## EXECUTIVE SUMMARY ## Source details **Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2024/english/1nldea2024004.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1nldea2024004.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1nldea2024004.pdf.json) --- ### Key findings on LSI supervision - Supervision of less significant institutions (LSIs) is effective in the Netherlands. - De Nederlandsche Bank’s (DNB) supervisory approach to LSI supervision is intrusive and transparent, building on well-developed supervisory tools that support strategically focused, ongoing supervisory dialogue with banks. - The supervisory framework blends the robust SSM/EU framework with Dutch elements, enriching the spectrum of supervisory techniques and tools. - DNB’s LSI supervisory capacity is founded in a solid knowledge base of a broader DNB and is used to cover critical topics including: - comprehensive and thorough assessments of risk management outcomes; - deep dives into governance, behavior and culture; and - the development of the nature risk agenda. - DNB and the Autoriteit Financiële Markten (AFM) cooperate very closely while complementing prudential and conduct supervision, including joint focus on Interest-Only (IO) Mortgages. - The supervisory process relies on strong enforcement and thorough licensing processes, supported by vigorous governance of DNB’s LSI supervision including 2nd and 3rd lines of defense. - Since the 2017 FSAP, DNB has: - developed a thorough risk-by-risk approach leveraging the SSM Supervisory Review Process to challenge banks’ ICAAP/ILAAP and set capital and liquidity requirements; - stepped up approaches in climate risk supervision and introduced a broader category of nature risk; - applied governance, behavior and culture frameworks in practice, producing enforceable findings and recommendations; - continued intensive supervision of IO Mortgages using tools across its supervisory toolbox and integrating actions in a broader framework. ### Supervisory enhancements and areas for further development - Maintain proactive and creative supervisory approach; proposed extensions include: - further development of granular data collection and processing practices; - potential adoption of modern technologies, including machine learning, to enhance analytical tools; - continued rigorous supervision of IO Mortgages, emphasizing quality of inputs for bank risk management (updated clients’ disposable incomes and collateral values), improved risk controls, and better data aggregation. - Supervision must reflect a changing market landscape and rapid deployment of new technologies by: - enhancing reported/collected data sets to enable offsite supervision to run thorough analyses; - upgrading analytical toolboxes to process large data sets across sectors and to offload routine analytical work so examiners can focus on complex issues and root causes; - promoting a level playing field across sectors by collecting comparable data and aligning analytical tools and approaches across credit institutions (banks) and nonbanks providing credit. ### Main recommendations (selected) - Organization of Supervision - Define intermediate steps in the budgetary process to provide additional safeguards to the independence of DNB’s supervisory function and the AFM. (Addressees: DNB, AFM, MOF; Priority: M; Timeframe: ST) - Implement the practice of a periodic benchmarking of supervisors’ salary levels against relevant peers in the financial industry. (Addressees: DNB, AFM; Priority: M; Timeframe: ST) - Explore further options to benefit from the second and third lines of defense in strengthening the processes of supervision. (Addressee: DNB; Priority: M; Timeframe: MT) - Ensure maximizing opportunities for collaboration between DNB and the AFM, especially to jointly engage with financial institutions and to share data, through systematic measures. (Addressees: DNB, AFM; Priority: M; Timeframe: ST) - Supervisory Approach and Tools - Ensure that authorities have a clear legal basis to access granular, transaction/loan level data on a regular basis for risk monitoring and analysis, including residential and commercial real estate loans. (Addressees: DNB, AFM, MOF; Priority: H; Timeframe: MT) - Explore opportunities to leverage DNB’s membership in the SSM/EU to implement largely automated supervisory tools based on advanced technologies, allowing processing of large data sets, in LSI supervision. (Addressee: DNB; Priority: M; Timeframe: MT) - Governance and Risk Management - Further clarify the requirement of independent supervisory board members in law. (Addressee: MOF; Priority: H; Timeframe: MT) - Continue supervisory efforts in the data aggregation field to further highlight its importance to banks and step-up their practice. (Addressees: DNB, AFM; Priority: M; Timeframe: MT) - Credit Risk Supervision - Further exploit lessons learned from the prolonged period of challenging economic conditions to strengthen risk management systems of banks and to enhance supervisory approaches of offsite supervision. (Addressee: DNB; Priority: M; Timeframe: ST) - Consider translating supervisory expectations related to collateral valuations into regulatory requirements or guidance. (Addressee: DNB; Priority: H; Timeframe: MT) - Introduce a requirement for all mortgage credit providers and their mortgage clients to periodically update the information on the clients’ financial situation. (Addressees: DNB, AFM, MOF; Priority: H; Timeframe: MT) - Consider a reporting requirement for transactions with related parties. (Addressee: DNB; Priority: M; Timeframe: MT) ### Scope of the review - The note reviews DNB’s LSI supervision in the broader context of the EU regulatory environment and the SSM; DNB applies EU approaches to all banks with due regard to the nature, scale and complexity of the institutions. - The mission focused on supervision of LSIs using selected Basel Core Principles (BCP) as guiding structure, including CP1, CP2, CP3, CP8, CP9, CP11, CP12, CP13, CP14, CP15, CP16, CP17, CP18, CP19, CP20, and CP26. - The review used DNB’s self-assessment, a questionnaire, ECB responses, around 40 meetings, documents shared in virtual data rooms, additional DNB responses, and publicly available information. ### Banking sector — market structure and key statistics - The banking sector in the Netherlands is relatively large compared to GDP, highly concentrated, with stable market positions for the largest banks. - Total banking sector assets: approximately 253 percent of GDP as of June 2023. - Market share of systemically important institutions (SI): around 93 percent. - Market share of top-4 banks: 76 percent. - SI landscape: one bank was newly categorized as SI; four SI banks have full or partial state ownership. - Dutch LSI population: 24 banks, including new banks emerging from Brexit and large investment firms. - In relative terms, Dutch LSIs have a market share of 8½ percent in total assets within the SSM. - Average balance sheet size of a Dutch LSI: €8,5 billion. - SSM average balance sheet size (2021): €2,3 billion. ### Selected financial indicators (percent) - Return on equity (SI): 2018 8.71; 2019 7.62; 2020 3.27; 2021 8.35; 2022 8.00. - Return on equity (LSI): 2018 4.63; 2019 9.08; 2020 1.97; 2021 8.24; 2022 5.80. - Return on assets (SI): 2018 0.52; 2019 0.46; 2020 0.19; 2021 0.49; 2022 0.48. - Return on assets (LSI): 2018 0.54; 2019 0.93; 2020 0.22; 2021 0.92; 2022 0.63. - Net interest margin (SI): 2018 1.44; 2019 1.42; 2020 1.28; 2021 1.23; 2022 1.34. - Net interest margin (LSI): 2018 1.26; 2019 1.15; 2020 1.05; 2021 0.96; 2022 1.08. - Cost-to-income ratio (SI): 2018 53.70; 2019 50.32; 2020 49.39; 2021 49.74; 2022 49.12. - Cost-to-income ratio (LSI): 2018 53.57; 2019 49.51; 2020 58.03; 2021 48.38; 2022 52.41. - CET1 to RWA (SI): 2018 16.45; 2019 16.48; 2020 17.03; 2021 16.97; 2022 15.68. - CET1 to RWA (LSI): 2018 21.36; 2019 20.08; 2020 25.20; 2021 24.99; 2022 23.35. - Leverage ratio (SI): 2018 4.61; 2019 4.88; 2020 5.23; 2021 6.54; 2022 5.80. - Leverage ratio (LSI): 2018 9.87; 2019 8.53; 2020 10.25; 2021 10.34; 2022 9.18. - NPL ratio (SI): 2018 1.95; 2019 1.86; 2020 2.24; 2021 1.73; 2022 1.60. - NPL ratio (LSI): 2018 1.88; 2019 1.63; 2020 2.29; 2021 1.98; 2022 1.80. - RWA density (SI): 2018 30.46; 2019 31.19; 2020 28.68; 2021 29.76; 2022 33.23. - RWA density (LSI): 2018 48.06; 2019 44.30; 2020 38.79; 2021 38.99; 2022 40.16. - Loan to deposit ratio (SI): 2018 123.45; 2019 124.52; 2020 106.46; 2021 104.01; 2022 108.04. - Loan to deposit ratio (LSI): 2018 104.27; 2019 102.76; 2020 97.46; 2021 94.09; 2022 95.04. ### Asset quality and nonperforming loans - Nonperforming assets are described as extremely low, reflecting: - Strength of Dutch economy with historically low levels of bankruptcies and high levels of liquidity. - Effects of recent government COVID-19 support programs for households and businesses. - Asset staging: - Stage 1: 82 percent of total assets (Figure 2). - Banks are well positioned to maintain low levels of cost of risk given: - Vast majority of assets in Stage 1. - Stable economic outlook. - Efficient foreclosure/insolvency regime in the Netherlands. ### Mortgage market structure and interest-only (IO) mortgages - Loans with real estate collateral: 38 percent of the overall balance sheet of the Dutch banking sector. - Residential mortgages: 27 percent. - Commercial real estate: 4 percent. - Corporate loans secured on real estate (included in the 38 percent). - Size of mortgage market: - Volume amounting 83 percent of GDP (Netherlands) versus approximately 40 percent of GDP (EU average) and approximately 50 percent of GDP (US). - Interest-Only (IO) mortgages: - Share of IO loans stands at 43.8 percent of total residential mortgages in the first quarter of 2022. - Another statement: 45 percent of mortgages are currently interest only. - Maturity profile will experience a spike between years 2035 and 2038. - Less than 2 percent of households are expected to be at risk of a residual debt if they sell their homes. - By 2040, nearly 80 percent of the main breadwinners in households with an interest only mortgage will have reached retirement age. - Volume of IO mortgages has been gradually decreasing for a decade; recent increase in interest rates implied increased demand across age groups. - Supervisory risk factors associated with IO mortgages: - Lack of monthly principal payments can translate into a lack of continuous monitoring of the relationship with the borrower. - Lack of an adequate update of borrower risk profile. - Reliance on collateral as the primary source of repayment. - High likelihood of the need for refinancing at maturity. - When originated in mass volumes