## _cr11144 ## Source details **Canonical URL:** [_cr11144](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11144.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11144.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11144.pdf.json) --- ### Executive summary — major findings and context - The Netherlands was heavily affected by the global financial crisis; public expenditure to provide capital support to banks and insurance companies was significant, and state ownership or participation is now extensive. - Four of the five largest financial groups are subject to restructuring programs at the behest of the authorities and the European Commission (EC). - The “twin peaks” supervision model (DNB prudential; AFM conduct-of-business) was severely tested; the case for the model remains strong but cross-border supervision and other areas need improvement. - With micro and macro prudential oversight concentrated in DNB, DNB was able to take a systemic view and react quickly and decisively during the crisis. - The financial sector remains dominated by systemically important institutions operating in diverse domestic and international markets; this requires strong supervisory institutions with recognized powers and willingness to use them. ### I. Sources of potential risk — macroeconomic developments - Recovery and output: - Emerged from a deep recession in mid-2009 in line with the Euro Area; recovery remains fragile. - Output fell sharply in 2009 owing to collapsing exports and falling domestic demand; upturn driven by exports and restocking while domestic demand remains weak. - Unemployment: - Increased only marginally in 2009 and peaked in 2010 at 4.5 percent. - Unemployment rate is well below the Euro Area average (about 10 percent). - Fiscal and debt stance: - Fiscal deficit standing at more than 5 percent in 2010. - Public-debt-to-GDP ratio increased by 18 percentage points between 2007 and 2010. - Inflation and interest rates: - Deflationary risk faded and inflation began to rise sharply, implying the low interest rate environment could soon end. ### Financial system structure, exposures, and crisis impact - Sector sizes and shares: - Banks: assets equal to 382 percent of end 2010 GDP. - Pension system: assets under management equal to 135 percent of GDP. - Insurance sector: assets equal to 69 percent of GDP; life insurance assets represent 89 percent of the sector. - Pension sector structure: 545 registered pension schemes; two largest funds manage 44 percent of scheme assets; ten largest funds manage 78 percent of scheme assets. - Bank exposures and funding (end 2010): - Loan exposures roughly equally distributed between domestic and international markets (mostly advanced countries), with a shift toward the domestic market. - Sovereign exposures account for about 13 percent of on and off balance sheet exposures. - Banking liabilities composition: deposits 43 percent, external liabilities 23 percent, issued debt securities 20 percent (mostly long and medium-term). - Five largest cross-border exposures (as percent of aggregate cross-border exposures): Belgium 6.2 percent; France 11.3 percent; Germany 9.5 percent; United Kingdom 19.7 percent; United States 8.3 percent. - Exposures of consequence to: Ireland 4.6 percent; Italy 2.7 percent; Spain 4.1 percent. - Crisis transmission and actions: - Dutch banks were exposed to U.S. securitized mortgages, including via U.S. subsidiaries, and hit by tightening of inter-bank funding markets. - Pension funds and insurance firms were affected and required remedial action; insurance firms required equity support. ### Key assessments of regulatory standards and financial soundness - Compliance: - Netherlands complies, or largely complies, with all principles assessed for banking, securities, and insurance except for one principle on securities market regulation. - Financial soundness since 2008: - Large banks maintain capitalization buffers well above minimum requirements following substantial capital support. - Capital augmentation and return to profitability appear to position banks to meet higher Basel III requirements. - DNB reforms: - DNB making intensive, well-focused efforts (e.g., VITA) to redress earlier shortcomings and adopt a more intrusive and decisive supervisory role. ### Main vulnerabilities and sectoral challenges - Household indebtedness and housing: - Household debt-to-disposable income ratio: 267 percent in 2010 Q1. - Average LTV ratio for new mortgages rose from slightly above 100 percent in 2000 to over 120 percent in 2010. - Mortgage Interest Deductibility (MID) regime cited as a significant driver of indebtedness. - Announced policy action: reduction in maximum LTV to 110 percent and repayment of at least 50 percent of principal over loan lifetime. - National Mortgage Guarantee (NHG) scheme: covers mortgage loans worth 110 billion euro out of a total mortgage portfolio of about 600 billion euro. - External risks from banks’ cross-border activities: - Significant foreign activities and local activities of foreign-owned financial institutions heighten need for multilateral and bilateral coordination, offsite surveillance, and stress testing with external risk dimensions. - Insurance sector: - Saturated market, low economic growth, and low interest rates; loss of tax advantage increases competition. - Life insurers vulnerable to interest rate risk and face image/reputational challenges. - Pension funds: - Systemic importance: 545 pension funds; ten largest hold 78 percent of total pension scheme assets. - Cover ratios fell from 130 percent to around 100 percent at end 2010, below the 105 percent regulatory requirement. - 340 pension funds are under supervisory recovery plans with potential benefit cuts. - Data gaps and legal constraints: - Insufficient granularity in regulatory data (e.g., sectoral breakdowns of non-performing assets). - DNB and AFM rulemaking authority is too limited; lack of discretion to put in system-wide enforceable rules. - Crisis management and resolution: - Important progress achieved but further reforms needed (see recommendations below). ### Selected FSAP Update recommendations (priorities preserved) - Macroprudential management (High/Medium): - Assign priority to developing macro-prudential instruments. (¶11) — (High) - Announce maximum loan-to-value (LTV) ratios for new lending, and consider linking higher LTVs to higher capital ratios. (¶11) — (High) - Provide supervisors powers to vary the level of designated macroprudential instruments in response to developments. (¶11) — (Medium) - Announce plans to reduce mortgage interest deductibility over the medium–term. (¶11) — (High) - Twin Peaks / supervisory powers (High/Medium): - Provide DNB and AFM greater discretion to put in place enforceable rules; current lack of sufficient rule making authority leads to ad hoc approaches vulnerable to legal challenge. (¶25 to 28) — (High) - Afford legal protection to DNB and AFM for official actions except in cases of gross negligence or willful misconduct. (¶28) — (High) - Continue integration of DNB staff across banking, insurance, and pensions functions to capture synergies. (¶38) — (Medium) - Microprudential bank and insurance supervision (High): - Establish routine reporting requirements to strengthen monitoring and risk modeling. (¶31 to 33) — (High) - Intensify supervision of large international financial institutions with emphasis on group supervision and business-model soundness; greater international cooperation beyond colleges of supervisors warranted. (¶34 to 36) — (High) - Adopt a more proactive and decisive approach, including timely off-site inspection and corrective actions that rely less on moral suasion. (¶39) — (High) - Securities market (High/Medium): - Strengthen AFM’s ability to enforce issuers’ compliance with financial reporting standards. (¶41) — (High) - Strengthen regulatory and supervisory framework for management companies of CIS. (¶45) — (Medium) - Pensions (High/Medium): - Develop a communication plan on recent and prospective changes in payouts to stakeholders. (¶51 to 54) — (High) - Require incorporation of professional Board members for pension funds beyond a minimum size and provide legal authority for direct supervision of core pension activities independently of the performing entity. (¶48) — (Medium) - Crisis management and bank resolution (High/Medium): - Reform the Deposit Guarantee Scheme so that it is: (i) ex ante funded, (ii) authorized to fund bank resolution operations, and (iii) enjoys depositor preference. (¶49) — (High) - Strengthen institutional crisis-management framework by: (i) shifting decision-making power from the Judiciary to DNB in bank resolution, and (ii) specifying more clearly roles of the MoF and DNB in bank resolution. (¶51) — (Medium) - Improve framework for official financial support by establishing a standing budgetary authorization for Government solvency support in a manner that avoids moral hazard. (¶52) — (Medium) - Establish a single regime for resolving banks under official control that sets objectives (including financial stability) and tasks and powers for official administrators. (¶51 to 54) — (High) ### Public support, exit strategy, and household balance sheets - Public support and policy response: - Support included equity injections, liquidity support, and guarantees; injections of voting and non-voting equity (qualifying as Tier 1) used to fully recapitalize banks and one major insurance company. - Recapitalizations allowed institutions to regain access to money market funding. - Policy measures required institutions to reduce leverage, build buffers, strengthen corporate governance, and enhance crisis management. - Household positions: - Household financial net worth broadly stable at almost 200 percent of GDP (reflecting large occupational pension holdings). - Real disposable household income declined during the crisis; likely to be anemic near medium term due to rising unemployment, weaker wages, and planned strong fiscal consolidation. - Excluding non-marketable assets, net financial asset position would have been negative since 2007 Q4. - House prices: rose by 6 percent (annualized) on average during 2000-08; fell by about 5 percent in 2009; stabilized