government marks financial sector as one of 12 vital critical infrastructure sectors.
  - Dutch National Cyber Security Center (NCSC) and industry initiatives (FI-ISAC, Electronic Crimes Task Force) active.
- Supervisory initiatives:
  - Since 2009 information security assessed and benchmarked; thematic reviews (penetration testing, Mobile Banking apps, IT complexity).
  - 2015 SSM cyber thematic review followed up in 2016; further work planned for 2016 and 2017 including TIBER ethical penetration tests.
- Supervisory expectations: robust detection techniques, regular board and management engagement, intrusive inspection, verification of incentives for banks to increase IT resilience, and data-sharing to foster system-wide resilience.

### Final observations and operational priorities
- Collective features affecting DNB budget autonomy, rule-making scope for LSIs, and removal authority create a perception of limited independence that could undermine supervisory effectiveness.
- Key operational priorities:
  - Secure budgetary autonomy and staffing flexibility for the DNB.
  - Greater scope for technical rule-making where needed.
  - Strengthen SB engagement and oversight of internal models.
  - Remediate data aggregation and quality issues across banks.

*Source: EXECUTIVE SUMMARY, Technical Note (cr1796) — IMF Financial Sector Assessment Program for the Kingdom of the Netherlands.*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 6

### EXECUTIVE SUMMARY

### Banking sector resilience and outlook
- The financial resilience of banks has been strengthened in recent years and banks are benefiting from continuing economic recovery.
- Broad-based economic recovery is helping to stimulate demand for credit, although credit growth remains slow, and unemployment continues to fall.
- Housing markets have started to recover since 2013 with prices and transaction volumes picking up.
- There has been an improvement in the financial position of Dutch banks: cost efficiency has improved and profitability has recovered.
- The banks' migration to the new Basel III standards is also well under way for capital adequacy and liquidity.
- Nonetheless, the outlook is challenging with greater competition, a low interest rate environment, and potential pressure on capital buffers from future regulatory changes.

### Single Supervisory Mechanism (SSM): effects and operational issues
- The introduction of the Single Supervisory Mechanism (SSM) has significantly strengthened banking supervision.
- The SSM transformed banking supervision in the euro area (EA); the ECB is directly responsible for six of the largest Dutch banks comprising the majority of the banking system.
- The SSM introduced greater frequency and intensity of engagement with banks, particularly through on-site examinations leveraging thematic exercises to encourage adoption of best practices.
- Operational frictions affecting ECB day-to-day supervision:
  - The ECB must execute a number of tasks, in particular relating to licensing and fit-and-proper assessments, according to national legislation transposing the Capital Requirements Directive (CRD IV).
  - All supervisory decisions need to be approved by ECB’s Governing Council, which creates a time-consuming and cumbersome supervisory decision-making process.
  - The decision-making process allows for the speedy adoption of decisions in case of an emergency.

### DNB operational independence: concerns
- The operational independence of the DNB needs to be strengthened.
- While there is no evidence of political or commercial intervention on day-to-day supervisory decisions and accountability mechanisms are extensive, some legislative and policy features may raise concerns in practice:
  - Ministerial control over the budget.
  - Authority of the Ministry of Finance (MoF) to set aside rules enacted by the supervisors.
  - Proposed cap on staff salaries (Wet normering topinkomens/Law on Standards for Remuneration for Senior Officials in the Public and Semi-Public Sector (WNT-3)) unless the MoF gives exemptions to individual staff, which may limit the supervisors’ ability to hire and retain staff with specialized expertise.
  - Authority in legislation for removal of the executive or supervisory boards of the supervisors is open to a wide interpretation and is not based on specific objective cause for removal.
- Even if these features do not affect independence in practice, they may create a perception of a lack of independence that could damage public confidence.

### Supervisory approach: asset quality, provisioning, models, data and governance
- A more active supervisory role in assessing loan classification for Significant Institutions (SIs) is needed to underscore prudent provisioning practices.
  - Recent asset quality reviews (AQRs) and stress testing by the European Banking Authority (EBA) confirm generally low levels of asset impairment of SIs.
  - Supervisory focus should provide bank management with considerations when setting loan classification parameters, such as conservative valuations of realizable net values.
  - The process of developing supervisors’ capacity to challenge bank management valuation of loans has started and needs to be continued.
- Identified FSAP priorities for both SIs and Less Significant Institutions (LSIs):
  - The assessment of banks’ business models and strategies will need to be prioritized by supervisors. Banks face a more challenging operating environment, in part because of lower interest rates and potential future regulatory changes.
  - Supervisors will need to focus on the adequacy of risk management as banks face pressure to reduce costs and search for higher-yielding assets; risk management may be economized and vigilance is required if strategies shift to search for yield.
  - Strengthening corporate governance. The role of the bank Supervisory Board (SB) was a key issue identified following the crisis; more progress is needed particularly in the SB’s oversight of implementation of risk management frameworks and internal models.
  - Greater attention to ongoing model monitoring is needed. Responsibility rests with the Joint Supervisory Teams (JSTs); frequency and intensity of activities have improved, but insufficient attention is paid to ongoing model monitoring. The ECB TRIM project will provide longer-term rigor, but interim attention is needed.
  - Data quality and aggregation. Weaknesses in data quality exist across Dutch banks, impacting regulatory reporting accuracy and management information reliability. Data issues arise from aging IT infrastructure and legacy systems often from mergers of multiple legal entities with incompatible IT systems. Supervisors need to work closely with banks to address data quality issues.
  - Implement harmonized definition of default and forborne loans.
  - Undertake a cross-sectoral review (including sampling loan files) of credit underwriting standards of mortgages originated for the banking, insurance, and pension sectors.

### Key statistics on SSM coverage
- The ECB directly supervises the significant and cross-border institutions: 127 banking groups in 19 countries, which include 1,108 banks representing €21.4 trillion of aggregated assets.
- The NCAs supervise the less significant ones under general oversight of the ECB: more than 3,400 banks, representing €4.9 trillion of aggregated assets.

### Selected policy recommendations (Table 1: Netherlands: Key Recommendations)
- Enhance the powers of the DNB (on LSIs and in consistency with the overall SSM approach) to introduce technical regulations in accordance with national and EU legislations.
  - Timeframe: I
  - Authorities Responsible for Implementation: MoF
- Exclude the DNB from the Wet normering topinkomens/Law on Standards for Remuneration for Senior Officials in the Public and Semi-Public Sector (WNT-3) (salary cap) proposed by the MoF, and give it with greater autonomy in setting its supervisory budget.
  - Timeframe: I
  - Authorities Responsible for Implementation: MoF
- Implement a more active supervisory role in assessing loan classification.
  - Timeframe: NT
  - Authorities Responsible for Implementation: SSM
- Encourage a more active role of the SB of Dutch banks by ongoing engagement with the SB.
  - Timeframe: NT
  - Authorities Responsible for Implementation: SSM
- Strengthen supervisory practices for internal ongoing model monitoring (Internal Ratings-based (IRB) and the Advanced Measurement Approach (AMA)).
  - Timeframe: I
  - Authorities Responsible for Implementation: SSM
- Place more emphasis on confirming that operational risk management systems are effectively implemented.
  - Timeframe: NT
  - Authorities Responsible for Implementation: SSM
- Clarify the expectations for prior notification for material outsourcing arrangements.
  - Timeframe: NT
  - Authorities Responsible for Implementation: SSM
- Prioritize work on data aggregation to raise standards.
  - Timeframe: I
  - Authorities Responsible for Implementation: SSM
- Implement harmonized definition of default and forborne loans.
  - Timeframe: NT
  - Authorities Responsible for Implementation: SSM
- Undertake a cross-sectoral review (including sampling loan files) of credit underwriting standards of mortgages originated for the banking, insurance, and pension sectors.
  - Timeframe: NT
  - Authorities Responsible for Implementation: DNB

(I: immediate: within one year; NT: near term: one–three years.)

*Source: EXECUTIVE SUMMARY, Technical Note (cr1796) — IMF Financial Sector Assessment Program for the Kingdom of the Netherlands.*

### 7.      The day-to-day supervision of significant groups is conducted by JSTs, supported by

### cr1796 - 7.      The day-to-day supervision of significant groups is conducted by JSTs, supported by

### Supervision structure and Joint Supervisory Teams (JSTs)
- The day-to-day supervision of significant groups is conducted by JSTs, supported by the ECB’s and NCA’s horizontal and specialized divisions (e.g., Internal Models, On-site Inspections, Authorizations, Crisis Management, etc.).
- Each JST is led by a Coordinator at the ECB (generally not from the country in which the supervised institution is headquartered), who is responsible for the implementation of the supervisory tasks and activities.
- The DNB is the prudential supervisor in the Netherlands and the NCA.
- The ECB supervises directly seven SIs and the DNB has responsibility for the direct supervision of LSIs, comprising 28 banks.