significantly increases risks for a bank/the system. - Interest-Only and Other Mortgages (2022Q1) - SI IO: Amount outstanding (bn EUR) 221.6 - SI Other: Amount outstanding (bn EUR) 270.3 - LSI IO: Amount outstanding (bn EUR) 36.8 - LSI Other: Amount outstanding (bn EUR) 60.9 - SI IO Average loan to value (percent) 47.0 - SI Other Average loan to value (percent) 57.4 - LSI IO Average loan to value (percent) 53.2 - LSI Other Average loan to value (percent) 60 - SI IO Median loan to value (percent) 45.9 - SI Other Median loan to value (percent) 57.4 - LSI IO Median loan to value (percent) 54.0 - LSI Other Median loan to value (percent) 60 - SI IO Average maturity (years) 17.7 - SI Other Average maturity (years) 22.3 - LSI IO Average maturity (years) 22.1 - LSI Other Average maturity (years) 23.0 - SI IO Median maturity (years) 16.0 - SI Other Median maturity (years) 25.0 - LSI IO Median maturity (years) 25.0 - LSI Other Median maturity (years) 25.0 - SI IO Average interest reset period (years) 7.9 - SI Other Average interest reset period (years) 10.0 - LSI IO Average interest reset period (years) 11.1 - LSI Other Average interest reset period (years) 12.2 - SI IO Median interest reset period (years) 6.0 - SI Other Median interest reset period (years) 8.0 - LSI IO Median interest reset period (years) 10.0 - LSI Other Median interest reset period (years) 14.0 ### Funding, capitalization, liquidity, and profitability - Funding: - Deposits of households and businesses: 55 percent of the total balance sheet (main funding source). - Deposit guarantee coverage: 58 percent of the deposits are covered by the deposit guarantee scheme (covered for up to €100,000). - Other unsecured deposits: 17 percent comprise current accounts of businesses representing operational deposits. - Capitalization and resilience: - Capital and liquidity positions well-above minimum requirements and above the EU average. - EBA/ECB stress test shows Dutch banks can withstand an adverse stress scenario including both higher inflation and a strong decline in economic growth. - Profitability and interest rate sensitivity: - Current average return on equity (RoE) of Dutch LSIs: 5.8 percent (2022, 2021: 8.24 percent / 2021 SSM LSI average: 3,5 percent). - RoE of the top-4 Dutch SIs: 8.0 percent (2022, 2021: 8.35 percent). - Profitability highly dependent on interest rate income; increase in policy interest rates by the ECB widened net interest margins, though margins have started tightening with the rise of deposit rates. - Liquidity: - All Dutch banks have LCR and NSFR ratios of more than 100 percent. - Average weighted LCR ratio of Dutch banks: 157 percent (March 2023). - Average weighted NSFR ratio: 134 percent (December 2022). - Liquidity buffer composition: - Central bank reserves and cash: 67 percent of the liquidity buffer. - Bonds: 25 percent of the liquidity buffer (partly carried at amortized cost on the balance sheet). - Banks are obliged to include assets at market value in the liquidity buffer; liquidation has no impact on the liquidity portfolio (because it's at market value), but possibly an impact on capital. ### Risks, challenges, and macro/sectoral exposures - Recent history and stressors: - COVID-19 fiscal and monetary stimulus lowered default rates during the pandemic. - Russia war in Ukraine temporarily increased energy prices and cyber-risk; Dutch banks remained resilient and profitable. - Failures of foreign banks abroad highlighted depositor behavior risks amplified by social media and fast account opening/money transfer speeds; these influence assumptions on liquidity outflows. - Climate and nature risks: - Dutch government targets: - 60 percent reduction in carbon emissions by 2030. - Climate-neutral, fossil free, nature-inclusive and fully circular by 2050. - Netherlands vulnerable to rising sea levels and flooding by rivers. - In serious but not inconceivable scenarios, flooding could result in losses of up to EUR 60 billion. - DNB started in 2019 to request LSIs to pay attention to climate-related risks; almost all Dutch LSIs have started integrating climate- and environmental risks within their practices, aligning with ECB and EBA guidance, though depth of action varies across LSIs. - Nonbank competition and market structure: - Increasing competition from nonbanks for lending products and from payment institutions for payment services. - Nonbanks can offer more aggressive terms (e.g., longer interest rate fixed period on mortgages) and may benefit from differences in regulatory requirements, greater flexibility in structuring balance sheets, or lower operational costs. - FinTechs and potential BigTech entrants present competitive and operational challenges; banks have responded by replicating some NBFI operating models (e.g., structures outside banks’ balance sheets), adding supervisory complexity. - Supervisory indicators and analyses intensified: - DNB developed a tool for sensitivity analysis of liquidity outflows. - Additional analyses conducted include: - Analysis of direct and indirect exposures of Dutch LSIs to specific countries, sectors and institutions. - In-depth analysis of credit risk via loan tape reporting. - Analysis of liquidity risk, funding issues and interest rate risk. - Intensified monitoring, additional reporting, and contact with banks where necessary. ### Supervisory response, governance, and framework for LSI supervision - Internal governance and supervisory intensification: - Bankbreed Risico Overleg (Bank Wide Risk Committee, BRO) founded during COVID-19 pandemic; consists of DNB’s senior management and meets monthly. - DNB intensified supervisory activities and analyses (see previous sections). - Integration with EU frameworks and cooperation: - DNB follows the EU Single Rulebook and the SSM regulation; participates actively in SSM and EBA structures. - LSI supervision leverages DNB’s long-established expertise in supervising large internationally active banks. - Proactive cooperation with European counterparts and international authorities via supervisory and crisis management colleges and numerous Memoranda of Understanding (MoU). - Resources and capacity considerations: - LSI supervision benefits from DNB’s broad capacity but faces competition for resources from SSM and SI supervision demands; potential long-term pressures on effectiveness and efficiency if not compensated by the SSM. - DNB has increasingly expressed demand for SSM support in LSI supervision. - Macroprudential integration and supervisory priorities: - DNB produces a micro-macro dialogue (MMD) risk report based on the semi-annual Financial Stability Report; uses indicators and stress tests to assess macro risk impacts on institutions. - Banks are required to consider macro risks in their own stress tests (as part of the SREP); DNB conducts top-down stress tests. - AFM complements DNB by setting conduct rules for mortgage lending. - DNB’s 2023 priorities for LSI supervision: - Credit Risk - Outsourcing - Data quality - Liquidity risk - Forward-looking challenges: - DNB needs to anticipate and respond proactively to technological innovation, climate/nature risk, macroeconomic environment changes, and geopolitical tensions. - New tools, approaches, and fresh perspectives on legacy issues (including mortgage lending) may be required. ### EU legislative developments and Basel III implementation - EU developments: - The EU adopted measures in the so called ‘CRDVI/CRRIII package’; the EU Council presidency and the European Parliament recently reached provisional agreement on amendments of CRD and CRR. - The EU applies the Basel framework to all banks while employing the proportionality principle. - Legislative acts potentially impactful for the Netherlands include amended Payment Services Directive (PSDII) and Covered Bonds Directive. - Latest updates on the banking package referenced: (December 2023). - Role of EBA and ECB regulatory products: - EBA delegated acts and EBA guidelines have a significant and direct impact on the Dutch regulatory framework; DNB transposes EBA documents without material changes. - ECB products largely inspire LSI supervision; DNB extensively applies the ECB framework in LSI supervision, including guidance on internal models, NPLs, and climate-related and environmental risks. - Supervisory independence, powers, and resources: - Operational independence, accountability and governance of DNB and AFM anchored in national legislation, Articles of Association, EBA Regulation and SSM Regulation. - Accountability primarily to the Minister of Finance and the Minister of Social Affairs and Employment. - Four-year budget limits informed by multi-year strategies; supervisory authorities are subject to the Cost Framework limiting budget growth for four years. - Yearly budget process steps: - (i) draft budgets submitted for consultation to panels of representatives of supervised institutions; - (ii) approved by the Supervisory Board of DNB and the AFM; - (iii) submitted to the Minister of Finance and the Minister of Social Affairs and Employment before December 1 for approvals; - (iv) after approval, published on the websites of DNB and the AFM. - At the end of the budget year DNB and the AFM must draw up an annual report relating to duties under the Wet op het Financieel Toezicht (WFT) and send it to the Minister of Finance, the Minister of Social Affairs and Employment and to Parliament. - Observations and recommendations: - Cooperative and informal budget discussions may not provide sufficient safeguards if disagreements arise between ministries and supervisory authorities. - Recommendation 1: Define intermediate steps in the budgetary process to provide additional safeguards to the independence of DNB’s supervisory function and the AFM. - Recommendation 2: Implement the practice of a periodic benchmarking of supervisors’ salary levels against relevant peers in the financial industry. ### Supervisory process, tools, SREP and analytics - Supervisory cycle: - Sufficiently tight with a logical chain of actions and feedbacks; proportionate implementation of the SSM supervisory framework to LSI supervision contributes to consistency and robustness. - SREP: - Steers the majority of supervisory activities and outcomes; qualitative and quantitative assessments are thorough and build on multiple inputs. - Outcomes shared with banks via ongoing supervisory dialogue, following a risk-by-risk logic. - Risk Assessment System (RAS): - Monitors four elements: (i) business models; (ii) governance and risk management; (iii) risk to capital; (iv) risk to liquidity/funding. - Builds on regular reporting data (mostly COREP and FINREP), qualitative information (including self-assessments by banks), and