in 2010; downward trend resumed more recently. ### Household debt metrics and policy implications - Household debt-to-disposable income ratio: 267 percent in 2010 Q1. - Average LTV ratio for new mortgages: - rose from slightly above 100 percent in 2000 to over 120 percent in 2010. - Recommended additional measures: - Consider assigning more stringent capital requirements to loans with higher LTVs. - Assign additional powers to DNB and AFM to facilitate timely action. - Increase transparency on NHG contingent government liabilities (NHG covers 110 billion euro of about 600 billion euro total mortgages). ### Corporate sector and overall financial stability - Non-financial corporations improved balance sheets after 2008–09; liquidity ratios decline yet to be reversed. - Overall assessment: financial institutions' positions restored and likely robust to a range of shocks due to recapitalizations and issuance of new capital. ### Banking sector metrics and stress tests — selected figures and results - Banking sector characteristics (end-2010 and selected figures): - Highly concentrated: assets of the largest seven banks account for more than 80 percent of the sector total. - Capital adequacy ratio (CAR): 13.9 percent at end-2010 (mostly core Tier 1). - Nonperforming loan (NPL) ratio: less than 3 percent of total loans. - Return on equity (ROE): 7 percent for the sector through 2010. - Liquidity: liquid assets more than cover short-term liabilities, but funding risk remains given reliance on wholesale market funding. - Stress tests (top-down for seven largest banks): - Scenarios: - (i) baseline scenario based on IMF WEO projections; - (ii) double-dip scenario using July 2010 CEBS deviations from baseline for 2011–12; - (iii) more severe double-dip scenario using twice the deviations from baseline for macroeconomic and EU sovereign bond market shocks. - Calibration: July 2010 CEBS stress test guided yield-curve shock calibrations; haircuts for Greece, Italy, Ireland, Portugal, and Spain updated and applied. - Results: - Under scenario 1, declines in Tier 1 ratios occurred but no bank fell below the 4 percent regulatory minimum or the 6 percent CEBS Tier 1 target. - Under adverse scenario 2, all banks would remain above the 4 percent regulatory minimum and the CEBS 6 percent Tier 1 target. - DNB liquidity stress testing: - Methodology: modified maturity gap approach assuming liabilities “run” and assets liquidated at stress discounts from mark-to-market. - Results for 2009 Q4 and 2010 Q3 indicate liquidity improved between these periods for 11 banks. ### Insurance companies and pension funds — conditions and supervisory responses - Insurance: - Life insurers reduced equity and real estate exposure but remain vulnerable to interest rate risk. - Stress tests show wide disparity across firms; likely industry consolidation and business model adaptation. - Implementation of Solvency II in 2013 expected to sharpen risk-based supervision. - Pensions: - Pillar 2 schemes AUM larger than GDP; 545 funds with ten largest holding 78 percent of assets. - Cover ratios fell from 130 percent to around 100 percent at end 2010 (regulatory requirement 105 percent). - 340 pension funds under supervisory recovery plans; indexation widely suspended. - Policy responses: negotiations on risk sharing/transference; recommendation to ensure proper stakeholder understanding of contract risks. ### Regulatory architecture, supervisory practice, and cross-cutting issues - High degree of compliance with Basel Core Principles, IOSCO, and IAIS standards overall; remaining weaknesses centered on rulemaking authority, reporting, and group-level powers. - Rule-making and legal constraints: - DNB and AFM ability to apply prudential or conduct-of-business rules system-wide is constrained, leading to ad hoc institution-by-institution approaches. - Explicit legal restriction against imposing broadly applicable intra-group exposure limits to insurance groups; limited powers to mandate prudential reporting due to Ministry of Economic Affairs requirements. - Recommended authority enhancements: - Grant regulatory agencies discretion to put in place enforceable rules broadly applied. - Allow DNB to vary macro-prudential instruments within a range. - Provide AFM with clear legal authority over product development and stronger powers to enforce issuers’ financial reporting compliance. - Consider explicit legal protection for DNB and AFM against suits for good-faith actions absent willful negligence. - Twin Peaks model: - Adopted in 2002; full transition completed in 2007. - DNB as unified prudential supervisor enabled a systemic response during the crisis; remaining improvements needed in cross-border supervision and resource allocation for large cross-border groups. - Supervisory intensity and reporting: - DNB implementing VITA to make supervision more intrusive and conclusive. - Regulatory reporting deficiencies: timeliness, lack of formalized quarterly returns, insufficient granularity for comprehensive offsite monitoring. - Recommendation: expand routinely collected regulatory reporting; publicly release a subset of institution-level regulatory data (excluding supervisory confidential items). ### Deposit Guarantee Scheme (DGS) and DGS-related recommendations - Current DGS: - Managed by DNB; pays out insured deposits over several months; DNB funds pay-out and recovers cost from banks. - DGS not authorized to fund deposit transfers or “purchase and assumption” transactions. - Recommended national DGS design enhancements: - Ex Ante Funding: contributions paid by banks invested in liquid instruments. - Contribution to Resolution: DGS allowed to support restructuring transactions and transfers of insured deposits to another bank. - Timeliness: reduce lag before payouts toward around 20 days. - Depositor Preference: give insured depositors and DGS priority rights over failed bank estate. - Note: changes consistent with keeping DGS within DNB. ### Resolution arrangements, official support, and recommended legal/institutional reforms - Institutional responsibilities of MoF, DNB, AFM, and Judiciary are clear but: - Move decision-making power from the Judiciary to DNB in bank resolution to speed actions and align with financial stability objectives. - Calibrate roles of MoF and DNB in systemic crises given potential public cost. - Remedy absence in budget laws of standing budgetary authorization for Government solvency support (e.g., amendment to Public Accounts Law). - Weaknesses in resolving ailing banks in going concern: - Special manager “stille curator” has unclear objectives and lacks explicit resolution powers. - Court-driven “emergency mechanism” leads to near-total moratorium and pushes toward gone-concern outcomes. - Box 2 — Strengthening going-concern resolution (selected recommended actions): - Strengthen DNB’s use of directions and cease-and-desist orders; make powers to change directors and management more explicit. - Grant DNB power to appoint, instruct and dismiss official administrators on qualitative and quantitative triggers. - Main tasks for official administrator: assess real financial situation; establish new balance sheet if needed; write down capital and convert subordinated debt into capital; design/implement restructuring plan; prepare orderly liquidation if restructuring not an option. - Grant administrator strong restructuring powers including rapid recapitalization without pre-emptive shareholder rights, conversion of subordinated debt into equity, transfer of assets/liabilities via “purchase and assumption” transactions. - Consider introducing a bank debt restructuring mechanism and selective stay on certain liabilities to facilitate going-concern operations. - Exit from state support: - Phased exit underway: partial repayments following capital issuances; proceeds from divestments to repay government; loan guarantee scheme expired end-2010. - Withdrawal of liquidity expansion and deposit insurance to be more gradual and EU-coordinated. - Full divestment from final shareholdings could take 3–5 years. ### Risk Assessment Matrix — selected domestic threats, likelihoods, and impacts - Domestic deleveraging — Likelihood: Medium; Impact: High. - Lack of understanding of developments beyond the border — Likelihood: Medium; Impact: High. - Sharp “double-dip” recession — Likelihood: Medium; Impact: Medium. - Slow growth in Europe — Likelihood: Medium; Impact: Medium-High. - Sustained high sovereign risk — Likelihood: Medium; Impact: Low. - Sustained dislocation in funding markets — Likelihood: Medium; Impact: Medium. ### Financial Soundness Indicators — selected table values (preserved exactly) - Deposit takers: Regulatory capital to risk-weighted assets by year - 2001: 11.7 - 2002: 12.0 - 2003: 12.3 - 2004: 12.3 - 2005: 12.6 - 2006: 11.9 - 2007: 13.2 - 2008: 11.9 - 2009: 14.9 - 2010: 13.9 - Return on assets (deposit takers) - 2001: 0.5 - 2002: 0.5 - 2003: 0.5 - 2004: 0.4 - 2005: 0.4 - 2006: 0.4 - 2007: 0.6 - 2008: -0.4 - 2009: 0.0 - 2010: 0.3 - Return on equity (deposit takers) - 2001: 15.7 - 2002: 11.8 - 2003: 14.8 - 2004: 16.8 - 2005: 15.4 - 2006: 15.4 - 2007: 18.7 - 2008: -12.5 - 2009: -0.4 - 2010: 7.1 - Liquid assets to total assets - 2001: 9.5 - 2002: 10.8 - 2003: 26.6 - 2004: 27.1 - 2005: 26.7 - 2006: 27.3 - 2007: 26.1 - 2008: 21.7 - 2009: 25.8 - 2010: 21.4 - Liquid assets to short-term liabilities - 2001: 179.7 - 2002: 187.4 - 2003: 293.0 - 2004: 302.4 - 2005: 279.4 - 2006: 226.7 - 2007: 226.8 - 2008: 202.1 - 2009: 187.4 - 2010: 176.2 - Nonperforming loans to total gross loans (selected years) - 2007: 1.7 - 2008: 3.2 - 2009: 2.8 ### Financial Soundness Indicators — 7 Largest Banks (exact values) - Dec 31 2008 / Dec 31 2009 / Jun 30 2010 - Return on assets: -0.5 -0.1 0.3 - Return on equity: -14.4 -1.4 6.9 - Net interest Margin: 1.1 1.3 1.4 - Cost to income ratio: 213.0 75.1 67.8 - Loans to deposits: 113.3 123.6 121.7 - Loans to assets: 67.5 71.5 70.5 - Government bonds to assets: 5.8 6.6 7.3 - Investment portfolio to assets: 19.7 13.2 14.2 - Capital Adequacy Ratio (CAR): 11.5 14.7 13.1 - Tier 1 Ratio: 9.2 12.1 10.7 - Core Tier 1 Ratio: 8.4 11.2 9.8 - Non-performing loans (NPLs) / Total loans: 1.3 2.9 2.2 - Loan loss provisions (LLPs) / Total Loans: 