### Framework for financial stability policy formulation
- Since 2014, promoting financial stability has been included as a DNB task in the Bank Act.
- The Act on Financial Supervision refers to financial stability as one of the main goals of microprudential supervision.
- Main authorities: MoF (legislation), DNB (setting macroprudential tools, prudential supervision), AFM (conduct and markets supervision).
- Financial Stability Committee (FSC):
  - Membership includes MoF (nonvoting).
  - Meets at least every six months.
  - Chaired by the president of the DNB.
  - Role: discuss and identify potential risks to financial stability and ways of mitigating them.
  - The FSC may issue macroprudential warnings and recommendations, but it cannot exercise the statutory powers assigned to the DNB and MoF.

### DNB tools and responsibilities for financial stability
- Instruments at DNB’s disposal:
  - Macroprudential tools, most of which apply to banks and are included in Dutch and European legislation. Main examples: the systemic risk buffer and the countercyclical capital buffer. For these instruments, the DNB is the competent and designated authority for the Netherlands.
  - Prudential supervision aimed at financial stability and individual institutions’ resilience.
  - Powers to collect information specifically for its financial stability task (included in the Bank Act since 2015).
  - Advisory role as a member of the FSC, including recommendations regarding loan-to-value (LTV) and loan-to-income ratio (LTI) limits (which are set by the government) and ad hoc issues such as the impact of tax incentives.

### Public infrastructure and legal framework
- Dutch legal safeguards include corporate, bankruptcy, and private property laws.
- Credit institutions must apply either International Financial Reporting Standards (IFRS) or the provisions in Title 9 Book 2 of the Dutch Civil Code.
- Accounts are legally required to be validated by independent auditors.
- DNB participates in TARGET2 and operates “TARGET2.NL.”
- DNB can provide Emergency Liquidity Assistance (ELA) for temporary short-term liquidity needs against sufficient collateral and under the premise that the institution is solvent; decisions must be consistent with the ESCB framework.
- Work is ongoing at FSB and Banking Union level on funding in resolution and use of the resolution fund to catalyze temporary liquidity provision.

### Market discipline and conduct supervision (AFM)
- AFM responsibilities:
  - Conduct of business of financial undertakings and securities market supervision.
  - Focus on fair and equitable behavior between market participants and towards customers, and on transparency and accuracy of information.
  - Supervises trading systems, collective investment schemes, investment firms, market intermediaries, issuers of securities, auditors, financial service providers (and pension administrators).
  - Licenses investment managers of investment institutions, financial service providers, asset managers, and other investment undertakings.
- Cooperation between DNB and AFM:
  - Robust cooperation and coordination with clear leadership and veto roles.
  - A covenant facilitates legal framework for supervisory cooperation and designation of a lead supervisor under the Act on Financial Supervision (Wft): DNB generally leads banks, insurers, and pension funds; AFM leads for securities firms.

### Financial reporting and corporate governance
- Netherlands has implemented the Dutch Corporate Governance Code (DCGC) applying to all exchange-listed companies.
  - DCGC contains principles and best practice provisions regulating relations between the management board, supervisory board, and shareholders.
  - Listed entities must state in their annual report whether they are compliant; in case of noncompliance they must give an explanation (comply or explain).
- AFM supervises compliance of annual financial reporting of listed companies with Title 9 of Book 2 of the Dutch Civil Code, Act on Financial Supervision, and IFRS.
- Under the Act on the Supervision of Financial Reporting, the AFM supervises financial statements of listed companies after adoption by shareholders.

### Market structure and banking sector size
- Banking system composition:
  - 55 banks and 43 branches of credit institutions established in EU countries.
  - Total banks assets are €2.585 trillion, down about a quarter since 2008.
  - As a percentage of GDP, the banking system is approximately four times the value of gross domestic product, down from over 540 percent in 2008.
- Concentration:
  - The banking system is one of the most concentrated in Europe, with the three largest banks representing over 72 percent of total banking system assets.
  - Rabobank, ING and ABN Amro control 60 to 80 percent of the banking markets for mortgages, business loans, and savings.
- Herfindahl Index: 21.16 for 2015Q3.

### Key financial indicators and sector performance (selected figures preserved)
- Dutch Banks: Key Financial Indicators (All figures as at December 31; ratios calculated as weighted averages for ING, Rabo and ABN Amro)
  - Return on equity: 2011: 8.3; 2012: 6.7; 2013: 6.9; 2014: 4.5; 2015: 7.8
  - Return on assets: 2011: 0.4; 2012: 0.3; 2013: 0.3; 2014: 0.2; 2015: 0.4
  - Net interest margin: 2011: 1.4; 2012: 1.3; 2013: 1.3; 2014: 1.5; 2015: 1.5
  - Cost-to-income ratio: 2011: 57.0; 2012: 60.0; 2013: 60.0; 2014: 64.0; 2015: 58.0
  - CET1 ratio (CET1-ratio-transitional): 2011: 8.9; 2012: 9.6; 2013: 9.8; 2014: 13.6; 2015: 13.6
  - Leverage ratio (Total exposure only available for 2014 and 2015 weighted average): 2011: 3.3; 2012: 3.6; 2013: 3.6; 2014: 4.1; 2015: 4.4
  - NPL ratio (Problem loans as a percentage of gross loans): 2011: 2.9; 2012: 3.2; 2013: 3.3; 2014: 3.5; 2015: 3.0
  - RWA density: 2011: 39.2; 2012: 40.8; 2013: 41.8; 2014: 32.6; 2015: 33.8
  - Loan to deposit ratio: 2011: 127.3; 2012: 127.7; 2013: 121; 2014: 119.7; 2015: 116.4

- Key Financial Ratios (All figures average and as at 2015Q4)
  - Dutch SIs vs SSM SIs:
    - RoA: 0.4 vs 0.3
    - RoE: 7.4 vs 4.8
    - Coverage Ratio: 37.7 vs 45.4
    - NPL ratio: 2.7 vs 7.0
    - Cost of Risk: 0.2 vs 0.5
    - LDR: 130.1 vs 124.7
    - CET1: 14.3 vs 13.5
    - LCR: 125.4 vs 129.1

### Asset composition and mortgage exposure
- Asset composition (as proportion of balance sheet total):
  - Mortgages account for 36 percent of total balance sheet assets.
  - Loans to large enterprises: 16 percent.
  - Loans to small businesses: 9 percent.
  - Derivatives and the investment portfolio together account for 16 percent.
- Liability structure:
  - Customer deposits: 55 percent.
  - Wholesale funding: 45 percent.
- Cross-border activities represent approximately 40 percent of consolidated banking system assets (reduced significantly since peak in 2007).
- Mortgages:
  - Banks heavily exposed to residential mortgages characterized by high LTVs, nonamortizing loans and pockets of negative equity.
  - About 21 percent of residential mortgages are underwater, especially among young households.
  - Housing prices declined 21 percent over 2008–2013, then rose by 7 percent since mid-2013; prices remain about 17½ percent below 2008 peak levels.
  - Government introduced an LTV limit of 106 percent in 2011 to reduce by 1 percentage point each year with a target of 100 percent by 2018.

### Asset quality, NPLs, and provisioning
- NPLs:
  - NPL ratio to total gross loans has remained at about the 3 percent level since 2013Q2.
  - As at 2015Q4, the NPL ratio for the Dutch SI banks was 2.7 percent vs 7 percent for SSM SIs.
- Coverage ratios:
  - Dutch banks have coverage ratios of approximately 37.7 percent vs 45.4 percent for SSM cohort (2015Q4).
  - Lower coverage reflects strong foreclosure and insolvency regime causing actual losses to be low.
- Loan impairment charges:
  - Peaked in 2013Q4 and have fallen each quarter to 2015, with largest improvements in domestic mortgage and SME portfolios.
- System average problem loans for 2015: 3.08 percent of gross loans for 2015 (text mentions system averages 3.08 percent).