ad hoc information. - RAS outcome is a risk analysis with short narratives accompanied with scores; methodology anchored by the ECB approach. - Supervisory tools and data systems: - COREP and FINREP data stored in DNB systems and the Information Management System (IMAS) administered by the ECB. - IMAS provides limited functionality to LSI supervision; LSI examiners review core data in DNB’s own systems and dashboards. - DNB proprietary systems: - SUPREMO: monitors pre-defined ratios and thresholds; creates reports to monitor capital and liquidity adequacy. - Satellite analytical tools: simulate stress levels on liquidity outflows when analyzing LCRs of banks. - ICAAP and ILAAP challenge: - SREP integrates supervisory knowledge to challenge banks’ ICAAP and ILAAP on a risk-by-risk basis; approach assessed as good practice. ### Granular data and offsite supervision - DNB collected detailed information about individual loans (‘loan-tapes’) usually required before onsite examinations and analyzed these datasets to identify irregularities and determine asset quality. - DNB upscaled reporting during COVID-19 and achieved a good quality of reported data. - Regular analyses of granular data would enhance efficiency and effectiveness of supervision across sectors while avoiding significant burden on banks. - Legal impediments: - The Bankwet – ‘Bank Act’ (BKW) does not allow DNB to collect personal data which is an issue if reports contain such data, or data that can constitute personal data when linked with other information. - The BKW/Uitvoeringsbesluit – ‘Implementing Acts’ do not anticipate collecting extensive datasets on a regular basis. - Recommendation 5: Ensure that authorities have a clear legal basis to access granular, transaction/loan level data on a regular basis for risk monitoring and analysis, including residential and commercial real estate loans. - Governance and data protection: - Once legal collection is possible, DNB needs to ensure proper governance to protect personal and sensitive supervisory data. - Advanced technologies and cooperation: - Technologies capable of processing ‘big data’ or using ‘machine learning’ models can qualitatively increase efficiency and intrusiveness of supervision. - Sensible to join forces with partner SSM/EU-NCAs to scale capacities for developing tools suitable to LSI and SI supervision across the SSM/EU. - Recommendation 6: Explore opportunities to leverage DNB’s membership in the SSM/EU to implement largely automated supervisory tools based on advanced technologies, allowing processing of large data sets, in LSI supervision. ### Supervision of risk management, governance and data aggregation - Legal and supervisory basis: - Risk management requirements follow EU regulation; pursuant to article 3:17 of the WFT a bank must organize its operations to safeguard controlled and sound business operations. - Article 23 of Besluit prudentiële regels (Bpr) states banks should pursue a policy aimed at managing relevant risks. - CRD requirements referenced (Article 76 on risk management function). - Governance and behavior: - DNB’s RAS extends to ‘behavior and culture’ addressing root causes of governance-related issues. - Supervisory boards must consist of at least three supervisory board members (article 3:19 WFT); Article 17 BPR can entail independent members depending on circumstances. - Recommendation 7: Further clarify the requirement of independent supervisory board members in law. - Data aggregation: - DNB/SSM implementing elements of BCBS ‘Principles for Effective Risk Data Aggregation and Risk Reporting’. - Recommendation 8: Continue supervisory efforts in the data aggregation field to further highlight its importance to banks and step-up their practice. ### Supervision of credit risk and IO mortgages (detailed) - DNB implements a consistent and overall strong approach to credit risk supervision building on the EU regulatory framework (CRR and CRD). - CRR references: - Article 47a: definition of non-performing loans. - Article 47b: definition of forbearance. - Article 178: definition of default. - Article 179: credit granting and monitoring process. - EBA framework elements include Guidelines on credit risk management practices, loan origination and monitoring, stress testing, definition of default, management of NPLs and forborne exposures, IRB models and moratoria during COVID-19, internal governance and SREP. - DNB actions: - Enhanced monitoring of emerging credit risk and NPLs based on monthly reported loan tapes during COVID-19. - Evaluated practices of banks in asset classification and provisioning, including governance of management overlays and ECL models. - Recommendation 9: Further exploit lessons learned from the prolonged period of challenging economic conditions to strengthen risk management systems of banks and to enhance supervisory approaches of offsite supervision. - AFM conduct measures (since 2018): - Multi-year supervisory campaign targeting mortgage providers with IO mortgages requiring customer awareness, regular reapproach until maturity, proactive assistance, and tailored solutions. - Providers to improve insights into specific customer risks of IO mortgages using a segmentation matrix; reports submitted quarterly and since June 2023 on semiannual basis. - Providers to set up ongoing customer outreach programs and report on continuous client outreach to AFM on semiannual basis. ### Collateral valuation frameworks - Findings: - EBA and ECB frameworks are high-level and relatively concise for appraising residential real estate; frameworks are largely overlapping. - Frameworks cover monitoring and controls; individual valuation vs indexation; appraisers; frequency of valuation; valuation methodology focused on expected future cash flow (and gone concern approach); back testing; IT databases; valuation of foreclosed assets. - DNB has developed strong analytical tools and solid practice to support examinations. - Supervisory practice provides incentives to banks; converting supervisory expectations into regulatory requirements or guidance could strengthen consistency. - Recommendations: - Recommendation 10: Consider translating supervisory expectations related to collateral valuations into regulatory requirements or guidance. - Recommendation 11: Introduce an obligation for all mortgage credit providers to periodically update the information about the (interest only) mortgage client’s financial situation. - Recommendation 12: Consider a reporting requirement for transactions with related parties. - Systemic measures related to IO mortgages (overview): - 2022 ECB and DNB supervisory expectations for the four largest mortgage-providing banks included substantially limit production of IO mortgages; stop production of IO mortgages without a maturity date; significantly reduce exposure; intensify monitoring; increase provisioning. - Since 2022, DNB requires banks using internal models to apply a minimum floor to their risk weighting of domestic mortgage loan portfolios, using Article 458 of the CRR. - AFM expectations for providers: segmentation matrices, ongoing customer outreach, management processes for recurring outreach, semiannual reporting to AFM; cooperation on behavioral research and published practical insights. - Industry self-regulation: Code of Conduct for Mortgage Financing established in 1989. ### Related party exposures - Findings: - The EU/Dutch regulatory framework does not establish the requirement to monitor and control separately and in aggregate related party exposures on the basis of regular reporting, as requested by the Basel Core Principles. - No framework established for competent authorities to perform an assessment of the information collected to meet supervisory needs. - Supervision of related party risk is typically carried out by external auditors, but their analysis is very limited. - Reporting framework includes information requirements related to large exposure and concentration limits. ### Market, operational and liquidity risk — supervisory practice and tools - Market risk: - EU prudential framework centers on CRD/CRR and MIFID/MIFIR; DNB evaluates COREP market risk, internal quarterly reports, ICAAPs and onsite examinations using RAS and SUPREMO. - DNB can require mitigating actions, use Pillar 2 measures, and include capital add-ons for market risk in the SREP. - AFM performs conduct supervision and DNB/AFM invited to further maximize cooperation. - Operational risk: - Grounded in CRD/CRR and DORA; DNB applies SSM Manual to supervise operational risk and uses DNB IT questionnaire, ICAAPs and interviews. - DNB organizes internal SREP panels to ensure level playing field and quality assurance. - Outsourcing: DNB stepped up supervision; monitoring of service providers not yet subject to formal supervision as required by DORA, informal monitoring applied. - COVID-19 accelerated shift to digital services, increasing supervisory attention to digital operational resilience; post-invasion insights further shaped practice. - Liquidity risk: - DNB implemented LCR and NSFR; Pillar 1 requirements of 100 percent LCR and 100 percent NSFR apply to all banks. - Pillar 2 requirements are institution-specific and include: - (i) a six month survival period bridging LCR and NSFR, based on internal stress tests; - (ii) limits to asset encumbrance of selected banks; - (iii) quantitative and qualitative requirements for higher risk banks. - DNB analyses regular reporting (LCR, NSFR, ALMM), ILAAPs, internal management information to inform liquidity dashboards and the RAS. - DNB performed a horizontal exercise inspired by the Silicon Valley Bank (SVB) case, testing system resilience and upgrading analytical toolkits. ### Enforcement - DNB/AFM enforcement: - Procedures to ensure consistency and transparency of enforcement action; administrative sanctions are published. - DNB and AFM employ a variety of formal and informal enforcement measures (including moral suasion) and are sufficiently agile in taking enforcement action. - Internal enforcement processes updated to support good governance, avoid inaction, and emphasize objectivity; cooperation between examiners and lawyers supported at all stages. - Decisions to start enforcement processes taken by division directors or the Executive Director responsible for banking supervision; final drafts to impose penalties submitted for approval to the director responsible for banking supervision. - Offenders may appeal decisions at the District Court in Rotterdam; lodging a writ of objection, appeal, or higher appeal generally does not have suspensive force except for provisional relief granted by a judge. ### Appendix I — Actions taken on prior