0.7 1.2 1.1 - LLPs to NPLs: 55.8 42.3 51.4 - Share of top 7 banks to total assets of the Banking system: 88 86 85 ### Bank stress tests — design and parameters (key elements preserved) - Solvency Stress Tests by FSAP team: - Institutions covered: Seven largest banks; 85 percent market share. - Severity: October 2010 WEO projections; Scenario 1: One SD from baseline; Scenario 2: Two SD from baseline. - Data used: June 2010 bank-by-bank consolidated financial statements and supervisory data. - Risk horizon: 5 years (2011-2015). - Metrics (hurdle rates): Tier 1 capital ratio (4%); Tier 1 capital ratio (6%). - Positions included: Credit risk in loan portfolio; sovereign risk in banking and trading books. - Other features: Balance sheet approach; Zero credit growth; Normalized net operating income; Zero payout ratio. - Liquidity Stress Tests by authorities: - Institutions covered: 11 largest banks. - Risk horizon: 12 months. - Metrics: Number of months banks can withstand shocks, accounting for concentration of liquid assets. - Positions and risk factors: Bank run; dry out of wholesale funding markets; haircuts on liquid assets. ### Basel Core Principles assessment — overview and context - Assessment part of FSAP Update mission November/December 2010. - Contextual facts: - Total financial assets of banking sector (Q2 2010) equal to almost five times GDP. - A quarter of assets ultimately held by foreign institutions (mostly within the EEA). - Direct government financial support equals 3.4 percent of GDP. - Major banks undergoing restructuring, consolidating balance sheets, reducing risk profiles, increasing domestic orientation. - Preconditions: - Monetary policy by DNB within ESCB framework; budgetary policy within SGP; legal system based on civil law; credit institutions apply IFRS or DCC; sophisticated payment and settlement systems. ### Securities markets and IOSCO core principles — highlights and recommendations - Market structure (as of Oct/Nov 2010): - 115 companies listed in Euronext Amsterdam; total market capitalization of €462.712 millions. - Market highly concentrated: top ten companies represent roughly 74 percent of total market capitalization. - 49 banks and 263 investment firms authorized; 243 investment firms located in the Netherlands. - CIS AUM: €392 billion at end 2009. - AFM and DNB roles: - AFM is primary securities supervisor; DNB participates in prudential supervision. - AFM exhibits high IOSCO implementation levels but has limited authority to request information from issuers to ensure compliance with financial reporting standards. - Key numeric/legal points: - Deposit guarantee coverage: €100,000. - Standard Pillar 1 minimum solvency ratio: 8 percent. - Mandatory tender offer threshold: 30 percent of the shares (or control over them). - Record retention requirement: five years. - Administrative fines maximum: €8 million. - On-site inspection cycles: one year (high-impact), three year (other firms). - Recommended legal reforms (selected): - Expand rule-making authority of AFM and DNB. - Strengthen AFM powers vis-à-vis issuers and in enforcement of accounting standards. - Remove licensing exemptions and harmonize prudential requirements for management companies of CIS. - Introduce reporting requirements for OTC derivatives markets and consider consolidated tape and transparency enhancements. ### Insurance supervision (IAIS) — ongoing supervision and recommendations - DNB supervisory approach: - Articulated expectations for insurers’ internal controls; proactive market analysis; systematic review of regulatory returns. - Quarterly returns introduced informally in 2009 should become routine. - DNB empowered with a wide range of preventative measures and an Intervention Ladder. - Prudential requirements and Solvency II: - Current solvency regime largely Solvency I with enhancements; DNB introduced RiSK tool in 2009 to report Solvency II QIS positions. - Implementation of Solvency II expected in 2013 to strengthen risk-sensitive supervision and group-wide oversight. - Recommendations (selected): - Consider broadening legal authority of DNB and AFM; provide explicit legal protection for supervisors; empower DNB to require quarterly returns. - Remove legal restrictions limiting DNB from imposing qualitative and quantitative intra-group limits under Bptfg. - Strengthen supervisory resources for internationally active groups and Solvency II implementation. - Authorities’ response: - Authorities welcome assessment; many recommendations to be addressed via Solvency II and ongoing reforms; DNB to increase supervisory resources while maintaining risk-based priorities. *Source: IMF Financial System Stability Assessment — Executive Summary and selected excerpts from the IMF staff report (provided content).* ### Executive Summary ...................................................................................................... ### Executive Summary ### Major findings and context - The Netherlands was heavily affected by the global financial crisis; public expenditure to provide capital support to banks and insurance companies was significant, and state ownership or participation is now extensive. - Four of the five largest financial groups are subject to restructuring programs at the behest of the authorities and the European Commission (EC). - The “twin peaks” supervision model (DNB prudential; AFM conduct-of-business) was severely tested; the case for the model remains strong but cross-border supervision and other areas need improvement. - With micro and macro prudential oversight concentrated in DNB, DNB was able to take a systemic view and react quickly and decisively during the crisis. - The financial sector remains dominated by systemically important institutions operating in diverse domestic and international markets; this requires strong supervisory institutions with recognized powers and willingness to use them. ### I. Sources of potential risk — Macroeconomic developments - The Netherlands emerged from a deep recession in mid-2009 in line with the Euro Area, but the recovery remains fragile. - Output fell sharply in 2009 owing to collapsing exports and falling domestic demand; the upturn has been driven by a strong pick-up of exports and restocking, while domestic demand remains weak. - Unemployment: - Increased only marginally in 2009 and peaked in 2010 at 4.5 percent. - Unemployment rate is well below the Euro Area average (about 10 percent). - Fiscal and debt stance: - Fiscal deficit standing at more than 5 percent in 2010. - Public-debt-to-GDP ratio increased by 18 percentage points between 2007 and 2010. - Deflationary risk faded and inflation began to rise sharply, implying the low interest rate environment could soon end. ### I. Sources of potential risk — Financial system structure and crisis impact - Sizes and shares: - Banks: assets equal to 382 percent of end 2010 GDP. - Pension system: assets under management equal to 135 percent of GDP. - Insurance sector: assets equal to 69 percent of GDP; life insurance assets represent 89 percent of the sector. - Pension sector structure: 545 registered pension schemes; two largest funds manage 44 percent of scheme assets; ten largest funds manage 78 percent of scheme assets. - Bank exposures and funding (end 2010): - Loan exposures roughly equally distributed between domestic and international markets (mostly advanced countries), with a shift toward the domestic market. - Sovereign exposures account for about 13 percent of on and off balance sheet exposures. - Banking liabilities composition: deposits 43 percent, external liabilities 23 percent, issued debt securities 20 percent (mostly long and medium-term). - Five largest cross-border exposures (as percent of aggregate cross-border exposures): Belgium 6.2 percent; France 11.3 percent; Germany 9.5 percent; United Kingdom 19.7 percent; United States 8.3 percent. - Exposures of consequence to: Ireland 4.6 percent; Italy 2.7 percent; Spain 4.1 percent. - Crisis transmission and actions: - Dutch banks were exposed to U.S. securitized mortgages, including via U.S. subsidiaries, and hit by tightening of inter-bank funding markets. - Pension funds and insurance firms were affected and required remedial action; insurance firms required equity support. ### Key assessments of regulatory standards and financial soundness - High degree of compliance with the three regulatory standards assessed—banking, securities, and insurance: - Netherlands complies, or largely complies, with all principles except for one principle on securities market regulation. - Financial soundness improvements since 2008: - All large banks maintain capitalization buffers well above minimum requirements, reflecting substantial capital support to several large banks during the crisis. - Capital augmentation and return to profitability appear to position banks well to meet higher Basel III requirements. - DNB reforms: - DNB is making intensive, well-focused efforts to redress earlier shortcomings. - Reforms guided by two publications demonstrating commitment to a more intrusive supervisory approach and a more proactive and decisive supervisory role. ### Main vulnerabilities highlighted - Two most challenging vulnerabilities: - High indebtedness of home buyers. - Households remain heavily indebted, with levels among the highest in the EU. - Most lending relates to housing, encouraged by mortgage interest deductibility (MID). - The average loan-to-value (LTV) ratio is well above 100 percent and has continued to rise in recent years. - Recent proposals to set a maximum LTV and require 50 percent paydown of principal during the mortgage lifetime are steps in the right direction but judged not to go far enough. - External risks related to banks’ cross-border activities. - Significant foreign activities of Dutch financial institutions and local activities of foreign-owned financial institutions, including those from elsewhere in the EEA, heighten the need for multilateral and bilateral coordination, offsite surveillance, and stress testing that captures external risk dimensions. - Insurance sector challenges: - Saturated market, low economic growth, and low interest rates. - Loss of tax advantage increases competition from banks and asset managers. - Life