### Funding, liquidity, and market funding reliance
- Household debt outstanding balance: €740 billion at end-2014, about 275 percent of disposable income and 111 percent of GDP.
- DNB notes 61 percent of homeowners between the age of 30–40 were in negative equity at end-2015Q1 (DNB 2015).
- Local pension companies capture more than 70 percent of Dutch household wealth.
- High loan-to-deposit ratio and funding gap financed by wholesale markets; Dutch banks sensitive to adverse changes in financing conditions and investor sentiment.
- Mitigation strategies employed by banks:
  - Increasing deposits, lengthening maturity of wholesale funding, building up stock of high-quality liquid assets (HQLA).
- Liquidity metrics:
  - DNB reports SI banks have met the 100 percent LCR threshold since monitoring commenced in June 2012.
  - Average LCR for SI banks: 125.4 percent as at 2015Q4.
  - Data for NSFR for SIs is above the 100 percent threshold.
  - DNB is relatively pro-active in liquidity supervision.
- Credit ratings for ING, Rabo and ABN-AMRO respectively: S&P (A-, A+ and a); Moody’s (Baa1, Aa2 and A1).

### Profitability, capital generation, and leverage
- Economic backdrop:
  - GDP growth reached 2 percent in 2015, up from 2 percent in 2014.
  - Average return on equity for the three largest Dutch banks: 7.4 percent as at 2015Q4 vs EA average of 4.8 percent.
- Profitability drivers in 2015: lower interest expense, lower impairment charges, aggressive cost management.
- Cost of risk reducing to below long-term averages in 2015.
- Capital:
  - Average T1 ratio stood at over 16 percent at the end of 2015 (migration to Basel III well under way).
  - Low dividend pay-out ratios helped build CET1.
  - Leverage (capital-to-asset ratio) of 5.3 percent as at 2015Q3.
- Stress test result (FSAP team):
  - In the adverse scenario, leverage ratio in the system (six largest banks) would decline from 3.8 percent to 3.2 percent.
  - The ratio for one of the largest banks would fall below the minimum 3 percent hurdle.
  - This outcome reflects relatively low RWA density in the Dutch banking system.

### Macro-financial outlook and near-term challenges
- Economic conditions supportive: recovering domestic economy, falling unemployment, low inflation, housing market recovery since 2013, falling corporate bankruptcies.
- Near-term challenges to bank profitability:
  - Intensifying competition in the mortgage market reducing interest income and fees.
  - Competition from nonbank lenders: over 50 percent of new mortgage loans underwritten by nonbanks in 2015.
  - Outlook for interest rates expected to remain ‘low for longer,’ affecting front and back book pricing.
  - Profitability benefited from materially lower loan-loss provisions in 2015.

### Main findings and recommendations (section header)
- The document transitions to MAIN FINDINGS AND RECOMMENDATIONS and begins subsection A. Organization, Adequacy of Resources, and Governance-Related Issues (CP 1 and 2), indicating subsequent discussion of supervisory organization and governance.

*International Monetary Fund — Selected excerpts from the Netherlands Financial Sector Assessment (cr1796).*

### 25.      The DNB largely has the power and authority to carry out its tasks, but aspects of

### cr1796 - 25.      The DNB largely has the power and authority to carry out its tasks, but aspects of

### Operational independence and accountability
- The DNB largely has the power and authority to carry out its tasks, but aspects of operational independence are of concern.
- The influential role of the MoF may be problematic because:
  - Negotiation for ministerial approval of the supervisory budget could limit the supervisors’ ability to attract and retain staff essential for effective supervision and to deliver fully on all their supervisory responsibilities.
  - Proposed legislation on salary cap could limit the supervisors’ ability to attract and retain staff essential for effective supervision.
  - The limited ability of the supervisor to introduce technical regulations for LSIs—which in any case cannot prejudice the ECB’s policy and regulatory framework for SIs and LSIs—has the potential to reduce supervisory effectiveness.
  - The authority of the MoF to set aside rules enacted by the supervisors (even if not formally used) could reduce supervisory effectiveness.
  - The authority specified in legislation for the removal of the executive or supervisory board of the DNB is open to interpretation.
- International standards cited:
  - Budgetary processes should not undermine autonomy and adequacy of resources.
  - Removal criteria should be based on specific objective cause for removal.
- Even if individual features do not affect independence, collectively they create the perception of a lack of independence, which could undermine supervisory effectiveness.

### Key supervisory recommendations (explicit)
- The FSAP recommends the DNB be given greater autonomy when deciding its budget and the DNB be excluded from the proposed salary cap. Adequate resourcing is a key element of securing effective supervision outcomes. The SSM continues to rely on the DNB (and NCA’s more broadly) to supply experienced and expert staff for a range of on-site tasks and thematic exercises. Without these staff from the DNB, the fulfillment of these tasks will be impacted, e.g., TRIM will require a dedicated number of DNB staff familiar with the practices of local banks and with expertise in internal models.
- The FSAP recommends the DNB be given greater flexibility to develop technical standards where there is a need. While rule making is increasingly determined by directly applicable EU regulations and binding standards (for which the DNB is co-decision maker), nonetheless, there are areas where the DNB needs to have the capacity to issue rules (e.g., fit-and-proper, corrective measures and sanctions).
- Supervisors should continue to increase dialogue and discussions with the supervisory board on results of supervisory activities and concerns (to strengthen corporate governance).
- SB oversight of internal models needs greater attention; supervisors determine that:
  - Banks comply with supervisory standards on their use;
  - The banks’ Boards and senior management understand the limitations and uncertainties relating to the output of the models and the risk inherent in their use; and
  - Banks perform regular and independent validation and testing of the models.

### Supervisory approach and enforcement findings
- For Significant Institutions (SIs):
  - The supervisory process adopted by the ECB is robust and conducive to a more structured, intense, and intrusive supervision.
  - Methodology is maturing and adapting to allow greater discretion at the JST (bottom-up) while pursuing standardization (top-down).
  - The supervisory process relies extensively on quantitative and qualitative analysis combining FINREP, COREP and other standard reports and expert judgment.
  - There is a direct link between supervisory assessment, the necessary supervisory measures, and the supervisory examination program (SEP).
  - Emphasis on business model analysis is evident for Dutch SIs.
  - Frequency and intensity of on-site activities for Dutch SIs has increased since establishment of the SSM (examples: monthly meetings with senior management and members of the board, thematic reviews).
  - Standardization of supervisory methods and techniques sometimes risks undermining a more risk-focused attitude (excess compliance-based techniques, checklists).
  - Industry feedback: overall improvement in supervision level, though communication from supervisors is not always satisfactory (better explanations of on-site examination results and clarity around future priorities and drivers of Pillar 2 add-ons are needed).
- For Less Significant Institutions (LSIs):
  - LSI supervision has benefited from DNB participation in the SSM.
  - DNB’s approach to prudential supervision transformed since last FSAP: more forward looking and data driven; better link between macroprudential and microprudential supervision; establishment of risk specialist divisions; alignment of SSM processes with DNB’s approach to LSIs (e.g., ratings methodology).
  - More forward-looking methods emphasize supervision of behavior and culture, governance and integrity, business models and strategies, and fit-and-proper tests.
- Enforcement and sanctioning:
  - Dutch law and the Single Resolution Mechanism Regulation (SRMR) provide a broad range of supervisory actions.
  - ECB direct enforcement powers and sanctions are limited; ECB can use enforcement and sanction powers available to the DNB (indirect actions evidenced).
  - Complex legal framework may make it operationally difficult and time consuming for ECB to impose enforcement actions.
  - DNB introduced a new area within the supervision department to detect early problem banks and apply measures by specialists.
  - For SIs, ECB has direct sanctioning powers only for pecuniary sanctions on legal persons for breaches of ECB decisions or directly applicable EU law (e.g., CRR); for non-pecuniary sanctions and sanctions on natural persons, NCAs impose these upon ECB request. For LSIs, the NCA is competent.
  - ECB has started to collect information on powers available in each jurisdiction to create a regulatory database; project not complete.

### Corporate governance and risk management findings
- Board structure and governance:
  - Netherlands uses a two-tier Board structure: Supervisory Board (oversight) and Management Board (executive).
  - Post-crisis emphasis on board role increased; ECB built on this via thematic reviews and recommendations to strengthen board involvement.
  - DNB actions:
    - Introduced new requirements and processes for supervision of integrity, behavior, and culture.
    - Fit-and-proper standards applied to all supervisory and management board members for all SIs and LSIs.
    - Supervisory boards are assessed individually and collectively for skills and expertise commensurate with risk profile and business model.
- Risk appetite framework (RAF):
  - RAF is relatively well developed across Dutch SIs and used actively by supervisors in risk management assessments.
- Internal capital and liquidity processes:
  - ICAAP and ILAAP are well developed and routinely reviewed by JSTs as part of SREP.