recommendations (select) - 2016 Recommendation 1: Enhance the powers of DNB to introduce technical regulations — Addressed. - 2016 Recommendation 2: Exclude DNB from the Wet normering topinkomens/Law on Standards for Remuneration for Senior Officials in the Public and Semi-Public Sector (WNT-3) and give greater autonomy in setting supervisory budget — Not relevant/Partly addressed. - 2016 Recommendation 3: Implement a more active supervisory role in assessing loan classification — Addressed (LSI supervision). - 2016 Recommendation 4: Encourage a more active role of the SB of Dutch banks by ongoing engagement with the SB — Addressed (LSI supervision). ### Strengthen supervisory — implementation status (select) - Internal ongoing model monitoring (IRB and AMA): Recommendation to strengthen supervisory practices — Status: Addressed (LSI supervision). - Operational risk management systems: Recommendation to confirm effective implementation — Status: Addressed (LSI supervision). - Outsourcing arrangements: Recommendation to clarify expectations for prior notification for material outsourcing arrangements — Status: Addressed (LSI supervision). - Data aggregation: Recommendation to prioritize work on data aggregation — Status: Addressed (LSI supervision) though challenges from legacy systems persist. - Harmonized definitions: default and forborne loans — Status: Addressed (LSI supervision); DNB implemented CRR Article 47a, Article 47b and Article 178 and follows EBA guidance. - Cross-sectoral review of mortgage underwriting standards: Recommendation to undertake review including sampling loan files — Status: Addressed (LSI supervision). *Source: KINGDOM OF THE NETHERLANDS—THE NETHERLANDS, INTERNATIONAL MONETARY FUND (content unit 1nldea2024004).* ### EXECUTIVE SUMMARY __________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### Key Findings on LSI Supervision - Supervision of less significant institutions (LSIs) is effective in the Netherlands. - De Nederlandsche Bank’s (DNB) supervisory approach to LSI supervision is intrusive and transparent, building on well-developed supervisory tools that support strategically focused, ongoing supervisory dialogue with banks. - The supervisory framework blends the robust SSM/EU framework with Dutch elements, enriching the spectrum of supervisory techniques and tools. - DNB’s LSI supervisory capacity is founded in a solid knowledge base of a broader DNB and is used to cover critical topics including: - comprehensive and thorough assessments of risk management outcomes; - deep dives into governance, behavior and culture; and - the development of the nature risk agenda. - DNB and the Autoriteit Financiële Markten (AFM) cooperate very closely while complementing prudential and conduct supervision, including joint focus on Interest-Only (IO) Mortgages. - The supervisory process relies on strong enforcement and thorough licensing processes, supported by vigorous governance of DNB’s LSI supervision including 2nd and 3rd lines of defense. - Since the 2017 FSAP, DNB has: - developed a thorough risk-by-risk approach leveraging the SSM Supervisory Review Process to challenge banks’ ICAAP/ILAAP and set capital and liquidity requirements; - stepped up approaches in climate risk supervision and introduced a broader category of nature risk; - applied governance, behavior and culture frameworks in practice, producing enforceable findings and recommendations; - continued intensive supervision of IO Mortgages using tools across its supervisory toolbox and integrating actions in a broader framework. ### Supervisory Enhancements and Areas for Further Development - The FSAP encourages DNB to maintain its proactive and creative approach and proposes extensions to solidify practice, including: - further development of granular data collection and processing practices; - potential adoption of modern technologies, including machine learning, to enhance analytical tools; - continued rigorous supervision of IO Mortgages, emphasizing quality of inputs for bank risk management (updated clients’ disposable incomes and collateral values), improved risk controls, and better data aggregation. - Supervision must reflect a changing market landscape and rapid deployment of new technologies by: - enhancing reported/collected data sets to enable offsite supervision to run thorough analyses; - upgrading analytical toolboxes to process large data sets across sectors and to offload routine analytical work so examiners can focus on complex issues and root causes; - promoting a level playing field across sectors by collecting comparable data and aligning analytical tools and approaches across credit institutions (banks) and nonbanks providing credit. ### Main Recommendations (selected from Table 1) - Organization of Supervision - Define intermediate steps in the budgetary process to provide additional safeguards to the independence of DNB’s supervisory function and the AFM (Addressees: DNB, AFM, MOF; Priority: M; Timeframe: ST). - Implement the practice of a periodic benchmarking of supervisors’ salary levels against relevant peers in the financial industry (Addressees: DNB, AFM; Priority: M; Timeframe: ST). - Explore further options to benefit from the second and third lines of defense in strengthening the processes of supervision (Addressee: DNB; Priority: M; Timeframe: MT). - Ensure maximizing opportunities for collaboration between DNB and the AFM, especially to jointly engage with financial institutions and to share data, through systematic measures (Addressees: DNB, AFM; Priority: M; Timeframe: ST). - Supervisory Approach and Tools - Ensure that authorities have a clear legal basis to access granular, transaction/loan level data on a regular basis for risk monitoring and analysis, including residential and commercial real estate loans (Addressees: DNB, AFM, MOF; Priority: H; Timeframe: MT). - Explore opportunities to leverage DNB’s membership in the SSM/EU to implement largely automated supervisory tools based on advanced technologies, allowing processing of large data sets, in LSI supervision (Addressee: DNB; Priority: M; Timeframe: MT). - Governance and Risk Management - Further clarify the requirement of independent supervisory board members in law (Addressee: MOF; Priority: H; Timeframe: MT). - Continue supervisory efforts in the data aggregation field to further highlight its importance to banks and step-up their practice (Addressees: DNB, AFM; Priority: M; Timeframe: MT). - Credit Risk Supervision - Further exploit lessons learned from the prolonged period of challenging economic conditions to strengthen risk management systems of banks and to enhance supervisory approaches of offsite supervision (Addressee: DNB; Priority: M; Timeframe: ST). - Consider translating supervisory expectations related to collateral valuations into regulatory requirements or guidance (Addressee: DNB; Priority: H; Timeframe: MT). - Introduce a requirement for all mortgage credit providers and their mortgage clients to periodically update the information on the clients’ financial situation (Addressees: DNB, AFM, MOF; Priority: H; Timeframe: MT). - Consider a reporting requirement for transactions with related parties (Addressee: DNB; Priority: M; Timeframe: MT). ### Scope of the Review - The note reviews DNB’s LSI supervision in the broader context of the EU regulatory environment and the SSM. DNB applies EU approaches to all banks with due regard to the nature, scale and complexity of the institutions. - The mission focused on supervision of LSIs using selected Basel Core Principles (BCP) as guiding structure, including CP1, CP2, CP3, CP8, CP9, CP11, CP12, CP13, CP14, CP15, CP16, CP17, CP18, CP19, CP20, and CP26. - The review used DNB’s self-assessment, a questionnaire, ECB responses, around 40 meetings, documents shared in virtual data rooms, additional DNB responses, and publicly available information. ### Banking Sector — Market Structure and Key Statistics - The banking sector in the Netherlands is relatively large compared to GDP, highly concentrated, with stable market positions for the largest banks. - Total banking sector assets: approximately 253 percent of GDP as of June 2023. - Market share of systemically important institutions (SI): around 93 percent. - Market share of top-4 banks: 76 percent. - SI landscape has been mostly stable; one bank was newly categorized as SI. - Four SI banks have full or partial state ownership. - Dutch LSI population: 24 banks, including new banks emerging from Brexit and large investment firms. - In relative terms, Dutch LSIs have a market share of 8½ percent in total assets within the SSM. - Average balance sheet size of a Dutch LSI: €8,5 billion. - SSM average balance sheet size (2021): €2,3 billion. ### Selected Financial Indicators (Table 2, in percent) - Return on equity (SI): 2018 8.71; 2019 7.62; 2020 3.27; 2021 8.35; 2022 8.00. - Return on equity (LSI): 2018 4.63; 2019 9.08; 2020 1.97; 2021 8.24; 2022 5.80. - Return on assets (SI): 2018 0.52; 2019 0.46; 2020 0.19; 2021 0.49; 2022 0.48. - Return on assets (LSI): 2018 0.54; 2019 0.93; 2020 0.22; 2021 0.92; 2022 0.63. - Net interest margin (SI): 2018 1.44; 2019 1.42; 2020 1.28; 2021 1.23; 2022 1.34. - Net interest margin (LSI): 2018 1.26; 2019 1.15; 2020 1.05; 2021 0.96; 2022 1.08. - Cost-to-income ratio (SI): 2018 53.70; 2019 50.32; 2020 49.39; 2021 49.74; 2022 49.12. - Cost-to-income ratio (LSI): 2018 53.57; 2019 49.51; 2020 58.03; 2021 48.38; 2022 52.41. - CET1 to RWA (SI): 2018 16.45; 2019 16.48; 2020 17.03; 2021 16.97; 2022 15.68. - CET1 to RWA (LSI): 2018 21.36; 2019 20.08; 2020 25.20; 2021 24.99; 2022 23.35. - Leverage ratio (SI): 2018 4.61; 2019 4.88; 2020 5.23; 2021 6.54; 2022 5.80. - Leverage ratio (LSI): 2018 9.87; 2019 8.53; 2020 10.25; 2021 10.34; 2022 9.18. - NPL ratio (SI): 2018 1.95; 2019 1.86; 2020 2.24; 2021 1.73; 2022 1.60. - NPL ratio (LSI): 2018 1.88; 2019 1.63; 2020 2.29; 2021 1.98; 2022 1.80. - RWA density (SI): 2018 30.46; 2019 31.19; 2020 28.68; 2021 29.76; 2022 33.23. - RWA density (LSI): 2018 48.06; 2019 44.30; 2020 38.79; 2021 38.99; 2022 40.16. - Loan to deposit ratio (SI): 2018 123.45; 2019 124.52; 2020 106.46; 2021 104.01; 2022 108.04. - Loan to deposit ratio (LSI): 2018 104.27; 2019 102.76; 2020 97.46; 2021 94.09; 2022 95.04. _Italic: Extracted from "EXECUTIVE SUMMARY" (Technical Note prepared in the context of the 2023 Netherlands Financial Sector Assessment Program)._ ### 7. The ratio of nonperforming loans (NPL) is low (Figure 1). Extremely low levels of non- ### 1nldea2024004 - 7. The ratio of nonperforming loans (NPL) is low (Figure 1). Extremely low levels of non- ### Asset quality and nonperforming loans - Nonperforming assets are described as extremely