insurers face serious image problems and need to make clear breaks in business plans and perceptions to restore public confidence. - Pension funds: - Under financial stress from low interest rates and extended life expectancy. - Indexation of benefits widely suspended; maintenance of commitments in nominal terms is under threat. - Under existing regulations, funds can adjust payouts; many funds have coverage ratios below regulatory minima and supervisory recovery plans have been imposed. - DNB’s proactive approach and high transparency are viewed as welcome. - Data gaps: - Crisis revealed lack of sufficient granularity in data for monitoring financial sector developments, e.g., lack of regular and consistent sectoral breakdowns of banks’ non-performing assets. - Legal and rulemaking constraints: - Rulemaking authority of DNB and AFM is too limited; they lack sufficient discretion to put in place enforceable system-wide rules. - Crisis management and resolution: - Important progress in crisis management and bank resolution techniques has been achieved, but further reforms are needed. ### Table 1 — Main FSAP Update Recommendations (selected with priorities) - Macroprudential management: - Assign priority to developing macro-prudential instruments. (¶11) — (High) - Announce maximum loan-to-value (LTV) ratios for new lending, and consider linking higher LTVs to higher capital ratios. (¶11) — (High) - Provide supervisors powers to vary the level of designated macroprudential instruments in response to developments. (¶11) — (Medium) - Announce plans to reduce mortgage interest deductibility over the medium–term. (¶11) — (High) - Twin Peaks / supervisory powers: - Provide DNB and AFM greater discretion to put in place enforceable rules; current lack of sufficient rule making authority leads to ad hoc approaches vulnerable to legal challenge. (¶25 to 28) — (High) - Afford legal protection to DNB and AFM for official actions except in cases of gross negligence or willful misconduct. (¶28) — (High) - Continue integration of DNB staff across banking, insurance, and pensions functions to capture synergies of a single regulator. (¶38) — (Medium) - Microprudential bank and insurance supervision: - Establish routine reporting requirements to strengthen monitoring and risk modeling. (¶31 to 33) — (High) - Intensify supervision of large international financial institutions with emphasis on group supervision and business-model soundness; greater international cooperation beyond colleges of supervisors warranted. (¶34 to 36) — (High) - Adopt a more proactive and decisive approach, including timely off-site inspection and corrective actions that rely less on moral suasion. (¶39) — (High) - Securities market: - Strengthen AFM’s ability to enforce issuers’ compliance with financial reporting standards. (¶41) — (High) - Strengthen regulatory and supervisory framework for management companies of collective investment schemes (CIS). (¶45) — (Medium) - Pensions: - Develop a communication plan on recent and prospective changes in payouts to stakeholders. (¶51 to 54) — (High) - Require incorporation of professional Board members for pension funds beyond a minimum size and provide legal authority for direct supervision of core pension activities independently of the performing entity. (¶48) — (Medium) - Crisis management and bank resolution: - Reform the Deposit Guarantee Scheme so that it is: (i) ex ante funded, (ii) authorized to fund bank resolution operations, and (iii) enjoys depositor preference. (¶49) — (High) - Strengthen institutional crisis-management framework by: (i) shifting decision-making power from the Judiciary to DNB in bank resolution, and (ii) specifying more clearly roles of the MoF and DNB in bank resolution. (¶51) — (Medium) - Improve framework for official financial support by establishing a standing budgetary authorization for Government solvency support in a manner that avoids moral hazard. (¶52) — (Medium) - Establish a single regime for resolving banks under official control that sets objectives (including financial stability) and tasks and powers for official administrators. (¶51 to 54) — (High) *Source: IMF Financial System Stability Assessment — Executive Summary (selected text from the provided content).* ### 7. The authorities provided large amounts of public support to strengthen balance ### _cr11144 - 7. The authorities provided large amounts of public support to strengthen balance ### Public support and policy response - Support actions included a combination of equity injections, liquidity support, and guarantees. - Key measure: injections of voting and non-voting equity (qualifying as Tier 1) used to fully recapitalize banks (and one major insurance company). - Recapitalization effect: allowed financial institutions to regain access to money market funding. - Policy measures required that financial institutions: - reduce leverage and build buffers; - have supervision become more “intrusive and conclusive” — implemented through the DNB’s VITA initiative; - build up corporate governance; - strengthen crisis management, with the authorities seeking an internationally coordinated approach and an important role for the European Union. ### Household financial positions and vulnerabilities - Household financial net worth: broadly stable at almost 200 percent of GDP, reflecting large holdings by the occupational pensions sector. - Housing stock: provides additional strength (not included in the financial balance sheet). - Real disposable household income: declined during the crisis; likely to be anemic over the near medium term due to rising unemployment and weaker wage growth and planned strong fiscal consolidation. - Household loans: broadly stable; liabilities are overwhelmingly long-term, limiting exposure to liquidity risk. - Excluding non-marketable assets (pension fund and life insurance assets), the net financial asset position would have been negative since 2007 Q4. - House prices: - rose by 6 percent (annualized) on average during 2000-08; - fell by about 5 percent in 2009; - stabilized in 2010 while house sales declined sharply; - downward trend resumed more recently, with affordability indicators pointing to potential downward adjustments. ### Household debt metrics and policy implications - Household debt-to-disposable income ratio: 267 percent in 2010 Q1. - Drivers and risks: - The generous MID regime allowing virtually unlimited deductions for interest payments on mortgages is a significant driver of rising household indebtedness. - Growth in interest-only and non-amortizing mortgages with principal accumulated separately has pushed debt-income ratios upward; amortization concentrated at loan maturity creates risk. - Amounts invested in life insurance products to amortize mortgages are often based on high interest rate projections that have not materialized. - Average LTV ratio for new mortgages: - rose from slightly above 100 percent in 2000 to over 120 percent in 2010. - This rise is well above prudential norms in most countries and increases banks’ vulnerability. - Recent policy action and recommended measures: - Announced reduction in maximum LTV to 110 percent, coupled with repayment of at least 50 percent of principal over the lifetime of the loan. - Additional action urged: consider assigning more stringent capital requirements to loans with higher LTVs. - Recommendation to assign additional powers to DNB and the AFM to facilitate timely action. - National Mortgage Guarantee (NHG) scheme: - Covers mortgage loans worth 110 billion euro out of a total mortgage portfolio of about 600 billion euro. - While NHG reduces bank exposure to mortgage losses, it increases contingent government liabilities; greater transparency on these contingent liabilities is recommended. ### Corporate sector financial positions - Non-financial corporations: financial positions improved since the crisis. - Sector was hit hard in 2008–09 with output and profits falling sharply and bankruptcies increasing. - Firms have reduced debt burdens and improved balance sheet positions by building up assets. - Liquidity ratios: decline has yet to be reversed. ### Overall financial stability assessment and stress testing - Financial institutions: position restored and likely robust to a range of shocks; vulnerabilities mitigated by recapitalizations and issuance of new capital. - Banking sector characteristics and metrics: - Highly concentrated: assets of the largest seven banks account for more than 80 percent of the sector total. - Capital adequacy ratio (CAR): 13.9 percent at end-2010, comprised mostly of core Tier 1 capital. - Nonperforming loan (NPL) ratio: less than 3 percent of total loans. - Return on equity (ROE): 7 percent for the sector through 2010. - Liquidity: liquid assets more than cover short-term liabilities, but funding risk remains given reliance on wholesale market funding. - Stress tests: - Top-down stress tests conducted for the seven largest banks under three macroeconomic scenarios: - (i) baseline scenario based on IMF WEO projections for GDP growth, unemployment, and interest rates; - (ii) double-dip scenario using July 2010 CEBS deviations from baseline for 2011–12 stress projections for GDP growth, unemployment, and interest rates; - (iii) more severe double-dip scenario that used twice the deviations from baseline for the macroeconomic and the EU sovereign bond market shocks. - Calibration: July 2010 CEBS stress test guided yield-curve shock calibrations; haircut values for Greece, Italy, Ireland, Portugal, and Spain yield shocks were updated and applied to the banking book. - Results: - Under scenario 1, all banks experienced declines from 2010 reported Tier 1 capital ratios, but no bank fell below the 4 percent regulatory minimum or the 6 percent CEBS Tier 1 target. - Under adverse scenario 2, estimates suggest all banks would remain above the current regulatory minimum of 4 percent Tier 1 capital and the CEBS 6 percent Tier 1 target. - DNB liquidity stress testing: - Methodology: modified maturity gap approach assuming liabilities “run” and assets liquidated at stress discounts from mark-to-market values. - Results shared for two periods (2009 Q4 and 2010 Q3) indicate liquidity has improved between