### Data and risk management gaps
- Data aggregation and quality concerns:
  - Weaknesses in data quality across Dutch banks impact regulatory reporting accuracy and management information reliability.
  - Causes include aging IT infrastructure, legacy systems, and mergers of multiple legal entities with incompatible IT systems.
  - Example: recent EBA stress testing exercise highlighted one Dutch SI as having the highest number of data flags.
  - Regulatory requirements for data aggregation are absent; Basel guidelines (BCBS 239) will be transposed into EBA guidelines in the future.
  - Supervisors are working with banks to remediate data aggregation issues, which will require time and large complex projects (data warehouses and downstream reporting systems).

### Selected quantitative indicators (time series and assessment figures preserved exactly as in source)
- Regulatory Capital to Risk-Weighted Assets: 14.3 14.9 14.9 17.9 17.3 17.3 17.5 17.9 20.1 18.7 18.8 20.0 20.1
- Regulatory Tier 1 Capital to Risk-Weighted Assets: 12.4 12.8 12.5 15.0 14.1 13.7 14.7 15.0 16.2 15.3 15.4 16.0 16.2
- Non-performing Loans Net of Provisions to Capital: 48.2 46.3 50.4 40.0 51.5 47.2 39.5 40.0 35.2 38.4 39.6 37.0 35.2
- Non-performing Loans to Total Gross Loans: 3.0 3.0 3.2 3.0 3.2 3.0 2.9 3.0 2.7 2.8 2.8 2.7 2.7
- Sectoral Distribution of Total Loans: Residents: 70.8 70.2 70.2 66.1 67.8 65.9 64.5 66.1 64.4 63.0 64.0 64.4 64.4
- Sectoral Distribution of Total Loans: Deposit-takers: 0.9 1.0 1.2 0.8 1.0 0.7 0.8 0.8 0.8 0.9 0.6 0.8 0.8
- Sectoral Distribution of Total Loans: Central bank: 5.9 5.1 4.1 2.4 3.7 1.7 1.0 2.4 5.8 1.7 3.9 5.3 5.8
- Sectoral Distribution of Total Loans: Other financial: 13.4 13.9 13.0 13.0 12.7 13.4 13.5 13.0 12.4 12.4 12.4 12.3 12.4
- Sectoral Distribution of Total Loans: General government: 3.4 3.3 3.6 3.3 3.5 3.4 3.4 3.3 3.2 3.5 3.3 3.3 3.2
- Sectoral Distribution of Total Loans: Nonfinancial corporations: 20.7 20.4 20.6 20.2 20.0 19.7 19.3 20.2 16.9 19.3 18.4 17.9 16.9
- Sectoral Distribution of Total Loans: Other domestic sectors: 26.6 26.5 27.7 26.3 26.9 27.0 26.5 26.3 25.3 25.2 25.4 25.0 25.3
- Sectoral Distribution of Total Loans: Nonresidents: 29.2 29.7 29.8 33.9 32.2 34.1 35.5 33.9 35.6 37.0 36.0 35.6 35.6
- Return on Assets: 0.3 0.4 0.3 0.3 0.3 0.4 0.4 0.3 0.6 0.4 0.5 0.6 0.6
- Return on Equity: 6.9 9.2 6.2 6.6 6.7 7.8 8.0 6.6 10.9 7.2 10.3 12.0 10.9
- Interest Margin to Gross Income: 65.7 66.3 82.8 77.7 73.2 75.1 74.5 77.7 73.5 70.3 65.6 77.4 73.5
- Non-interest Expenses to Gross Income: 66.8 66.3 108.5 84.4 82.8 76.3 73.2 84.4 77.9 88.7 61.5 52.8 77.9
- Liquid Assets to Total Assets (Liquid Asset Ratio): 23.7 23.7 23.6 21.1 21.3 22.1 21.3 21.1 22.8 21.2 22.6 22.9 22.8
- Liquid Assets to Short Term Liabilities: 166.8 167.6 180.3 162.5 158.4 165.5 162.1 162.5 169.7 153.4 157.8 166.0 169.7
- Suitability screening (2011–2015): a total of 5,469 people have been screened, of whom 614 (11.2 percent) were found to be unsuitable or their integrity was not considered to be beyond doubt.

### Final observations
- Collective features affecting budget autonomy, rule-making scope for LSIs, and removal authority create a perception of limited independence that could undermine supervisory effectiveness.
- Key operational priorities identified: secure budgetary autonomy and staffing flexibility for the DNB; greater scope for technical rule-making where needed; strengthen board engagement and oversight of internal models; remediate data aggregation and quality issues.

*Source: IMF Financial Sector Assessment Program (FSAP) country report excerpt.*

### 44.      Greater effort to ensure independence of the risk function is needed. Separation of the

### 44.      Greater effort to ensure independence of the risk function is needed. Separation of the

### Risk function independence
- Separation of the Chief Risk Officer (CRO) and Chief Financial Officer (CFO) function has been slow and instigated relatively recently (2015 in some cases).
- Some banks are still working through effectively separating risk (second line of defense) from business units (first line of defense) and in other cases from finance.
- Effective separation requires ensuring risk management has the right type of prescience and risk culture.
- Independent reporting to the board via the board risk committee is part of ensuring effective separation.
- Prior to the SSM, local Dutch rules were not prescriptive on the separation between the CFO and CRO functions.

### D. Capital Adequacy, Credit Risk and Problem Assets, Provisioning and Reserves (CP 16, 17 and 18) — Capital
- Over the last five years, banks have significantly increased the quality and amount of regulatory capital through capital raisings, stronger internal revenue generation, and lower dividend payout.
- Capital adequacy ratios for the larger banks have increased (Figure 2).
- Further regulatory changes may result in additional regulatory capital being required (examples cited: total loss absorbing capital (TLAC), CRDIV, and amendments to the standardized approaches for credit, market, and operational risk, including changes to treatment of internal models).
- The RWA density for Dutch banks is low, particularly those using IRB models.
- Stronger capital buffers would further strengthen resilience and enable banks to support private sector credit demand.
- The three largest Dutch banks have increased CET1 from 2008 to 2015; ING had made the largest progress compared with Rabo and ABN AMRO.
- CRDIV has been transposed into the Wft and related administrative orders of the law on financial supervision (Bpr); Dutch legislation is in line with the Directive and does not materially differ.
- The SSM OND project evaluated full implementation of CRDIV and the majority of Dutch banks are in line with the five-year phase-out schedule (mainly insurance deductions for LSIs as SIs have divested their insurance subsidiaries).
- The DNB has imposed additional buffer requirements on the larger Dutch banks.

Key figures on additional buffer requirements (In percent):
- ING Bank NV: O-SII Buffer 2; SRB 3
- Rabo Bank: O-SII Buffer 2; SRB 3
- ABN Amro Bank NV: O-SII Buffer 2; SRB 3
- SNS Bank NV: O-SII Buffer 1; SRB n/a
- NV Bank Nederlandse Gemeenten: O-SII Buffer 1; SRB n/a

- The SREP is applied to all banks at least annually and results in capital and liquidity decisions, including, if warranted, a Pillar 2 add-on.
- The ICAAP plays an integral role in the Netherlands SREP. For SIs, the EBA SREP guideline was being implemented for the 2016 capital decision.
- For LSIs, the ICAAP has traditionally been used in bottom-up assessment and includes assessment of expected loss and adequacy of provisions.
- The majority of SIs use internal models to calculate risk-weighted assets and are approved to estimate RWA for credit, market, and operational risk.
- JSTs are responsible for ongoing model monitoring; the Internal Model Division (INM) within the ECB performs consistency checks and co-signs JST proposals.
- The upcoming TRIM project is designed to clarify supervisory expectations.

Recommendations (Capital)
- Continued focus on capital management planning to retain healthy buffers is needed.
- Rationale: Stronger capitalized banks are better placed to support private sector credit demand.