low, reflecting: - Strength of Dutch economy with historically low levels of bankruptcies and high levels of liquidity. - Effects of recent government COVID-19 support programs for households and businesses. - Asset staging: - Stage 1: 82 percent of total assets (Figure 2). - Banks are well positioned to maintain low levels of cost of risk given: - Vast majority of assets in Stage 1. - Stable economic outlook. - Efficient foreclosure/insolvency regime in the Netherlands. ### Mortgage market structure and interest-only (IO) mortgages - Loans with real estate collateral: 38 percent of the overall balance sheet of the Dutch banking sector. - Residential mortgages: 27 percent. - Commercial real estate: 4 percent. - Corporate loans secured on real estate (included in the 38 percent). - Size of mortgage market: - Volume amounting 83 percent of GDP (Netherlands) versus approximately 40 percent of GDP (EU average) and approximately 50 percent of GDP (US). - Interest-Only (IO) mortgages: - Share of IO loans stands at 43.8 percent of total residential mortgages in the first quarter of 2022. - Another statement: 45 percent of mortgages are currently interest only (text noting this figure in the IO risk discussion). - Maturity profile will experience a spike between years 2035 and 2038. - Less than 2 percent of households are expected to be at risk of a residual debt if they sell their homes. - By 2040, nearly 80 percent of the main breadwinners in households with an interest only mortgage will have reached retirement age. - Volume of IO mortgages has been gradually decreasing for a decade; recent increase in interest rates implied increased demand across age groups. - Supervisory risk factors associated with IO mortgages: - Lack of monthly principal payments can translate into a lack of continuous monitoring of the relationship with the borrower. - Lack of an adequate update of borrower risk profile. - Reliance on collateral as the primary source of repayment. - High likelihood of the need for refinancing at maturity. - When originated in mass volumes significantly increases risks for a bank/the system. - Table 3: Interest-Only and Other Mortgages (2022Q1) - SI IO: Amount outstanding (bn EUR) 221.6 - SI Other: Amount outstanding (bn EUR) 270.3 - LSI IO: Amount outstanding (bn EUR) 36.8 - LSI Other: Amount outstanding (bn EUR) 60.9 - SI IO Average loan to value (percent) 47.0 - SI Other Average loan to value (percent) 57.4 - LSI IO Average loan to value (percent) 53.2 - LSI Other Average loan to value (percent) 60 - SI IO Median loan to value (percent) 45.9 - SI Other Median loan to value (percent) 57.4 - LSI IO Median loan to value (percent) 54.0 - LSI Other Median loan to value (percent) 60 - SI IO Average maturity (years) 17.7 - SI Other Average maturity (years) 22.3 - LSI IO Average maturity (years) 22.1 - LSI Other Average maturity (years) 23.0 - SI IO Median maturity (years) 16.0 - SI Other Median maturity (years) 25.0 - LSI IO Median maturity (years) 25.0 - LSI Other Median maturity (years) 25.0 - SI IO Average interest reset period (years) 7.9 - SI Other Average interest reset period (years) 10.0 - LSI IO Average interest reset period (years) 11.1 - LSI Other Average interest reset period (years) 12.2 - SI IO Median interest reset period (years) 6.0 - SI Other Median interest reset period (years) 8.0 - LSI IO Median interest reset period (years) 10.0 - LSI Other Median interest reset period (years) 14.0 ### Funding, capitalization, liquidity, and profitability - Funding: - Deposits of households and businesses: 55 percent of the total balance sheet (main funding source). - Deposit guarantee coverage: 58 percent of the deposits are covered by the deposit guarantee scheme (covered for up to €100,000). - Other unsecured deposits: 17 percent comprise current accounts of businesses representing operational deposits. - Capitalization and resilience: - Capital and liquidity positions well-above minimum requirements and above the EU average. - EBA/ECB stress test shows Dutch banks can withstand an adverse stress scenario including both higher inflation and a strong decline in economic growth. - Profitability and interest rate sensitivity: - Current average return on equity (RoE) of Dutch LSIs: 5.8 percent (2022, 2021: 8.24 percent / 2021 SSM LSI average: 3,5 percent). - RoE of the top-4 Dutch SIs: 8.0 percent (2022, 2021: 8.35 percent). - Profitability highly dependent on interest rate income; increase in policy interest rates by the ECB widened net interest margins, though margins have started tightening with the rise of deposit rates. - Liquidity: - All Dutch banks have LCR and NSFR ratios of more than 100 percent. - Average weighted LCR ratio of Dutch banks: 157 percent (March 2023). - Average weighted NSFR ratio: 134 percent (December 2022). - Liquidity buffer composition: - Central bank reserves and cash: 67 percent of the liquidity buffer. - Bonds: 25 percent of the liquidity buffer (partly carried at amortized cost on the balance sheet). - Banks are obliged to include assets at market value in the liquidity buffer; liquidation has no impact on the liquidity portfolio (because it's at market value), but possibly an impact on capital. ### Risks, challenges, and macro/sectoral exposures - Recent history and stressors: - COVID-19 fiscal and monetary stimulus lowered default rates during the pandemic. - Russia war in Ukraine temporarily increased energy prices and cyber-risk; Dutch banks remained resilient and profitable. - Failures of foreign banks abroad highlighted depositor behavior risks amplified by social media and fast account opening/money transfer speeds; these influence assumptions on liquidity outflows. - Climate and nature risks: - Dutch government targets: - 60 percent reduction in carbon emissions by 2030. - Climate-neutral, fossil free, nature-inclusive and fully circular by 2050. - Netherlands vulnerable to rising sea levels and flooding by rivers. - In serious but not inconceivable scenarios, flooding could result in losses of up to EUR 60 billion. - DNB started in 2019 to request LSIs to pay attention to climate-related risks; almost all Dutch LSIs have started integrating climate- and environmental risks within their practices, aligning with ECB and EBA guidance, though depth of action varies across LSIs. - Nonbank competition and market structure: - Increasing competition from nonbanks for lending products and from payment institutions for payment services. - Nonbanks can offer more aggressive terms (e.g., longer interest rate fixed period on mortgages) and may benefit from differences in regulatory requirements, greater flexibility in structuring balance sheets, or lower operational costs. - FinTechs and potential BigTech entrants present competitive and operational challenges; banks have responded by replicating some NBFI operating models (e.g., structures outside banks’ balance sheets), adding supervisory complexity. - Supervisory indicators and analyses intensified: - DNB developed a tool for sensitivity analysis of liquidity outflows. - Additional analyses conducted include: - Analysis of direct and indirect exposures of Dutch LSIs to specific countries, sectors and institutions. - In-depth analysis of credit risk via loan tape reporting. - Analysis of liquidity risk, funding issues and interest rate risk. - Intensified monitoring, additional reporting, and contact with banks where necessary. ### Supervisory response, governance, and framework for LSI supervision - Internal governance and supervisory intensification: - Bankbreed Risico Overleg (Bank Wide Risk Committee, BRO) founded during COVID-19 pandemic; consists of DNB’s senior management and meets monthly. - DNB intensified supervisory activities and analyses (see list in previous section). - Integration with EU frameworks and cooperation: - DNB follows the EU Single Rulebook and the SSM regulation; participates actively in SSM and EBA structures. - LSI supervision leverages DNB’s long-established expertise in supervising large internationally active banks. - Proactive cooperation with European counterparts and international authorities via supervisory and crisis management colleges and numerous Memoranda of Understanding (MoU). - Resources and capacity considerations: - LSI supervision benefits from DNB’s broad capacity but faces competition for resources from SSM and SI supervision demands; potential long-term pressures on effectiveness and efficiency if not compensated by the SSM. - DNB has increasingly expressed demand for SSM support in LSI supervision. - Macroprudential integration and supervisory priorities: - DNB produces a micro-macro dialogue (MMD) risk report based on the semi-annual Financial Stability Report; uses indicators and stress tests to assess macro risk impacts on institutions. - Banks are required to consider macro risks in their own stress tests (as part of the SREP); DNB conducts top-down stress tests. - AFM complements DNB by setting conduct rules for mortgage lending. - DNB’s 2023 priorities for LSI supervision: - Credit Risk - Outsourcing - Data quality - Liquidity risk - Forward-looking challenges: - DNB needs to anticipate and respond proactively to technological innovation, climate/nature risk, macroeconomic environment changes, and geopolitical tensions. - New tools, approaches, and fresh perspectives on legacy issues (including mortgage lending) may be required. *Source: KINGDOM OF THE NETHERLANDS—THE NETHERLANDS, INTERNATIONAL MONETARY FUND (content unit 1nldea2024004).