these periods for 11 banks. - DNB uses results to encourage better liquidity risk management practices. ### Insurance companies and pension funds - Insurance companies: - Life insurers have significantly reduced exposure to equity and real estate markets but remain vulnerable to interest rate risk. - Limited buffers in discretionary benefits due to competition for guaranteed rates and profit sharing schemes increase sensitivity to financial risks. - Stress tests show wide disparity: some firms suffer under medium-term low growth/low interest rate scenarios, others are less affected or strengthen, suggesting likely industry consolidation and adaptations in business models. - Pension funds: - System size and systemic importance: second only to the banking sector. - 545 pension funds; the ten largest funds hold 78 percent of total pension scheme assets. - Pillar 2 pension schemes have assets under management larger than the Netherlands’ GDP. - Cover ratios: fell from 130 percent to around 100 percent at end 2010, below the 105 percent regulatory requirement. - Supervisory response: suspension of indexation of accrued benefits for underfunded schemes; 340 pension funds are under supervisory recovery plans with potential benefit cuts to restore cover ratios. - Policy responses: negotiations under way on risk sharing and risk transference between social partners; high transparency in accounting and disclosure has brought long-term sustainability issues to the fore. - Recommendation: ensure proper understanding by all parties of the risks assumed in pension contracts. ### Regulatory architecture, cross-sectoral issues, and recommendations - Compliance: high degree of compliance with three key regulatory standards; Netherlands complies or largely complies with all core principles apart from one principle of the IOSCO securities market standard. - Cross-cutting supervisory themes and constraints: - Rule-making authority: - DNB and AFM ability to apply prudential or conduct-of-business rules system-wide is constrained, forcing ad hoc institution-by-institution approaches that risk arbitrariness and chilling supervisors’ willingness to act. - Explicit legal restriction against imposing broadly applicable intra-group exposure limits to insurance groups; DNB’s powers to mandate prudential reporting limited by Ministry of Economic Affairs requirements to reduce regulatory burden. - These constraints may impede adoption of macro-prudential instruments. - Recommended authority enhancements: - Give regulatory agencies discretion to put in place enforceable rules that apply broadly over supervised institutions. - DNB should be able to vary macro-prudential instruments within a given range in line with emerging conditions. - AFM should have clear legal authority to exercise oversight over product development. - Consider providing explicit legal protection to DNB and the AFM against lawsuits for actions taken in good faith while discharging duties, provided there is no willful negligence. - Limits on legal authority at the holding company level: - For mixed financial conglomerates, DNB’s authority over holding companies is limited to ensuring adequate risk management and internal controls, with power to give instructions when necessary. - For insurance groups, DNB has limited authority and no enforcement power against non-regulated holding companies; indirect measures to influence intra-group exposures could be legally challenged. - Work is underway at the EU level to address weaknesses in supervision of mixed conglomerates; DNB has used mechanisms (e.g., license conditions on regulated entities) to work around supervisory limitations but stronger direct authority over groups is recommended. - Adequacy of information for coordinated risk assessment: highlighted as an area requiring attention (text ends at this thematic transition). *Source: IMF staff report excerpt — chapter titled "7. The authorities provided large amounts of public support to strengthen balance" from the provided PDF content.* ### 31. DNB’s efforts to employ a more intensive approach to supervision are welcome; ### 31. DNB’s efforts to employ a more intensive approach to supervision are welcome; ### Supervisory intensity and offsite monitoring - DNB has moved to a more intensive, intrusive supervisory approach (including the comprehensive “VITA” project) to make supervision more “intrusive and conclusive.” - Key deficiency: intensity of supervision must be complemented with better offsite monitoring. - Present monitoring is predominantly through management information systems used by individual financial institutions, rather than by a regular on-sight presence of regulators. - Critical requirement: availability of regulatory reporting information sufficient to monitor the material risks at regulated entities and financial groups. ### Regulatory reporting: deficiencies and needed enhancements - Current reporting weaknesses: - Regulatory reporting is not sufficient to form a comprehensive view of an individual institution. - Reporting suffers from a lack of timeliness, and quarterly returns are not formalized. - Objectives for strengthening reporting: - Consistent and sufficiently comprehensive information should be strengthened. - An expanded set of routinely collected regulatory reporting information is needed to: - (i) better inform offsite monitoring, including for purposes of stress tests, and to increase capacity for early warning of impending difficulties; - (ii) reduce the need for ad hoc requests; and - (iii) facilitate the sharing of relevant financial information with foreign supervisors. ### Public release of institution-level regulatory data - Recommendation: a subset of regulatory reporting should be provided as a public release of financial information on individual institutions (preferably on a quarterly basis). - Current practice: - DNB provides institution-specific information on insurance firms via its website. - Bank data are only provided in aggregate form. - Implementation note: - A regime of providing regulatory reporting to market participants could be introduced over a cycle and as credit markets begin to stabilize. - Reporting would exclude information that is supervisory in nature (e.g., customer/client and large exposures information would remain confidential). ### International linkages and supervisory coordination - Supervisory colleges: - Important innovation to reinforce home-host coordination for supervisors of Large Complex Financial Institutions (LCFIs). - A number of supervisory college meetings have already taken place in the Netherlands; infrastructure for regularizing such arrangements is taking shape. - Multilateral exchanges in colleges are not a substitute for the home authority’s detailed knowledge of operations abroad, and incentives for full disclosure in colleges may be weak—anecdotal evidence suggests some participants are wary of full and frank exchange. - DNB actions: - Needs to complement supervisory college participation with heightened direct understanding of Dutch institutions’ activities abroad and the environments in which they operate. - This will likely require devoting additional resources to supervision. ### European single market implications - Single financial market brings benefits and additional supervisory challenges. - AFM has been proactive in participating in the college of supervisors for Euronext N.V. and engaging via CESR. - Limitation: fragmented authority of domestic supervisors may permit regulatory arbitrage and fragmented views of risk. - Suggestion: in the long run, regional supervisory authorities might centralize more functions to avoid regulatory arbitrage and fragmented risk views. - Positive precedent: assignment of full supervisory responsibilities over credit rating agencies to the European Securities Markets Authority (ESMA) constitutes a good starting point for further centralization. ### Banking supervision and the “twin peaks” model - Progress since 2003/2004 FSAP: - Many recommendations implemented; high level of compliance in present assessment. - Reforms underpinned by the Act on Financial Supervision (AFS) and the “twin peaks” regulatory structure. - Remaining issues: - New supervisory system remains a work in progress; some potential benefits of “twin peaks” yet to be fully realized. - Allocation of resources to banking supervision does not appear fully commensurate with the nature and scale of banking risks to the Netherlands. - The scale of foreign subsidiaries’ activities could, and subsequently did, threaten group viability—justifying greater DNB resources for intrusive monitoring. - Benefits expected from full implementation of “twin peaks”: - Allow more flexible decisions on commitment of supervisory resources to systemically important sectors and firms. - Single prudential regulator within DNB should enable resource rebalancing toward banks over time through recruitment and re-training. - Cultural and practice shifts: - Banking supervision historically emphasized “moral suasion.” - Merger of banking supervision with pensions and insurance is only now significantly changing practice; DNB has introduced measures to change culture and adopt more intrusive supervision (VITA). Box 1 — The Netherlands: “Twin Peaks” Model of Supervision - Timeline and design: - In 2002 authorities adopted an objective-based “twin peaks” supervisory model. - Under the model, DNB became a single prudential supervisor for banks, insurance companies, investment firms, pension funds, and securities firms; AFM was created as supervisor responsible for conduct-of-business supervision. - Full transition to “twin peaks” completed only in 2007. - Rationale and considerations: - Unified prudential supervisor driven by financial conglomerates operating across lines and complex products. - Separation of prudential and conduct-of-business supervision based on different objectives and skill sets. - DNB location chosen for synergies with macroeconomic analysis, central bank credibility, and to enhance DNB’s role as monetary policy moved to the ECB. - Outcome: - With micro and macro prudential oversight concentrated in DNB, it can take a systemic view and reacted quickly during the crisis. - Remaining areas for