### Credit risk
- Household sector (HH) remains highly indebted but net wealth position is strong.
  - Household debt is high at approximately 112 percent of GDP.
  - Households have a relatively high debt-to-income ratio of 275 percent.
  - Net financial assets are equivalent to 209 percent of GDP as at end-2015.
- Housing markets are recovering after a 21 percent price decline from 2008–2013.
  - Approximately 21 percent of households had negative equity as at June 2016, notably younger households.
  - Mortgage arrears were 1.6 percent at 2015Q4.
  - New macroprudential rules aim to reduce maximum LTV ratios over a transition period; the FSAP recommends further reductions.
  - As part of 2013 Housing Market Reform Agenda, new IO mortgages are no longer eligible for mortgage interest deductibility from January 2014; the share of IO loans declined by 6 percentage points (from 61 percent) since 2012.
- A substantial share of mortgage value (55 percent) are IO mortgages and vulnerable to house price shocks and roll-over risks.
  - Only 21 percent of borrowers have a full IO loan; this group tends to be older and financially sound.
  - Currently, of the 21 percent full IO loans the majority has an LTV of below 80 percent.
  - New legislation banned beneficial tax treatment of mortgage interest payments for non-amortizing loans to discourage new IO mortgage production.
- Commercial real estate (CRE) markets stabilizing after pre-crisis boom collapse.
  - MSCI Investment Property Databank: capital values declined for 26 consecutive quarters from 2008Q4; accumulated drop amounted to 20 percent by end-2014.
  - Industrial market recorded -4 percent in 2016Q1; office and retail growth close to zero percent.
  - Vacancy rates increasing since 2009; office sector is weakest with excess supply.
  - Banks have reduced CRE exposure through deleveraging.
- Debt burden high and negative equity among young borrowers prevalent.
  - Approximately 44 percent of younger households (aged between 30-39) face negative housing equity.
  - Banks have renegotiated mortgages with distressed borrowers but progress on re-profiling debt has been slow.
- Recent macroprudential measures to lower maximum LTV expected to help over time; continued focus on sound credit underwriting needed.

- Targeted review of residential mortgages results integrated into risk assessment system (RAS) for each bank; thematic review informed underwriting standards and valuation practices.
- Limits on LTVs and DSTI ratios tightened; lenders required to apply a “stressed” interest rate (5 percent) when calculating DSTI for mortgage loans with interest rates fixed for less than 10 years.
- Credit risk focus for SIs and LSIs through off-site and on-site examinations; thematic reviews and stress testing contributed to supervisors’ assessment.

- Mortgage investments have risen rapidly in the insurance sector.
  - Mortgages provide returns around 2 to 2.5 percentage points above swaps.
  - Share of insurers in mortgage investment grew from 3 percent in 2009 to 8 percent in 2016.
  - For some insurance groups mortgage investments make up to 40 percent of portfolios (excluding unit-linked business).
  - Pension fund exposure to Dutch home loans reached €15 billion at end-2015; insurance mortgage portfolio totaled €46 billion.

Recommendations (Credit risk)
- Authorities recommended to undertake a cross-sectoral review (including sampling loan files) of credit underwriting standards of mortgages originated for the banking, insurance, and pension sectors.

### Provisioning
- CRDIV/CRR and EBA guidelines on SREP and supervisory reporting provide general framework for classification of assets and maintenance of provisions and reserves.
- In the Netherlands, prudential standards for provisioning are not issued by the DNB; banks follow IFRS.
- The general framework does not fully cover assessing whether classification and provisioning are adequate for prudential purposes.
- The SSM and DNB do not have power to adjust classification of individual assets, nor to increase levels of provisions and reserves; they can apply a capital add-on under Pillar 2 if provisioning is deemed inadequate.
- Traditionally supervisors in the Netherlands viewed loan valuation as an accounting function; supervisor must introduce prudential considerations to narrow bank management’s judgment.
- Supervisors should provide prudential considerations when setting loan classification parameters and provisioning (items to consider for residential mortgages, CRE triggers).
- Collateral valuation considerations such as conservative valuations of realizable net values are important.
- Supervisors assess portfolio quality using EBA’s guidelines on common procedures and methodologies for the SREP and categorize exposures as “performing,” “nonperforming,” and “forborne.”

Recommendations (Provisioning / Supervision)
- A more active supervisory role in assessing loan classification is needed to underscore prudent provisioning practices.
  - The role of supervisors in the Netherlands primarily involves review of policy and procedures; a more intrusive role is needed.
  - The process of developing capacity to challenge bank management valuation of loans has started.
- Strengthening the supervisory pillar should include:
  - Consultation with banks and accounting firms on proposed prudential guidelines;
  - Training for supervisors on valuing loans and challenging assumptions on collateral values; and
  - Development of market data to gauge reasonableness of collateral valuations by banks (not to set a value but to question significant variances from market values or trends).

### E. Liquidity Risk (CP 24)
- The LCR and NSFR have strengthened liquidity requirements, encouraging reliance on more stable funding and minimizing maturity mismatches.
- DNB had introduced several monitoring rules on liquidity prior to CRR; new liquidity requirements strengthened regime and created incentives to reduce exposure to short-term market financing.
- Migration plans for LCR and NSFR compliance were implemented early; DNB introduced a survival period requirement with a minimum requirement of one month, based on profile of the bank.
- DNB introduced requirements to limit liquidity risk from excessive cross-border liabilities: policy constrains investment of deposit funds in non-Member States.
  - Rule prescribes that a prudent and acceptable ratio will exist if the product of the proportion of guaranteed liabilities in the balance sheet and the proportion of loans and investment in non-Member States in the balance sheet total does not exceed 0.25 percent.
- The ILAAP is established for Dutch SIs; JSTs used framework for comprehensive liquidity risk assessment.
- Supervisory monitoring activities include: meetings with treasury staff; observing ALCO meetings; verifying risk management policies; analyzing prudential and additional liquidity ratios (e.g., self-funding ratios); and confirming board engagement in liquidity risk appetite and oversight.
- SREP framework enhanced during 2016 to support JSTs with more robust stress testing tools and proxies to challenge banks’ estimates and assumptions.
- Dutch banks are well placed to meet full implementation of LCR and NSFR, but continued monitoring is needed.
  - Liquidity risk ranks lower in priorities due to: (i) lower inherent risk profile from higher liquidity buffers; (ii) strengthened risk management; (iii) environment of excess liquidity and negative interest rates.
  - Approximately a third of the system is funded by market financing.
  - Reliance on wholesale funding exposes system to changes in market sentiment, although funding is well diversified by type and geography of holders.
  - Banks have extended maturity profile of wholesale funding to manage this risk.

*KINGDOM OF THE NETHERLANDS—NETHERLANDS  INTERNATIONAL MONETARY FUND*

### 66.      Given the extent of market-based funding, ongoing scrutiny of liquidity risk is needed,

### cr1796 - 66.      Given the extent of market-based funding, ongoing scrutiny of liquidity risk is needed,

### Liquidity Risk: group/aggregate LCR and liability classification
- Given the extent of market-based funding, ongoing scrutiny of liquidity risk is needed, including through rigorous stress testing.
- Interrogating the assumptions behind the group/aggregate LCR is needed to ensure assets are freely available within and across the group to meet stressed outflows.
- Accurate classification of liability buckets is needed to ensure run-off assumptions are calibrated properly.
- Particular concerns:
  - Banks with large portfolios of liabilities that are treated as retail under the LCR framework yet are, in practice, professionally managed.
  - Treatment and validation of assumptions for nonmaturity portfolios to ensure assumptions are conservative.
  - Ongoing analysis of composition of the liquidity buffer to understand where liquidity needs within a group are most needed.

### Operational Risk (CP 25): regulatory framework and supervisory findings
- The regulatory and supervisory framework for operational risk is generally comprehensive.
- Banks are required to adhere to general risk management standards complemented with tailored guidelines (e.g., cloud computing, Information Security Control Framework, etc.).17
- Risk management requirements are based on standards set by the BCBS for operational risk.
- Banks report a mix of qualitative and quantitative information on a regular basis used to shape supervisory activities (thematic reviews, on-site examinations, meetings with senior management).

Findings on Dutch SIs
- Dutch SIs are large, integrated, and operate in many cross-border markets shaping their inherent operational risk profile.
- Product base is diverse and sophisticated; technology is a key component of the business model.
- Expansive business models are linked to active risk taking via active marketing, aggressive incentive plans, number of new products introduced, and attractive terms for investors—these elements increase operational risk and require supervisory vigilance.
- Loss data indicates SIs are exposed to a moderate level of operational risk mainly in legal risks.
- Large cost-cutting programs at large banks may result in a higher inherent operational risk profile.
- Dutch SIs are heavily reliant on IT outsourcing arrangements and technology.
  - The largest banks use outsourcing to leverage external expertise and cost efficiencies; one large bank outsources all of its IT.
  - Outsourced activities mapping showed exposure to off-shore service providers/cloud providers.

Supervisory actions
- Supervisory focus on operational risk is being stepped up for both SIs and LSIs.
- Supervision examination plans for each SI are incorporating additional on-site work on operational risk to address issues like IT infrastructure, AMA model reviews, outsourcing, data quality and legal issues.
- Supervisors hold regular meetings with key control functions within banks to monitor emerging issues.