* ### 27. Since 2017, the EU has adopted several new laws to elevate prudential standards and ### 1nldea2024004 - 27. Since 2017, the EU has adopted several new laws to elevate prudential standards and ### EU legislative developments and Basel III implementation - The EU has taken several steps in implementing Basel III and these efforts can be accomplished by the so called ‘CRDVI/CRRIII package’ where the EU Council presidency and the European Parliament recently reached provisional agreement on the amendment of Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR). - Unlike some other jurisdictions, the EU applies the Basel framework to all banks while employing the proportionality principle. - EU legislators have adopted measures to: - foster credit risk management; and - shield the system from the impacts of the COVID-19 pandemic. - For the Netherlands, legislative acts including the amended Payment Services Directive (PSDII) and Covered Bonds Directive are potentially impactful on the market landscape. - Latest updates on the banking package referenced: (December 2023). ### Role of EBA and ECB regulatory products - EBA delegated acts and EBA guidelines have a significant and direct impact on the Dutch regulatory framework; DNB follows both very closely. - The EBA regulatory framework completes the EU Single Rule Book and spans topics including credit risk, climate risk, and reporting and disclosure. - DNB transposes EBA documents without material changes, even if they are not endorsed as the EU directly applicable regulations. - Although the ECB has limited direct involvement in day-to-day supervision of LSIs, its products largely inspire LSI supervision; DNB extensively applies the ECB framework in LSI supervision, including guidance on internal models, NPLs, and climate-related and environmental risks. ### DNB engagement and national complements - DNB actively contributes to EU regulatory initiatives and occasionally complements the EU framework with national elements. - DNB contributes to EU projects to ensure suitability of the EU framework to the Dutch financial system and to refresh supervisory capacity through frequent peer contacts. - Where necessary, DNB sets additional benchmarks (for instance, establishing healthy balance sheet ratios) to complement the SREP framework. ### Supervisory independence, powers, and resources - The operational independence, accountability and governance of DNB (prudential supervisor) and the AFM (conduct supervisor) are anchored in national legislation, the Articles of Association of DNB and the AFM, and framed by the EBA Regulation and SSM Regulation. - DNB and the AFM are accountable primarily to: - the Minister of Finance; and - the Minister of Social Affairs and Employment (for pension fund supervision). - Their operations can be audited by the Court of Audit. - Budget framework and processes: - The four-year budget limits of DNB and the AFM are informed by multi-year strategies. - The supervisory authorities are subject to the Cost Framework that limits the growth of their budget for a period of four years. - The limits build on the Supervisory Strategy of each authority which sets the strategic agenda for a four-year term. - Yearly budget process steps: - (i) draft budgets are submitted for consultation to panels of representatives of supervised institutions; - (ii) subsequently approved by the Supervisory Board of DNB and the AFM; - (iii) then – before December 1 – submitted to the Minister of Finance and the Minister of Social Affairs and Employment for their approvals; - (iv) after approval, published on the websites of DNB and the AFM. - At the end of the budget year DNB and the AFM must draw up an annual report relating to duties under the Wet op het Financieel Toezicht (WFT), including the evolution of meeting KPIs, and send it to the Minister of Finance, the Minister of Social Affairs and Employment and to Parliament. - Observations and concerns: - Ministries assess budget proposals based on (i) formal compliance with law, (ii) procedural agreements, (iii) the definition of key performance indicators, and (iv) factual or procedural errors. - The cooperative and informal practice in budget discussions may correct deficiencies in normal circumstances but may not provide sufficient safeguards if disagreements arise between ministries and supervisory authorities, nor a sufficient shield against political interventions. - Recommendations: - Recommendation 1: Define intermediate steps in the budgetary process to provide additional safeguards to the independence of DNB’s supervisory function and the AFM. - Recommendation 2: Implement the practice of a periodic benchmarking of supervisors’ salary levels against relevant peers in the financial industry. - Rationale: DNB and the AFM derive salary levels from the mid-point of the economy which may disadvantage supervision in hiring experts for areas with specific skill sets; only positions requiring the same level of expertise as supervision should be selected for regular comparisons. Gender and broader diversity aspects can be taken into account. ### Organization of supervision and internal governance - DNB has a clear organization and internal governance framework including three lines of defense. - Internal governance features: - Responsibilities of specific units are clearly defined; hierarchy reflects SSM requirements to separate SI supervision. - DNB uses ‘Planning & Control Cycle’ to measure and report performance. - Internal evaluations and audits are performed regularly by Risk Management & Strategy (2nd line) and Internal Audit (3rd line). - Opportunities to strengthen second and third lines: - Expand follow-up practice in Risk Management & Strategy to allow additional discussion time and regular follow-ups. - Internal Audit could provide concise and focused ‘quick scans’ and make some audits (for instance on information security) recurrent with a pre-defined frequency. - Recommendation 3: Explore further options to benefit from the second and third lines of defense in strengthening the processes of supervision. ### Supervisory cooperation (domestic and international) - Domestic cooperation: - Strong, well-established cooperation between DNB and the AFM grounded in WFT and a cooperation agreement. - Management boards meet periodically and lower-level cooperation is fluent; information exchange is seamless. - Prudential and conduct regulation are viewed as intertwined with common long-term goals. - Suggested enhancements: - Increase joint interactions with the industry (joint meetings, joint examinations) to improve effectiveness and communication. - Create a standardized but flexible IT solution for secure data and information sharing to facilitate regular and ad hoc exchanges. - Recommendation 4: Ensure maximizing opportunities for collaboration between DNB and AFM, especially to jointly engage with financial institutions and to share data, through systematic measures. - International cooperation: - Facilitated through an extensive set of Memoranda of Understanding (MoUs) which are updated as needed. - DNB enters MoUs with supervisory authorities and other governmental institutions to provide a formal framework for exchange and handling of supervisory information. - DNB facilitates EU cooperation frameworks and operates in both home and host modes, actively engaging with other supervisors. ### Supervisory process, tools, and SREP - Supervisory cycle: - Sufficiently tight with a logical chain of actions and feedbacks; supervisory activities are well integrated and coherent across SI and LSI supervision. - Proportionate implementation of the SSM supervisory framework to LSI supervision contributes to consistency and robustness. - Example: the ‘fit and proper’ process is intrusive with a robust governance and synchronized with the ECB. - SREP: - The SREP process steers the majority of supervisory activities and outcomes. - SREP qualitative and quantitative assessments are thorough and build on multiple inputs including internal processes and analytical tools of LSIs. - SREP outcomes are shared with banks via ongoing supervisory dialogue, following a risk-by-risk logic, and communicated to senior management in both written and oral formats. - Banks find DNB’s risk-by-risk approach makes results foreseeable and easy to interpret. - Risk Assessment System (RAS): - DNB’s risk-based, forward-looking, intrusive supervisory approach is framed by the RAS which monitors four elements: - (i) business models; - (ii) governance and risk management; - (iii) risk to capital; and - (iv) risk to liquidity/funding. - RAS builds on: - regular reporting data (mostly COREP and FINREP); - qualitative information (including self-assessments by banks); and - ad hoc information from various sources. - Self-assessments are cross-checked and later verified in on-site examinations. - The RAS outcome is a risk analysis with short narratives accompanied with scores; methodology is anchored by the ECB approach. - Supervisory tools and data systems: - Core data from COREP and FINREP is stored in DNB systems and the Information Management System (IMAS) administered by the ECB. - IMAS provides limited functionality to LSI supervision; LSI examiners review core data in DNB’s own systems and dashboards. - DNB proprietary systems: - SUPREMO: monitors pre-defined ratios and thresholds; creates reports to monitor capital and liquidity adequacy. - Satellite analytical tools: simulate stress levels on liquidity outflows when analyzing LCRs of banks. - ICAAP and ILAAP challenge: - The SREP integrates supervisory knowledge to challenge banks’ ICAAP and ILAAP on a risk-by-risk basis. - DNB performs thorough assessments and challenges individual calculations, methodologies and assumptions, discussing supervisory capital or liquidity requirements with banks. - DNB has built strong analytical capacity and expertise; all findings are linked to the SREP structure. - DNB’s approach to the SREP is assessed as good practice. *Source: 1nldea2024004 - 27. Since 2017, the EU has adopted several new laws to elevate prudential standards and* ### 51. The conditions in the COVID-19 pandemic underscored the need to analyze granular ### 51. The conditions in the COVID-19 pandemic underscored the need to analyze granular ### Granular data and offsite supervision - DNB collected detailed information about individual loans (‘loan-tapes’) usually required before onsite examinations and analyzed these datasets to identify irregularities and determine asset quality. - DNB succeeded in promptly and flexibly responding to the COVID-19 situation while expanding capabilities of offsite supervision. - Banks upscaled their reporting activities without major issues, achieving a good quality of reported data. - Monitoring of granular information on various risks allowed risks to be compared across different institutions through close cooperation of several organizational parts of DNB. - This agile approach provided supervision with sufficiently detailed and accurate information on recent developments to support well targeted actions. - The COVID-19 experience demonstrates advantages of regular analyses of granular data for developing tools mapping microprudential treatment of the same risk exposures and designing measures to maintain level playing field. - Regular analyses of granular data would enhance efficiency and effectiveness of supervision (across sectors) while avoiding significant burden on banks (financial institutions). ### Legal impediments to regular collection of granular data - The Bankwet – ‘Bank Act’ (BKW) does not allow DNB to collect personal data which represents an issue if reports contain such data, or data that can constitute personal data when linked with other information. - The BKW/Uitvoeringsbesluit – ‘Implementing Acts’ do not anticipate collecting extensive datasets on a regular basis. - Recommendation 5: Ensure that authorities have a clear legal basis to access granular, transaction/loan level data on a regular basis for risk monitoring and analysis, including residential and commercial real estate loans. ### Governance and data protection - Once DNB is in a position to legally collect relevant supervisory data, it needs to ensure proper governance to protect this data. - Although the FSAP did not observe particular weaknesses in current arrangements, the nature of supplementary data may require additional measures. - DNB should focus on ensuring relevant precautions to protect any personal data and to make sure this sensitive data is adequately managed. ### Advanced technologies and cooperation - Technologies capable of processing ‘big data’ or using ‘machine learning’ models can qualitatively increase efficiency and intrusiveness of supervision. - Major supervisors are exploring this potential or developing/testing first-generation tools using advanced technologies. - For DNB, an upgrade could be necessary due to increasing complexity of the financial system and growing penetration of the banking market by NBFIs. - As the Netherlands and DNB significantly invest into the SSM project, limited resources are available to develop such tools exclusively for Dutch LSI supervision. - It is sensible to join forces with partner SSM/EU-NCAs to scale capacities for developing tools suitable to LSI and SI supervision across the SSM/EU. - Recommendation 6: Explore opportunities to leverage DNB’s membership in the SSM/EU to implement largely automated supervisory tools based on advanced technologies, allowing processing of large data sets, in LSI supervision. ### Supervision of risk management and governance - Risk management requirements are well elaborated, closely following the EU regulation; pursuant to article 3:17 of the WFT a bank must organize its operations to safeguard controlled and sound business operations. - Article 23 of Besluit prudentiële regels - the ‘Decree on Prudential Rules’ (Bpr) further states that banks should pursue a policy aimed at managing relevant risks. - The CRD sets requirements for the treatment of risks by banks, including that the risk management function should ensure that all material risks are identified, measured, and properly reported (Article 76 of CRD referenced). - DNB applies the EBA Guidelines for Common Procedures and Methodologies for the Supervisory Review and Evaluation Process (SREP) and Supervisory Stress Testing (2022) and the Guidelines on Internal Governance (2021); operationalized by the SSM LSI SREP Methodology. - Governance framework is robust; corporate governance requirements established by national law and EU regulations; DNB issues supervisory guidance on responsibilities of Boards and senior management. - DNB’s RAS assesses internal governance and risk management systems while extending the approach to ‘behavior and culture’ addressing root causes of governance-related issues. The RAS assessment includes: - identification of behavioral patterns in leadership, group dynamics and decision-making and organizational capacity to adapt; - assessment of effects of these patterns on company performance and risk profile; - influencing institutions to change risky behavioral patterns observed. - Supervisory findings and recommendations are enforced and followed-up (DNB verifies remedial actions by banks). - Supervisory boards must consist of at least three supervisory board members (article 3:19 WFT); independent supervisory board members proved significant in practice. - Article 17 BPR can entail, depending on circumstances, that a bank should have a supervisory board with independent members; DNB can demand reliance on article 17 BPR where applicable. - While current practice of appointing independent supervisory board members is well established, further clarification in law would ensure consistency across institutions and in time. - Recommendation 7: Further clarify the requirement of independent supervisory board members in law. - Increasing demands for data from banks, combined with legacy issues, warrant further work; DNB/SSM has established a comprehensive and long-term program to implement elements of BCBS ‘Principles for Effective Risk Data Aggregation and Risk Reporting’ across banks. - Recommendation 8: Continue supervisory efforts in the data aggregation field to further highlight its importance to banks and step-up their practice. ### Supervision of credit risk and IO mortgages - DNB implements a consistent and overall strong approach to credit risk supervision building on the EU regulatory framework (CRR and CRD). - CRR contains definitions of forbearance, non-performing and defaulted loans (¶58); Article 47a describes the definition of non-performing loans, Article 47b describes the definition of forbearance, Article 178 describes the definition of default. - CRR describes the credit granting and monitoring process (Article 179) and contains capital requirements with respect to credit risk (Title II), including usage of internal models, stress testing (Chapter 3), and credit risk mitigation techniques (Chapter 4). - EBA framework elements for credit risk include Guidelines on credit risk management practices and accounting for expected credit losses; Guidelines on loan origination and monitoring; Guidelines on stress testing; Guidelines on the application of the definition of default; Guidelines on management of non-performing and forborne exposures; Guidelines related to IRB models and moratoria during COVID-19; and Guidelines on internal governance and SREP. - DNB’s practice was tested and gradually upgraded during prolonged uncertainty and economic challenges; during COVID-19 DNB undertook enhanced monitoring of emerging credit risk and NPLs based on monthly reported loan tapes. - DNB evaluated practices of banks in asset classification and provisioning, including governance measures regarding management overlays or expected credit losses (ECL) models. - Recommendation 9: Further exploit lessons learned from the prolonged period of challenging economic conditions to strengthen risk management systems of banks and to enhance supervisory approaches of offsite supervision. - IO mortgages present challenges; DNB’s supervision considers systemic factors including efficiency of collateral repossessions, real estate market development, demographic developments, and monitors prudential indicators related to IO mortgages. - DNB conducted a horizontal analysis on LSIs’ risk management of IO mortgage portfolios and asked LSIs to explicitly incorporate specific risks of IO mortgages in their ICAAP. - AFM initiated in 2018 a multi-year supervisory campaign targeting all mortgage providers with IO mortgages requiring customer awareness, regular reapproach until maturity, proactive assistance, and tailored solutions. - Data on borrower creditworthiness and collateral values are critical; banks rely on voluntary client outreach for borrower information under AFM initiatives. - An appropriate legal underpinning is essential to strengthen banks’ risk management practices and improve conduct standards (preventing and overcoming arrears, installing continuous customer outreach programs). *KINGDOM OF THE NETHERLANDS—THE NETHERLANDS INTERNATIONAL MONETARY FUND* ### 70. Collateral valuation frameworks could be further elaborated. While the EBA ### Collateral valuation frameworks could be further elaborated. ### Collateral valuation frameworks — findings - The EBA and the ECB developed frameworks, but they "remain quite high-level and relatively concise to address the issue of appraising residential real estates." - Both frameworks are "largely overlapping, ensuring regulation of all banks across the EU member states." - The ECB focuses on immovable property, while the EBA Guidelines "also include movables in the scope." - The frameworks cover principles/requirements encompassing: - (i) monitoring and controls; - (ii) individual valuation vs indexation; - (iii) appraisers; - (iv) frequency of valuation; - (v) valuation methodology, with the focus on expected future cash flow (and gone concern approach); - (vi) back testing; - (vii) IT databases of banks; - (ix) valuation of foreclosed assets. - DNB has developed "strong analytical tools" and a "solid practice" to support examinations and implementation of these frameworks. - The supervisory practice can provide important incentives to banks; however, converting supervisory expectations into regulatory requirements or guidance could strengthen consistency. - The AFM could revisit its proposal of Guidance on Real Estate Valuations (‘Leidraad Vastgoedtaxatie’) (consultation document 2015). ### Policy recommendations (explicit) - Recommendation 10: "Consider translating supervisory expectations related to collateral valuations into regulatory requirements or guidance." - Recommendation 11: "Introduce an obligation for all mortgage credit providers to periodically update the information about the (interest only) mortgage client’s financial situation." - Recommendation 12: "Consider a reporting requirement for transactions with related parties." ### Systemic measures related to sustainability of interest-only (IO) mortgages — overview (Box 2) - Prudential Measures: - In 2022, the ECB and DNB formulated supervisory expectations for the four largest mortgage-providing banks in the Netherlands, including: - substantially limit production of IO mortgages; - stop the production of IO mortgages without a maturity date; - significantly reduce exposure of IO mortgages; - intensify monitoring (e.g., introduce in new contracts an obligation for clients to update personal information); - increase provisioning. - In 2022, DNB conducted a horizontal analysis on IO mortgages of smaller mortgage-providing banks; in 2023, DNB expected these banks to explicitly incorporate IO portfolio risks in documentation submitted as part of the SREP process. - Since 2022, DNB requires banks using internal models to apply a minimum floor to their risk weighting of domestic mortgage loan portfolios, using Article 458 of the CRR (one of the options and discretions provided by CRD IV/CRR). - Conduct of Business Measures (AFM): - AFM initiated in 2018 a multi-year supervisory campaign targeting all mortgage providers with IO mortgages on their balance sheet. - AFM objective: all mortgage providers must ensure that customers with an (partial) IO mortgage are aware of consequences on their financial situation, are able to timely make a conscious decision, and can undertake steps to improve their financial situation if necessary. - AFM supervisory expectations included: - Providers to improve insights into specific customer