improvement include cross-border supervision. ### Securities markets regulation - AFM performance: - As primary supervisor of securities markets, AFM exhibits high levels of implementation of the IOSCO Principles. - Uses a risk-based approach for supervision of intermediaries; significant resources dedicated to Euronext Amsterdam and Euronext N.V. - Supervisory programs implemented under a clear enforcement strategy; AFM perceived as credible and effective enforcer. - DNB’s role: - DNB’s prudential supervision of investment firms is appropriate and credible; supervision based on activities with on-site inspections annually for higher-risk firms and every three years for others. - DNB has recently strengthened enforcement of reporting obligations, improving compliance. - Legal and supervisory gaps: - AFM has limited authority to request information from issuers to ensure compliance with financial reporting standards. - Legal framework does not subject some management companies to solvency requirements or review of qualified holdings; reporting obligations for management companies are not sufficient from a prudential perspective. - DNB does not conduct on-site inspections of management companies except when signaled. - Recommendations to strengthen enforcement and regulatory framework: - Provide AFM legal authority to request information from issuers to assess financial statements. - Extend to at least nine months the period given to AFM to file an action before the Enterprise Chamber of the Amsterdam Court. - Eliminate firewalls that prevent sharing of information between AFM departments. - For management companies of Collective Investment Schemes (CIS): - (i) Subject all management companies to solvency requirements and reviews of qualified holdings; - (ii) Provide DNB with legal authority to establish reporting obligations for prudential purposes; - (iii) Enhance prudential supervision by striking a better balance between off-site supervision and on-site inspection. - Strengthen rulemaking authority for DNB and AFM under a framework of accountability to the MoF to allow swift regulatory responses. ### Insurance supervision and pensions - Insurance: - Since 2003/2004 FSAP, significant reforms: legislative framework and risk-based supervision strengthened. - AFS provides consolidated legal framework for licensing, corporate governance, internal controls, group-wide supervision, technical provisions, supervision of intermediaries, and consumer protection. - DNB’s risk-based methodology and introduction of macro-prudential supervision and proactive market analysis enhance oversight. - Updated regime shows high observance with the Insurance Core Principles (ICPs). - DNB’s Supervisory Strategy for 2010–2014 incorporates crisis lessons; intends tighter supervision with supra-institutional macro-prudential oversight, greater attention to business models, culture, and conduct. - Implementation of Solvency II in 2013 will sharpen risk-based supervision and strengthen oversight of insurance groups and financial conglomerates. - Pension funds: - Organized as a foundation (Stichting) and legally separate from companies. - No general statutory obligation for employers to make pension commitments, but once made, Pension Act (Pensioenwet), effective January 1, 2007, safeguards participants’ rights. - AFM charged with conduct-of-business supervision; DNB with prudential supervision. - Suggested improvements: develop a communication plan; require incorporation of professional Board Members for pension funds of a given size and complexity; provide legal authority for direct supervision of core pension activities independently of the entity performing them. ### Deposit insurance - Temporary increase in deposit insurance was essential during the crisis; preparations under way for establishing a permanent scheme. - Current DGS: - Managed by DNB; pays out insured deposits over several months in case of bank insolvency. - DNB funds the pay-out and subsequently recovers cost from banks. - DGS is not authorized to fund deposit transfers or “purchase and assumption” transactions. - Recommended improvements for national DGS design (noting broad EU-level elements are being determined): - Ex Ante Funding — DGS should be funded ex ante by contributions paid by banks (possibly calculated on a risk-based formula), with contributions invested in liquid instruments for ready pay-out. If funds are insufficient, authorities should be authorized to close the funding gap. - Contribution to Resolution — DGS should be allowed to support certain bank restructuring transactions rather than only pay out depositors, including transferring insured deposits to another bank via auction of deposit book components or “purchase and assumption” transactions; in case of insufficient assets, DGS would compensate transferee for acquiring liabilities. - Timeliness — Plans are in train to cut the present lag before payouts to around 20 days; efforts should be made to ensure more rapid payout (or transfer of deposits). - Depositor Preference — Insured depositors and the DGS should be given priority rights over the estate of the failed bank to protect contributing banks and simplify “purchase and assumption” transactions. - Note: All these changes would be consistent with keeping the DGS within DNB. ### Resolution arrangements and crisis framework - Institutional setup: - Responsibilities of MoF, DNB, AFM, and the Judiciary are clear and broadly appropriate. - Main areas warranting attention: - Shift decision-making from the Judiciary to DNB in bank resolution contexts to ensure attention to financial stability, improve speed, and ensure consistency with related actions (such as DNB’s provision of Emergency Liquidity Assistance (ELA)). - Calibrate respective roles of MoF and DNB in bank resolution during systemic crises given potential public cost. - Official financial support framework: - Framework for emergency liquidity assistance by DNB is robust and flexible; clarification of parameters guiding DNB’s assistance may be useful. - Weakness: absence in budget laws of a standing budgetary authorization for the Government to fund solvency support; remedy could be an amendment to the Public Accounts Law or other legislation. Well-designed funding (ensuring private creditors take appropriate losses) limits moral hazard. - Weaknesses in resolving ailing banks in going concern: - Special manager “stille curator” has unclear objectives, does not fully replace management, and lacks explicit resolution powers. - “Emergency mechanism” designed to protect creditors (with no place for financial stability), is court driven, leads to almost total moratorium, and pushes banks toward gone-concern outcomes. - Recommendation: provide DNB a single regime for resolving banks under official control setting objectives (including financial stability), tasks, and powers for official administrators; also strengthen instruments for resolving banks under private control. *Source: _cr11144 - 31. DNB’s efforts to employ a more intensive approach to supervision are welcome;* ### 54. The framework for orderly liquidation of banks should also be strengthened and ### _cr11144 - 54. The framework for orderly liquidation of banks should also be strengthened and ### Strengthening the framework for orderly liquidation and resolution - Introduce a consultative, if not steering, role for DNB and the AFM throughout the resolution process to ensure financial stability concerns are robustly addressed. - Introduce mechanisms that support the rapid transfer of deposits and assets, as well as essential functions. - Closely coordinate any reform of the liquidation/resolution framework with corresponding enhancements of the DGS. ### Box 2 — Strengthening the Framework for Resolving Banks as Going Concerns (recommended actions) - Strengthen DNB’s hands in utilizing directions and cease-and-desist orders as an effective early intervention tool. - Make DNB’s powers to change directors and management of banks more explicit. - Grant DNB power to appoint, instruct and dismiss official administrators on the basis of qualitative and quantitative triggers. - Main objective of official administration: contribute to the overall soundness of the banking system by providing orderly resolution; creditor interests come second. - Basic tasks of the official administrator should include: - (i) assess the real financial situation of the bank, - (ii) where necessary, establish a new balance sheet reflecting a fair and true view of that financial situation, - (iii) write down capital and convert subordinated debt into capital as needed, - (iv) where possible, design and implement a restructuring plan for the bank (after DNB approval), - (v) in case restructuring is not an option, prepare the bank for orderly liquidation. - Grant the official administrator strong and explicit restructuring powers, including full takeover of the powers of decision-making bodies of the ailing bank (management board, supervisory board, general assembly of shareholders). - Establish forceful restructuring tools for the administrator, including: - (i) rapid recapitalization of banks without pre-emptive rights of pre-existing shareholders, - (ii) conversion of subordinate debt into equity, - (iii) transfer of assets (including businesses and subsidiaries), liabilities, and combined portfolios of assets and liabilities (“purchase and assumption transactions”) to third party acquirers. - Consider introducing a bank debt restructuring mechanism to restore the bank to viability. - To facilitate going-concern operations, consider imposing a selective stay on certain liabilities. ### Exit from crisis interventions and state support - Exit from state support is proceeding as planned and remains broadly appropriate. - A phased exit is underway: - Several financial institutions have partially repaid the state for equity injections following successful capital issuances. - Proceeds from sale of operations (e.g., sale of insurance subsidiaries) will be used to repay the government. - The loan guarantee scheme was allowed to expire at the end of 2010. - Withdrawal of liquidity expansion and deposit insurance will be more gradual, and coordinated within an EU context. - Disposal