### Recommendations on operational risk monitoring and outsourcing
- Greater attention to ongoing model monitoring for AMA banks is needed to ensure adequate estimation of operational risk capital.
  - DNB assesses usage of risk identification and assessment tools during on-site visits. Instruments in scope include: Risk and Control Self Assessments (RCSAs), Business Process Modeling, Scenario Analysis, Internal Loss Data (ILD), External Loss Data (ELD), Key Risk Indicators (KRIs)/Key Performance Indicators (KPIs) and scorecards.
  - For AMA banks, minimum requirements on the business environment and internal control factors are specified through the CRR Art. 322 paragraph 6.
- More verification and testing is needed to accurately assess banks’ processes to manage and monitor risks associated with outsourcing arrangements, including prior notification.
  - Supervisors make regular assessments of outsourcing risks via meetings with senior bank management, on-site inspections, etc.
  - Outsourced activities mapping showed exposure to off-shore service providers/cloud providers.
  - Prior notification has been introduced for ‘cloud computing’ but this requirement needs to be applied across all material outsourcing arrangements to allow supervisors to assess suitability (e.g., permit supervisors’ access, etc.).
  - Guidelines for banks and supervisors are needed to ensure prudent practices; it is understood that guidance will soon be issued.

### Cyber Risk and Financial Stability in the Netherlands (Box 2)
- New technologies and fintech initiatives are reshaping financial services; example: ING partnering with more than 40 fintechs and participation in the R3 project on distributed ledger technology.
- Cybercrime has become the second most-reported economic crime this year; average damage to organizations has grown by 14 percent from last year.
- Risks have evolved from capture of protected information to disruptions in accessibility of financial platforms and integrity of financial information.
- Dutch regulatory and industry arrangements:
  - Risk management standards for IT-related operational risk are established by Wft.
  - Banks required to have an effective operational risk management framework enterprise-wide, subject to ongoing testing and enhancements.
  - Banks required to adhere to industry standards for IT security, such as ISO/IEC 27 of the International Standards Organization.
  - Prior notification is required before banks enter into material outsourcing arrangements involving cloud computing.
  - The Dutch government has marked the financial sector as one of the 12 sectors vital to the critical infrastructure.
  - The Dutch National Cyber Security Center (NCSC) communicates best practices and shares cyber security information, monitors, and performs incident and response activities in collaboration with other CERT organizations.1
  - Financial Industry Information Sharing Analysis Centre (FI-ISAC) and the Electronic Crimes Task Force are examples of industry initiatives for information sharing and operational collaboration with law enforcement.
- Supervisory initiatives and planned work:
  - Since 2009, information security is assessed, monitored, benchmarked and followed-up periodically to assure a minimum maturity level.
  - Specific investigations: quality of penetration testing (2013), Mobile Banking apps (2014), and IT complexity (2015).
  - During 2015, the SSM undertook a cyber thematic review; results were followed-up during 2016 and integrated into supervisory action plans.
  - The DNB extended the thematic work to the financial market infrastructure.
  - Ongoing activities include IT on-site visits, seminars, round tables, periodic BCM/DR inspections and DR-scenarios for the Financial Key Infrastructure.
  - Further work planned in 2016 and 2017 includes ethical penetration tests using intelligence-based scenarios (Threat Intelligence-Based Ethical Red Teaming (TIBER)), continued IT on-sites and information security assessments, monitoring and follow-up, and SSM follow-up on the 2015 cyber thematic review.
- Supervisory expectations:
  - Robust detection techniques, regular board and management engagement, and intrusive inspection are key.
  - Supervisors need to verify banks are appropriately incentivized to (a) increase security and IT resilience by raising risk management standards; and (b) leverage collective strengths through greater global coordination.
  - Achieving consistent industry standards at each layer of the service point is necessary.
  - Data-sharing among participants is vital to foster system-wide resilience.

*Source: IMF staff report (cr1796) — Kingdom of the Netherlands — Netherlands*

### 2007. As a central bank, the DNB has several tasks (price stability, shock resilient

### cr1796 - 2007. As a central bank, the DNB has several tasks (price stability, shock resilient

### Mandate, objectives and statutory powers
- DNB objectives for prudential supervision described in the Wft, Section 1(24): prudential supervision shall focus on the solidity of financial enterprises and to the stability of the financial system.
- Wft Section 3:18a gives DNB the power to carry out the SREP, including a stress test, in line with the technical criteria in Article 98 of the CRDIV and the power to increase prudential requirements for individual banks and banking groups.
- ECB powers for Significant Institutions (SIs) and DNB powers for Less Significant Institutions (LSIs):
  - In accordance with Article 10 of the SSMR, the ECB may require from credit institutions, financial and mixed financial holding companies, and mixed-activity holding companies established in the SSM area all the information necessary to its supervisory tasks, including recurring intervals and specified formats.
  - Pursuant to Article 11 of the SSM Regulation, the ECB may conduct all necessary investigations of these entities, persons or third parties when established or located in the SSM area.
- DNB can supervise banks and banking groups for LSIs and evidence was seen of SREP assessments and Pillar 2 requirements applied to both SIs and LSIs.

### Rulemaking, interaction with the Ministry of Finance (MoF) and legislative process
- MoF derives rule-making authority from government-determined regulation; DNB can propose rules within its mandate.
- Increasingly, supervisory rules are determined by directly applicable European regulation (CRR or binding technical standards by EBA) based on maximum harmonization.
- DNB practice for additional rules/powers: annual public letter to MoF proposing legislative changes; MoF responds to Parliament.
- DNB reviews and updates the Wft approximately annually and is subject to public consultation.
- Comment: AFS gives MoF substantial role and powers to overturn DNB rules; circumstances for use should be more precisely specified for transparency. DNB should have greater powers and flexibility to issue rules for LSIs, without prejudice to ECB policy and regulatory framework.

### Independence, governance, accountability and resourcing
- ECB independence ensured by Article 130 TFEU and extends to supervisory tasks by Article 19 SSMR.
- Appointment/removal processes for ECB and DNB governing bodies are transparent; internal governance governed by SSM Regulation, ECB Rules of Procedure, Rules of Procedure of the Supervisory Board, and DNB’s Rules of Procedure.
- ECB supervisory resources financed via supervisory fee borne by supervised entities; budgetary authority vested in Governing Council. In September 2015, Governing Council decided to augment SSM-related headcount over the next two years.
- ECB staff immune from legal proceedings for official acts; 2012 amendments to Wft strengthened legal protection of DNB staff.
- DNB budgeting process:
  - DNB prepares annual budget under Kaderwet zelfstandige bestuursorganen (Kzb), Chapter 4—Financial supervision rules, Part 1—Budget autonomous administrative bodies.
  - DNB funds supervisory budget through levies imposed on supervised financial undertakings; advisory panel of supervised firms consulted but without decision-making powers.
  - Power to set tariffs for levies set out in the Wet bekostiging financieel toezicht (Wbft).
  - DNB reports on budget realization yearly; in 2015, regular supervision costs amounted to €144 million, €8.4 million lower than the budget.
  - Budget approved by MoF and MoSA; once approved, supervisors have room to reallocate resources.
- Remuneration and WNT implications:
  - As of January 1, 2013, governing board members of DNB are subject to the WNT. Transitional period means actual capping of remunerations exceeding the WNT maximum would only be effective as of January 1, 2017.
  - MoF has no intention for a general exception for DNB boards; individual exceptions possible under specific qualifications.
  - WNT currently does not apply to nongoverning/supervisory board members; proposal WNT-3 out for consultation may extend to all staff and likely affect salaries.
- Comment: MoF approval role in DNB budget may result in potential undue influence. FSAP recommends exclusion of DNB from WNT cap to preserve ability to attract and retain professionals. SSM relies on DNB/NCAs to supply experienced staff for on-site tasks and thematic exercises (e.g., TRIM requiring DNB staff experienced in internal models).

### Supervisory approach (Principle 8) and integration with SSM
- EU approach to supervision outlined in CRD and EBA regulations/guidelines, applied proportionately by nature, scale and complexity, on consolidated and solo basis.
- In the SSM, SREP assesses institution’s viability at:
  - a 12-month horizon,
  - in the medium term (three to five years),
  - and over the cycle,
  - relying on backward- and forward-looking quantitative and qualitative information, including stress tests.
- DNB/SI/LSI alignment:
  - SREP on Dutch LSIs largely consistent with EBA guidelines and gradually converging to SSM approach.
  - Business-model analysis is a key component; results integrated into SREP, RAS and SEP.
  - DNB supervision unit draws extensively on Financial Stability Department; macrofinancial risks integrated into bank supervision (e.g., micro-macro risk register).
- Crisis management:
  - SSM crisis management covers phases from preparatory supervision to resolution involvement. Main decision-makers during resolution are resolution authorities (SRB and National Resolution Authority—NRA); in the Netherlands the NRA is the DNB.
- Comments: Framework for SIs is robust, maturing towards greater JST discretion; DNB approach for LSIs has increased forward-looking and risk-based aspects considering macro environment, business models, culture, and IT.