risks of IO mortgages using a segmentation matrix classifying IO-customers in risk buckets according to end LTV and time to event (maturity date, retirement year). Reports submitted quarterly and since June 2023 on semiannual basis. - Providers to set up an ongoing customer outreach program to inform IO-customers on mortgage situation and affordability, alternatives to improve financial situation, encourage remedial action where potential vulnerability exists, provide tailored solutions to customers lacking resources, and personally outreach to high-risk customers. - Providers to set up a management process for recurring customer outreach until IO mortgage maturity and to report on continuous client outreach to AFM on semiannual basis. - AFM cooperated with providers on research into effective methods of consumer outreach from a behavioral perspective and published practical insights to assist providers. - Mortgage providers must have adequate procedures ensuring consumer interests are balanced when developing and maintaining financial products; periodic product review is required and mortgage-products should be offered only to suitable target groups. - Industry Self-regulation: - The Code of Conduct for Mortgage Financing was established in 1989. ### Related party exposures — findings - The EU/Dutch regulatory framework does not establish the requirement to monitor and control separately and in aggregate related party exposures on the basis of regular reporting, as requested by the Basel Core Principles. - No framework has been established for competent authorities to perform an assessment of the information collected to meet supervisory needs. - Supervision of related party risk is typically carried out by external auditors, but their analysis is "very limited." - The reporting framework does include information requirements related to large exposure and concentration limits. ### Market, operational, and liquidity risk — supervisory practice and tools - Market Risk: - The EU prudential framework centers around CRD/CRR and is complemented by conduct regulation in MIFID/MIFIR; EBA and ESMA have delivered technical standards and guidelines. - DNB evaluates data from COREP (market risk), internal DNB quarterly reports (kwartaalrapportage), ICAAPs, and onsite examinations using the RAS and supporting systems (e.g., SUPREMO). - DNB discusses bank risk appetite and limits during RAS updates and onsite visits; DNB can require mitigating actions, use Pillar 2 measures, and include capital add-ons for market risk in the SREP. - Conduct supervision is performed by the AFM; DNB and AFM exchange findings and are invited to "further maximize their cooperation opportunities." - Operational Risk: - The EU framework for operational risk is grounded in CRD/CRR and DORA and further elaborated in EBA technical standards and guidelines. - DNB publishes and regularly updates an overview detailing how EU guidelines and recommendations are implemented in Dutch law with references to relevant national provisions. - DNB applies the SSM Manual to supervise operational risk and has a dedicated operational risk section in the RAS; analysis uses the DNB IT questionnaire (bank self-assessment), ICAAPs, and interviews. - DNB organizes internal SREP panels comparing results across banks to ensure a level playing field and quality assurance. - DNB has stepped up supervision of outsourcing; SREP includes outsourcing risk review and a series of onsite inspections focused on institutions’ risk management over outsourced services. - Monitoring of service providers is not yet subject to formal supervision as required by DORA; an informal monitoring of important service providers is applied (e.g., using publicly available information). - DNB emphasizes third party reports within notified outsourcing arrangements and requests banks to demonstrate knowledge and risk management over service providers in onsite inspections and horizontal IT/outsourcing analyses. - COVID-19 accelerated banks’ shift to digital services, increasing supervisory attention to digital operational resilience (IT risk management, 3rd party oversight, IT cybersecurity); post-invasion insights have further shaped practice. - Liquidity Risk: - DNB has implemented LCR and NSFR and other elements of the modern regulatory framework with robust supervisory practice. - Pillar 1 requirements of the 100 percent LCR and 100 percent NSFR are applicable to all banks, directly following the CRR and the LCR Delegated Regulation. - Pillar 2 requirements are institution-specific and include: - (i) a six month survival period, covering the gap between the LCR (1 month) and the NSFR (1 year), based on internal stress tests; - (ii) limits to the asset encumbrance of selected banks; - (iii) quantitative and qualitative requirements for higher risk banks. - DNB analyses regular reporting (e.g., LCR, NSFR, ALMM), ILAAPs, internal management information to inform liquidity dashboards and the RAS and to assess liquidity risk in the SREP. - DNB performed a horizontal exercise inspired by the Silicon Valley Bank (SVB) case, testing system resilience and upgrading analytical toolkits. ### Enforcement — findings - DNB/AFM have implemented procedures to ensure consistency and transparency of enforcement action, framed by the AFM-DNB Enforcement policy (available online). - Administrative sanctions are published to enhance transparency and predictability. - DNB and AFM employ a variety of formal and informal enforcement measures (including moral suasion) and are "sufficiently agile" in taking enforcement action. - Internal enforcement processes were updated to support good governance, avoid inaction, and emphasize objectivity; cooperation between examiners and lawyers is supported at all stages. - Decisions to start enforcement processes are taken by division directors or the Executive Director responsible for banking supervision, depending on decision specifics and bank risk category; DNB uses a matrix of supervisory power. - Final draft decisions to impose penalties/administrative fines are submitted for approval to the director responsible for banking supervision; interested parties can raise objections which are independently assessed. - Offenders may appeal decisions at the District Court in Rotterdam; lodging a writ of objection, appeal, or higher appeal generally "does not have suspensive force" except for provisional relief granted by a judge. ### Appendix I — Actions taken on prior recommendations (select) - 2016 Recommendation 1: "Enhance the powers of DNB (on LSIs and in consistency with the overall SSM approach) to introduce technical regulations in accordance with national and EU legislations." — Addressed. DNB and the AFM combine different approaches to achieve sufficient detail and consistency, including facilitating direct references to EU guidelines. - 2016 Recommendation 2: "Exclude 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." — Not relevant/Partly addressed. The initiative was not submitted to Parliament; budgetary independence has not increased. - 2016 Recommendation 3: "Implement a more active supervisory role in assessing loan classification." — Addressed (LSI supervision). DNB enhanced its supervisory program with a focus on implementation of related frameworks. - 2016 Recommendation 4: "Encourage a more active role of the SB of Dutch banks by ongoing engagement with the SB." — Addressed (LSI supervision). DNB demonstrated practical engagements with supervisory boards and this area was further elaborated by the FSAP. *Source: Excerpt from IMF country report chapter on the Netherlands (content unit 1nldea2024004).* ### 5. Strengthen supervisory ### 5. Strengthen supervisory ### Internal ongoing model monitoring (IRB and AMA) - Recommendation: Strengthen supervisory practices for internal ongoing model monitoring (Internal Ratings-based (IRB) and the Advanced Measurement Approach (AMA)). - Status: Addressed (LSI supervision). - Implementation notes: - DNB has explained its thorough approach in assessments of models. - DNB benefits from its broad experience. - This was further evidenced by feedback from DNB counterparts. ### Operational risk management systems - Recommendation: Place more emphasis on confirming that operational risk management systems are effectively implemented. - Status: Addressed (LSI supervision). - Implementation notes: - DNB has implemented a number of different approaches to assess operational risk management systems. - DNB uses a variety of tools, including onsite examinations. ### Outsourcing arrangements - Recommendation: Clarify the expectations for prior notification for material outsourcing arrangements. - Status: Addressed (LSI supervision). - Implementation notes: - The EU framework on outsourcing has been updated. - With its implementation, DNB enhanced technical solutions to transfer notifications. - DNB intensified its supervisory activity in the field. ### Data aggregation - Recommendation: Prioritize work on data aggregation to raise standards. - Status: Addressed (LSI supervision). - Implementation notes: - The work has been prioritized and banks’ practices have been put under ongoing scrutiny by supervision. - Challenges on the side of banks prevail due to the complexity of related issues, which include legacy systems and increasing demands on data. ### Harmonized definitions: default and forborne loans - Recommendation: Implement harmonized definition of default and forborne loans. - Status: Addressed (LSI supervision). - Implementation notes: - DNB implemented harmonized definition of default and forborne loans. - DNB benefited from the EU/ECB initiatives in the area (the ECB regulation has been followed also for LSIs). - Specifically, DNB implemented CRR Article 47a and CRR Article 47b, which describe the definition of non-performing loans and forborne loans respectively, and Article 178 CRR, which describes the definition of default. - DNB is also compliant with the EBA guidelines on the definition of default as of 2019. - DNB follows the 2017 ECB Guidance to Banks on the Treatment of NPLs which includes, but is not limited to, the classification of loans. ### Cross-sectoral review of mortgage underwriting standards - Recommendation: Undertake a cross-sectoral review (including sampling loan files) of credit underwriting standards of mortgages originated for the banking, insurance, and pension sectors. - Status: Addressed (LSI supervision). - Implementation notes: - DNB has undertaken a broad spectrum of activities. - DNB built on the support provided by the AFM frameworks. *From: 1nldea2024004 - 5. Strengthen supervisory* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1nldea2024004.pdf_