### Supervisory techniques and tools (Principle 9)
- SI supervisory engagement determined by SEP which accounts for supervisory priorities, bank clustering (six ‘clusters’ by size/complexity) and SREP scores (1–4 scale).
- SEP identifies minimum engagement levels and core activities risk by risk.
- JSTs often exceed Minimum Engagement Level (MEL) in ongoing supervision; thematic reviews (e.g., corporate governance, cyber risk) inform SREP and SEP and follow-up remediation.
- SSM planning:
  - Annual/bi-annual planning process for on-site inspections and annual planning for off-site supervision; thematic on-site reviews targeted Dutch banking risks (e.g., 2015 mortgage portfolio review).
- Comments: For SIs, SSM deploys an appropriate range of tools; on-site supervision significantly improved. LSIs subject to heightened DNB intensity to assess business models, inherent risk profile and quality of risk management.

### Corrective and sanctioning powers (Principle 11)
- SSM Supervisory Manual: ECB can identify need for immediate supervisory measures for SIs during ongoing or on-site activities.
- Enforcement and sanctioning framework:
  - Combination of powers assigned to ECB (administrative pecuniary penalties for breaches of directly applicable EU law) and NCAs; NCAs’ powers not fully harmonized.
  - Where ECB lacks direct enforcement powers, it can request/instruct NCAs to act based on powers available to them; ECB collecting information on powers available in each jurisdiction to create a regulatory database.
- For LSIs, DNB engages bank management or Board informally or formally when concerns arise.
- Administrative actions available (non-exhaustive): conditional fines; restrictions of authorized business or management activities; appointment of external attorney to supervise activities; prohibition or revocation of execution of a decision.
- Comments: Dutch law and SSMR provide a broad range of supervisory actions. ECB direct enforcement powers limited but can leverage DNB enforcement powers; complex legal framework may make enforcement operationally difficult and time consuming. DNB introduced a new supervision area to detect early problem banks and apply measures with enforcement colleagues.

### Consolidated supervision (Principle 12)
- Consolidated and group-wide supervision implemented, relevant given Dutch SIs’ cross-border exposures (e.g., 40 percent of SIs balance sheets are cross border).
- ECB group-wide supervisory approach gathers information on risk management and internal governance at group level; risk-category methodologies cover specific areas.
- JST structure:
  - Core JST reviews consolidated assessment and considers national-level analyses.
  - Sub-coordinator (manager for parent-company NCA staff in JST) involved in strategic supervisory program discussions; JST coordinator liaises on important supervisory decisions such as SREP.
- JSTs apply “relevance” and “significance” tests to determine supervisory reach within a group using quantitative indicators (percentage of total assets, income contribution, contribution to consolidated capital requirements, risks) and qualitative indicators (local subsidiary’s role, centralization, strategy, risk management).
- Prudential standards from CRR/CRD IV (P1 and P2) imposed at consolidated, sub-consolidated and individual bases; evidence seen of group and sub-consolidated level application.
- Supervisory colleges and MOUs used for joint decision making and comprehensive group review.
- Comments: Consolidated approach in place for SIs and LSIs; ring-fencing powers and reorganization requirements available where needed. EU supervisory coordination via SSM, colleges and MOUs with third-country supervisors established.

### Corporate governance (Principle 14)
- Netherlands has two-tier Board structure: Supervisory Board (oversight) and Management Board (executive). For assessment, “Board” = Supervisory Board; “senior management” = Management Board.
- Governance requirements based on national transposition of CRD IV and national rules implementing EBA guidelines; Corporate Governance Code (DCGC) also applies.
- SSM assessment based on BCBS and SSG international practices (e.g., BCBS Corporate governance principles for banks, July 2015; BCBS Principles for effective risk data aggregation and risk reporting, July 2013; SSG Observations on Developments in Risk Appetite Frameworks and IT Infrastructure, December 2010).
- For SIs governance assessed continuously in SREP; corporate governance and risk management is one of four SSM SREP modules (internal governance; risk framework and risk culture; risk infrastructure, data and reporting). Thematic reviews on governance and risk appetite performed.
- DNB emphasis on culture, behavior and integrity with fit-and-proper testing for Supervisory and Management Boards.
- Remuneration rules transposed into national law with variable pay capped at 20 percent of fixed remuneration; EBA guidelines refer to 100 percent.
- Comments: Dutch governance regulations established in CRD and EBA guidelines and DCGC. Need for more active challenging by Supervisory Boards to ensure effective oversight of senior management; Dutch supervisory boards historically less intrusive—transitioning under SSM approach will take time.

### Risk management process (Principle 15)
- CRD legal basis for comprehensive and effective risk management framework; EBA guidelines specify supervisory expectations.
- RAF well embedded in SIs with specific SSM focus on governance and risk appetite.
- Comments:
  - Risk appetite frameworks relatively well developed across Dutch SIs and more mature than other SSM SIs; supervisors cascade RAF into business units and legal entities.
  - ICAAP and ILAAP well developed; JSTs routinely review internal capital and liquidity adequacy assessments and strategies as part of SREP.
  - Supervisory Board oversight of internal models needs greater attention due to heavy use of internal models by SIs; supervisors require:
    - Banks comply with supervisory standards on model use;
    - Boards and senior management understand limitations and uncertainties of model outputs;
    - Banks perform regular and independent model validation and testing.
  - Data aggregation weaknesses are thematic across Dutch banks; legacy IT infrastructure contributes to data quality and accuracy issues in MI and regulatory reporting. Absence of regulatory data aggregation requirements has likely contributed to neglect. Remediation requires large complex projects (data warehouses and downstream reporting systems).
  - Greater effort needed to ensure independence of risk function; splitting CRO and CFO has been slow and recent, and separation still being implemented in some banks.

### Capital adequacy (Principle 16)
- CRD and CRR implement Basel capital standards in the EU; complemented by EBA RTS on Own Funds. Whole of Part II and III (Art. 25-386) of CRR and Title VI, Chapter 4 (Art. 128-142) of CRD IV implement Basel standards in EU.
- Basel Committee RCAP assessment (December 2014) found EU implementation:
  - Materially Noncompliant overall;
  - Compliant: scope of application, transitional arrangements, capital buffers, internal models approach for market risk, operational risk, supervisory review process, disclosure requirements;
  - Largely Compliant: definition of capital, standardized approach for credit risk, securitization framework, standardized approach for market risk;
  - Materially Noncompliant: IRB approach for credit risk;
  - Noncompliant: counterparty credit risk framework.
- Comments: Banks required to meet capital adequacy reflecting individual risk profile; SREP used at least annually to assess capital adequacy across credit, market, IRRBB and operational risks; ICAAP and stress testing (e.g., EBA 2016 exercise) important. New capital rules and buffer requirements have led to significant increase of CET1 capital for SIs and LSIs.

### Credit risk (Principle 17)
- CRD and EBA guidelines set expectations for banks’ internal credit risk processes; ECB supervisory manual provides investigative suggestions for on-site inspections covering full lending lifecycle.
- Credit risk focus:
  - Targeted review of residential mortgages performed; results integrated into RAS for banks.
  - Limits on LTVs and DSTI ratios tightened; mortgage lenders required to apply a “stressed” interest rate (5 percent) when calculating DSTI ratios for mortgage loans with interest rates fixed for a period less than 10 years.
- On-site credit file reviews part of inspections; topics examined include loan losses (write-downs), extensions/rollovers, restructured loans, nonperforming (nonaccruals).
- DNB conducts routine on-site examinations of credit risk for LSIs including loan file sampling to assess debt serviceability and accuracy of credit risk assessments.
- Comments: Credit risk focus strong for SIs and LSIs using mix of off-site and on-site examinations; thematic reviews and stress testing contribute to supervisory assessment.

### Problem assets, provisions and reserves (Principle 18)
- CRD IV/CRR and EBA guidelines on SREP and supervisory reporting provide general framework but do not fully cover CP requirements related to supervisors’ ability to require asset reclassification or provisioning increases for prudential purposes.
- Supervisors assess portfolio quality using EBA SREP guidelines, evaluating performing, nonperforming and forborne exposures. Guidelines do not expressly reference EBA definitions for “nonperforming” and “forborne” exposures, allowing potential national divergence.
- Loan classification standards in EBA/ITS/2013/03 aim to harmonize asset quality indexes and strengthen supervisory tools for asset quality assessment.
- In the Netherlands:
  - Supervisors cannot require banks to adjust classification of individual assets or increase provisioning for financial statement purposes (Article 104 CRD empowers NCA to do this for own funds purposes).
  - Where weaknesses identified, supervisors use moral suasion; examples exist where banks adjusted provisioning to align with supervisory estimations.
  - Alternative supervisory leverage is increasing own funds requirements (Pillar 2), although evidence of explicit linkage scarce.
- Comments and supervisory strengthening recommendations:
  - Three players in loan classification/provisioning: bank management, accountants, and banking supervisor. Supervisory pillar should introduce prudential considerations to narrow management judgment.
  - Recommended supervisory actions to strengthen role:
    - Consultation with banks and accounting firms on proposed prudential guidelines;
    - Training for supervisors on valuing loans and challenging collateral assumptions;
    - Development of market data to gauge reasonableness of collateral valuations and question significant variances.

### Liquidity risk (Principle 24)
- 2007/08 funding market seizing had material impact on Dutch banks due to large funding gaps requiring market-based financing of approximately 41 percent of total liabilities.
- Since then, banks strengthened liquidity risk management, increased reliance on stable funding, and lengthened maturity profile of market-based financing.
- Liquidity requirements for Dutch banks were enhanced (text truncated at this point in source).

*International Monetary Fund — CR1796 (excerpt).*

### introduction of revised guidance for liquidity risk management in 2010 based on the

### introduction of revised guidance for liquidity risk management in 2010 based on the

### Liquidity regulation framework and supervisory requirements
- 2010: introduction of revised guidance for liquidity risk management based on BCBS standards (Principles for Sound Risk Management 2008); banks began submitting ILAAPs.
- By 2011: banks had to comply with a survival period as an outcome of the ILAAP assessment.
- Implementation preparation: banks reported migration plans for compliance with the LCR and NSFR; supervisors reviewed these plans.
- Regulatory expectations: all banks required to implement robust strategies, policies, processes, and systems for identifying, measuring, managing and monitoring liquidity risk over an appropriate set of time horizons.
- SSM-specific reporting (quarterly): counterbalancing capacity, funding concentration, funding costs, funding plans, maturity calendar, and the LCR templates.
- Liquidity position monitoring: assessed at least annually as part of the SREP with the ILAAP as a key document; following SREP supervisors may apply additional requirements above minimum requirements (example observed: binding LCR by significant currency for one bank).

### Reporting, metrics, and supervisory tools
- For significant institutions (SIs) supervised by the SSM, a subset of the EBA additional monitoring metrics is reported: LCR, Maturity Ladder, Concentration in the Buffer, Funding Costs, and the Funding Plan.
- Reporting cadence and access: supervisors receive internal management reports and supervisory information on at least a quarterly basis in an automated fashion using existing reports and customizable tools.
- COREP requirements: current COREP regarding the LCR and NSFR requires bank reporting on a significant currency basis to allow supervisor assessment of liquidity stress at a currency level.

### DNB rule limiting non-Member State investments
- The DNB introduced an additional policy rule (beyond LCR/NSFR) constraining investment of deposit funds in non-Member States.
- The rule: restricts the proportion of loans and investments in non-Member States on the balance sheet to no more than 0.25.
- Objective: limit banks licensed in the Netherlands, under the protection of the Dutch DGS, from intermediating deposits raised in the Netherlands and other EU Member States to be invested outside the Member States.

### ILAAP assessments, progress, and outstanding issues
- First Dutch ILAAP assessments: 2012; SSM-guided ILAAPs for SIs started in 2015.
- 2015 assessments: had shortcomings/areas for development (e.g., challenger model to test stress testing assumptions).
- 2016 assessments: many areas addressed, yet several areas still need further attention.
- The ILAAP has provided supervisors a comprehensive methodology to assess liquidity funding risks; the ILAAP is an established process for Dutch SIs and JSTs used it for comprehensive assessments.

### Foreign currency liquidity, trapped liquidity, and data quality
- Dutch SIs operate in many currencies; significant currencies: euro, dollar, pound, yen, and Swiss franc.
- Given extent of foreign funding, ongoing scrutiny of foreign currency liquidity risk is needed, including rigorous stress testing.
- Data quality needs: interrogate reporting data used as inputs to group/aggregate LCR to ensure assets are freely available within and across the group to meet stressed outflows.
- Liability classification: accurate classification of liability buckets is needed to ensure run-off assumptions are calibrated properly—important where liabilities treated as retail under LCR are in practice professionally managed.
- Evidence: work to address these issues has commenced and was becoming more mature.

### System-wide liquidity profile and bank strategies
- Liquidity priorities: liquidity risk ranks lower in Dutch banks’ priorities due to (i) lower inherent risk profile; (ii) more robust risk management; and (iii) current environment of excess liquidity and negative interest rates.
- Impact of new requirements: LCR and NSFR under the CRR strengthened the liquidity regime, incentivized reduced exposure to short-term market financing, and increased funding from stable sources.
- Dutch banks’ progress: well advanced in complying with quantitative and qualitative liquidity requirements; the additional limit on non-Member States will further reinforce systemic liquidity buffers.
- System reliance on market funding: approximately a third of the system is funded by market financing; banks rely on wholesale funding to fill deposit funding gaps.
- Liability structure: banks have implemented strategies to mitigate wholesale funding reliance: deriving a greater proportion of funding from deposits; reducing reliance on short-term wholesale funding; diversifying funding base; and lengthening maturity profile of wholesale funding.
- Deleveraging effect: deleveraging has had a positive impact on liquidity metrics.
- System metric: banks have implemented risk management strategies to mitigate reliance on wholesale funding for a material portion of liabilities (approximately 30 percent for the system).

### Supervisory engagement and SREP enhancements
- Supervisory activities used to monitor liquidity: meetings with treasury staff, attending ALCO meetings, verification of risk management policies, analysis of prudential ratios and additional liquidity ratios (e.g., self-funding ratios), and board engagement confirmation in setting liquidity risk appetite and oversight.
- SREP enhancements during 2016: developed more robust stress testing tools and proxies to effectively challenge banks’ estimates and assumptions; supported the work of the JST.
- Use of SREP outcomes: SREP assessment results have produced requirements on significant currencies to ensure sufficient liquidity during stress.

### Operational risk (Principle 25): framework, supervisory coverage, and findings
- Principle 25 summary: supervisor determines banks have an adequate operational risk management framework covering policies and processes to identify, assess, evaluate, monitor, report and control or mitigate operational risk on a timely basis.
- Regulatory basis: general OR requirements established in CRDIV and complemented by technical standards and guidance including EBA guidance on AMA, validation approaches (GL10), Assessment of OR in the SREP (EBA/GL/2014/13), Internal Governance (GL44), OR Market-Related Activities (GL35), OR Mitigation Techniques (GL25), and Outsourcing.
- ECB supervisory activities within SREP: analysis of supervisory reporting and peer benchmarks (COREP), assessment of controls, external auditor reports, meetings with senior management, thematic reviews, on-site examinations, and assessment of ICAAP.
- Recent trends: supervision activities for operational risk strengthened in frequency and intensity; SREP framework and SSM manual support consistent and comprehensive assessment of OR.
- Supervisory on-site presence: stepped-up across a broader set of topics including ORMF, outsourcing, information-related operational risks, and data quality.
- AMA usage: majority of SIs use the AMA to calculate operational risk RWAs; evidence suggests OR RWAs are adjusting to the risk profile linking measurement and capital adequacy.
- Management information: supervisors rely on management information for deeper OR analysis; examples of improved governance include CRO reports to board risk committees, OR tolerances and limits in the risk appetite framework, near-miss reporting, and OR losses reported by event type.

### Operational risk key vulnerabilities and supervisory gaps
- Identified vulnerabilities:
  - SIs exposed to low frequency/high-value events; legal risk prevalent.
  - Data quality and IT infrastructure issues common across SIs, creating control weaknesses and operational vulnerabilities.
  - Exposure to off-shore service providers/cloud providers through outsourcing arrangements.
- Supervisory gaps and needs:
  - Greater attention to ongoing model monitoring for AMA banks is needed to ensure adequate estimation of operational risk capital; responsibility rests with JSTs and current interim attention is insufficient pending TRIM project outcomes.
  - More verification needed to accurately assess banks’ processes to manage and monitor outsourcing risks; prior notification introduced for “cloud computing” but this requirement needs to be applied across all material outsourcing arrangements.
  - Need for guidelines for banks and supervisors to ensure prudent practices for outsourcing risk management; guidance is expected to be issued.

*IMF Financial Sector Assessment content unit: cr1796*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1796.pdf_