of impaired assets will be more prolonged. - Financial institutions that received support are developing restructuring and divestment plans in conjunction with EC requirements; full divestment from final shareholdings could take 3–5 years. ### Risk Assessment Matrix — selected domestic threats, likelihoods, and impacts - Domestic deleveraging - Likelihood: Medium - Considerations: Households are highly indebted; risk of increased risk aversion could weaken activity and the housing market. - Impact: High — banks heavily exposed to housing sector lending; significant fall in house prices with lending arrears would significantly impact banks’ balance sheets. - Lack of understanding of developments and institutions beyond the border - Likelihood: Medium - Considerations: Reliance on supervisory colleges; domestic oversight depends on overseas supervisors’ quality and willingness to share information. - Impact: High — Netherlands banks are very exposed to developments overseas; supervisors may have a limited picture of overseas developments. - Sharp “double-dip” recession - Likelihood: Medium - Considerations: Vulnerability of U.S. and European economies; strong trade linkages could transmit demand shocks to the Netherlands. - Impact: Medium — bank solvency may be affected via employment declines, house price corrections, rising nonperforming loans, and exposure through foreign subsidiaries. - Slow growth in Europe - Likelihood: Medium - Considerations: Structural rigidities, fiscal burdens, demographic pressures, problems in the periphery could lead to prolonged low growth. - Impact: Medium-High — effects similar to double dip but higher likelihood relative to double dip. - Sustained high sovereign risk - Likelihood: Medium - Considerations: Rise in spreads on “peripheral” sovereign debt could spread; corporate spreads and sovereign-linked assets would be forced up. - Impact: Low — Netherlands appears less exposed to peripheral countries; Dutch banking groups report lowest exposure to Greece, Portugal, and Ireland among European countries. - Sustained dislocation in funding markets - Likelihood: Medium - Considerations: Renewed illiquidity or high premia in funding markets could occur. - Impact: Medium — banks reliant on market funding (interbank, securitization, covered bonds) would be most affected; could increase competition for retail deposits and squeeze profitability. ### Financial Soundness Indicators — selected figures (preserve source table values) - Deposit takers: Regulatory capital to risk-weighted assets by year - 2001: 11.7 - 2002: 12.0 - 2003: 12.3 - 2004: 12.3 - 2005: 12.6 - 2006: 11.9 - 2007: 13.2 - 2008: 11.9 - 2009: 14.9 - 2010: 13.9 - Return on assets (deposit takers) - 2001: 0.5 - 2002: 0.5 - 2003: 0.5 - 2004: 0.4 - 2005: 0.4 - 2006: 0.4 - 2007: 0.6 - 2008: -0.4 - 2009: 0.0 - 2010: 0.3 - Return on equity (deposit takers) - 2001: 15.7 - 2002: 11.8 - 2003: 14.8 - 2004: 16.8 - 2005: 15.4 - 2006: 15.4 - 2007: 18.7 - 2008: -12.5 - 2009: -0.4 - 2010: 7.1 - Liquid assets to total assets - 2001: 9.5 - 2002: 10.8 - 2003: 26.6 - 2004: 27.1 - 2005: 26.7 - 2006: 27.3 - 2007: 26.1 - 2008: 21.7 - 2009: 25.8 - 2010: 21.4 - Liquid assets to short-term liabilities - 2001: 179.7 - 2002: 187.4 - 2003: 293.0 - 2004: 302.4 - 2005: 279.4 - 2006: 226.7 - 2007: 226.8 - 2008: 202.1 - 2009: 187.4 - 2010: 176.2 - Nonperforming loans to total gross loans (selected years) - 2007: 1.7 - 2008: 3.2 - 2009: 2.8 ### Financial Soundness Indicators — 7 Largest Banks (Table 3b exact values) - Dec 31 2008 / Dec 31 2009 / Jun 30 2010 - Return on assets: -0.5 -0.1 0.3 - Return on equity: -14.4 -1.4 6.9 - Net interest Margin: 1.1 1.3 1.4 - Cost to income ratio: 213.0 75.1 67.8 - Loans to deposits: 113.3 123.6 121.7 - Loans to assets: 67.5 71.5 70.5 - Government bonds to assets: 5.8 6.6 7.3 - Investment portfolio to assets: 19.7 13.2 14.2 - Capital Adequacy Ratio (CAR): 11.5 14.7 13.1 - Tier 1 Ratio: 9.2 12.1 10.7 - Core Tier 1 Ratio: 8.4 11.2 9.8 - Non-performing loans (NPLs) / Total loans: 1.3 2.9 2.2 - Loan loss provisions (LLPs) / Total Loans: 0.7 1.2 1.1 - LLPs to NPLs: 55.8 42.3 51.4 - Share of top 7 banks to total assets of the Banking system: 88 86 85 ### Bank stress tests — design and parameters (Table 4 key elements) - Solvency Stress Tests - Who performed: FSAP team - Institutions covered/market share: Seven largest banks; 85 percent market share - Severity of macro-scenarios: October 2010 WEO projections for GDP growth, unemployment, and interest rates. - Scenario 1: One SD from baseline for the three macro variables. - Scenario 2: Two SD from baseline. - Data used: June 2010 bank-by-bank consolidated financial statements and supervisory data. - Risk horizon: 5 years (2011-2015) - Metrics (hurdle rates): Tier 1 capital ratio (4%); Tier 1 capital ratio (6%) - Positions and risk factors included: Credit risk in the loan portfolio; sovereign risk in the banking and trading books. - Other model features: Balance sheet approach; Zero credit growth; Normalized net operating income; Zero payout ratio. - Liquidity Stress Tests - Who performed: Authorities - Institutions covered/market share: 11 largest banks - Risk horizon: 12 months - Metrics: Number of months banks can withstand shocks, accounting for the concentration of liquid assets. - Positions and risk factors included: Bank run, dry out of wholesale funding markets, and haircuts on liquid assets. - Other model features: Concentration of liquid assets used in months-of-survival metric. ### Basel Core Principles assessment — overview and context - Assessment undertaken as part of an IMF Financial Sector Assessment Program (FSAP) Update mission to The Netherlands in November/December 2010; follows up on BCP assessment performed in the context of 2004 FSAP. - Assessment conducted in accordance with the Core Principles Methodology by the Basel Committee of Banking Supervisors (BCBS). - Team reviewed legal framework, held extensive discussions with DNB, AFM, MoF, associations, and private sector participants; examined DNB on- and off-site supervision and used a comprehensive self-assessment by DNB in cooperation with MoF and AFM. - Contextual findings: - Total financial assets of the banking sector (Q2 2010) equal to almost five times GDP. - A quarter of assets is ultimately held by foreign institutions (mostly from within the EEA). - Direct government financial support equals 3.4 percent of GDP. - Major banks undergoing restructuring, consolidating balance sheets, reducing risk profiles, and increasing domestic orientation. - Banking sector returned to profitability in 2009 but remains considerably below pre-crisis levels. - Economic recovery expected to be modest; strengthening of regulation will keep the banking sector in a challenging environment. - Preconditions noted: - Monetary policy conducted by DNB within the ESCB framework. - Budgetary policy conducted within a fiscal framework and Stability and Growth Pact (SGP) requirements. - Legal system based on civil law; most financial sector legislation derives from EU directives, regulations, and decisions. - Credit institutions must apply either IFRS accounting principles or provisions in the Dutch Civil Code. - Auditing profession subject to self-regulation and AFM regulation. - Payment and settlement systems are highly sophisticated and DNB participates in domestic and pan-European systems. *Source: _cr11144 - 54. The framework for orderly liquidation of banks should also be strengthened and (IMF staff report excerpt).* ### 66. The Netherlands is a market-oriented economy. Market participants have access to ### _cr11144 - 66. The Netherlands is a market-oriented economy. Market participants have access to ### Main findings - High degree of compliance with the Basel Core Principles (BCPs) overall, but remaining weaknesses need to be addressed. - Since 2004, and particularly as a reaction to the financial crisis, DNB has increased supervisory capacities and made ongoing supervision more intrusive. - Cooperation with home and other supervisors within supervisory colleges has intensified. - Deposit guarantee scheme protects individual depositors up to €100,000; currently financed ex-post by the financial sector, with plans to create an ex-ante scheme with risk-based premiums and a more rapid pay out process. ### Objectives, independence, powers, transparency and cooperation (CP 1) - Organizational and legal changes since 2004 have substantially improved clarity of mandates and objectives. - DNB and the AFM have a clear understanding of roles under the Twin Peaks system; cooperation and coordination have functioned well, including during the crisis. - The AFS provides a larger role for the MoF, including rule making authority, than in most comparable systems. ### Licensing and structure (CPs 2–5) - AFS clearly defines permissible activities of a bank and prohibits unlicensed institutions from using the word “bank.” - Licensing conditions are set out in the AFS and supplemented by the Decree on Prudential Regulation (DPR). - The criteria allow DNB discretion to set conditions and assess license applications. ### Prudential regulation and requirements (CPs 6–18) - Capital adequacy: - Rules based on Basel II as transposed by the Capital Requirement Directive (CRD). - Standard Pillar 1 minimum solvency ratio for all banks is 8 percent. - In practice, banks operate at capital levels much higher than the legal minimum. - Liquidity: - DNB has comprehensive liquidity rules since 2003; these are being enhanced to reflect crisis lessons and to incorporate Basel 3 recommendations. - Problem assets, provisioning, reserves: - DNB does not set specific rules; level of required provisions set according to Expected Loss (EL) estimates under the IRB approach of Basel II/CRD. - Related-party exposures: - No specific limits set by DNB; AFS provisions cited as legal basis but without explicit reference to related party lending. - Assessors found no evidence of significant related party lending issues but concluded DNB needs a more formal framework of limits and prohibitions. ### Methods of ongoing banking supervision (CPs 19–21) - Supervisory approach is risk-based, drawing on the Financial Risk Analysis Method (FIRM) and Risk Analyses Program (RAP). - FIRM methodology under review to reflect financial crisis lessons. - Pre-crisis risk-assessment did not adequately identify systemic vulnerabilities: increased leverage, increased reliance on wholesale funding, acquisition of substantial portfolios of structured securities. - Authorities are enhancing integration of macro-prudential and micro-prudential supervision. - DNB’s "From Analysis to Action (VITA)" project aims to make supervision more intrusive and ensure adequate follow-up and enforcement (“conclusiveness”). ### Accounting and disclosure (CP 22) - Banks compile financial statements under IFRS (publicly listed banks) or the DCC (non-listed banks); DCC disclosure provisions substantially the same as IFRS. - AFM primarily responsible for monitoring compliance with accounting and disclosure standards; DNB maintains dialogue with auditors and accounting profession. - DNB has established disclosure standards for banks based on Basel II, Pillar 3. ### Corrective and remedial powers of supervisors (CP 23) - AFS provides DNB with a comprehensive set of intervention powers. - Historically, DNB often used “moral suasion” rather than formal enforcement; this has become less effective recently. - DNB recognizes shortcomings and through VITA seeks to increase intrusive and conclusive supervision. - Resolution powers are incomplete: no instruments to force an orderly resolution without shareholder approval. - MoF and DNB are jointly working on legislation to introduce additional crisis management tools, including transferring deposits of a failing bank to another bank. ### Consolidated and cross-border banking supervision (CPs 24–25) - DNB supervises on both consolidated and solo basis per the CRD; supervisory activities include quarterly returns, capital adequacy calculations, large exposures, exposures to related parties, supervisory review process. - Measures taken to enhance functioning of college of supervisors arrangements in line with Financial Stability Board (FSB) recommendations. - Although legal powers exist for effective consolidated supervision of cross-border groups, DNB has sometimes relied heavily on host supervisors. - DNB may need to intensify capacity and scrutiny for large, diversified cross-border groups proportionate to their risk profiles. ### Key statistics and exact figures - Deposit guarantee coverage: €100,000. - DNB liquidity rules first in place since 2003. - Standard Pillar 1 minimum solvency ratio: 8 percent. - New joint DNB and AFM policy rule on fitness and properness came into force on January 1, 2011. - Ministry of Finance published draft legislation for consultation in March 2011 to strengthen DNB formal powers. - DNB published supervisory themes for 2011 in February 2011. ### Summary of compliance highlights (selected extracts from Table 5) - Principle 1.2: MoF has substantial rule-making role; no evidence of interference compromising DNB operational independence, but circumstances for MoF powers need clearer specification; MoF may approve DNB’s supervisory budget. - Principle 6: Minimum solvency ratio is 8 percent; banks operate at higher levels in practice; DNB sets bank-by-bank capital requirements using Basel II-based methodology. - Principle 9: DNB does not set specific rules on problem assets/provisioning; provisioning policies set at individual bank level in compliance with IFRS/DCC; external auditor has primary responsibility for assessing adequacy of provisions. - Principle 11: Informal but generally effective approach to related party lending; for full compliance, specific rules detailing limits/prohibitions should be in place. - Principle 14: Liquidity rules in place since 2003; recommended that reporting be standardized to permit currency-level analysis (reporting currently in Euros only). - Principle 19: Pre-crisis risk assessment missed systemic vulnerabilities; measures are being taken to integrate macro- and micro-prudential supervision. ### Authorities’ response and actions underway - Authorities appreciate the IMF assessment and welcome recommendations. - DNB has initiated a reform program to make supervision more intrusive and conclusive, including creation of a new supervisory division within DNB since January 2011 with several expertise centers and a separate department focused on intervention policy. - MoF published draft legislation in March 2011 to strengthen DNB formal powers. - DNB identified strengthening data collection as a supervisory theme for 2011. - Minister announced proposals on institutional framework and division of responsibilities between MoF and supervisors. - MoF and Ministry of Justice exploring limiting liability of financial supervisors via legislation. - DNB will continue to strengthen international cooperation (bilateral, colleges of supervisors, crisis management groups) and increase supervisory resources while prioritizing on a risk-based approach. - Regarding CP 11, DNB notes it uses FINREP reporting which requires institutions to report a standardized table on exposures to related parties; exposures assessed and disclosed in annual accounts and form part of DNB’s discussions with external auditors; DNB provided IMF with evidence that this approach is actively enforced using formal powers under the AFS. *Source: IMF staff report excerpt provided in the content unit.* ### APPENDIX II: IOSCO CORE PRINCIPLES—SUMMARY ### APPENDIX II: IOSCO CORE PRINCIPLES—SUMMARY ### INTRODUCTION AND METHODOLOGY - Assessment conducted from November 25 to December 14, 2010 as part of the Financial Sector Assessment Program (FSAP) by Ana Carvajal, Monetary and Capital Markets Department. - Assessment based on the IOSCO Principles and Objectives of Securities Regulation and its Methodology adopted in 2003 and updated in 2008. - Note: In 2008 IOSCO only updated the footnotes of the Methodology. In June 2010 IOSCO approved a revision to the IOSCO Principles, which mainly resulted in the addition of nine new Principles. However, a revised methodology has not been developed yet. As a result this assessment has been conducted based on the current methodology. ### DESCRIPTION OF THE REGULATORY STRUCTURE - The AFM is the primary authority responsible for the supervision of securities markets in the Netherlands, with participation of DNB in prudential supervision. - AFM additional responsibilities: - Supervision of statutory auditors. - Supervision over financial reporting by issuers. - Consumer protection in relation to mainly exempted issuers that engage in “abusive” offerings. - AFM does not have the mandate to hear individual complaints of customers; that is the mandate of the Financial Services Complaint Tribunal (KIFID) and the Financial Ombudsman. - Exchanges, Multilateral Trading Facilities (MTFs), and central clearing counterparties (CCPs) are subject to indirect oversight by AFM and DNB. - Memoranda of Understanding (MoUs) exist among regulators of countries where Euronext and LCH Clearnet SA operate to ensure coordination of oversight. ### MARKET STRUCTURE - As of October 2010: - 115 companies listed in Euronext Amsterdam. - Total market capitalization of €462.712 millions. - Market highly concentrated: top ten companies represent roughly 74 percent of total market capitalization. - Bulk of new listings in Euronext take place in the Paris segment. - As of November 2010: - 49 banks and 263 investment firms authorized to carry out investment services in the Netherlands. - 243 of the investment firms were located in the Netherlands. - Approximately 90 percent of the investment firms are dedicated to asset management. - Remaining investment firms trade on their own account, are market makers or give advice; majority are not leveraged. - CIS (collective investment schemes) landscape as of November 2010: - 120 firms licensed to manage CIS. - 113 located in the Netherlands; of which 93 are management companies, and 20 are investment companies. - These firms manage a total of 389 CIS, of which 55 are umbrella funds with a total of 559 sub funds. - Roughly 800 foreign CIS authorized in the Netherlands. - Assets: - Assets under management (AUM) by CIS reached €392 billion at end 2009. - The bulk of the CIS authorized in the Netherlands are non-UCITS (Undertakings for Collective Investment Schemes in Transferable Securities). - Bond funds: 43 percent of the Dutch investment fund industry. - Equity funds: 42 percent. - Share of Dutch pension funds in the holding unit of Dutch investment funds rose from 44–76 percent at end 2009. - Market operators and infrastructure: - Main market: Euronext Amsterdam, operated by Euronext Amsterdam, a fully owned subsidiary of Euronext NV. - Euronext NV operates Eurolist and Liffe Connect. - Eurolist integrates markets of Brussels, Paris, the Netherlands, and Lisbon; since 2010 integrated a cash market from London through the London gateway. - Settlements via Euroclear on a DVP T+3 basis. - Liffe Connect is a regulated market for derivatives. - LCH Clearnet S.A. provides central counterparty and clearing services for both markets. - Three MTFs licensed in the Netherlands: New York Stock Exchange (NYSE) Arca Europe, Alternext, and TOM. - NYSE Arca Europe operates a central limit order book for trading blue chips stocks from 14 countries. - Alternext is an alternative market for medium size companies. - TOM is a MTF for cash markets recently licensed and in process of obtaining a license to operate a MTF for derivatives. ### GENERAL PRECONDITIONS FOR EFFECTIVE SECURITIES REGULATION - Preconditions present in the Netherlands include: - No significant barriers to entry and exit for market participants. - Legal and accounting system supports implementation of requirements and effective regulation. - Commercial law is up-to-date; corporate governance standards are current. - Insolvency legislation is sophisticated. - Regulators have legally enforceable powers of decision and action. - Taxation framework is supportive to industry operations. ### MAIN FINDINGS - Principles for the regulator (Principles 1–5): - Supervisors operate under a clear legal framework. - AFM and DNB enjoy operational independence in practice, though certain legal framework features could threaten such independence. - Strong framework of accountability for AFM and DNB. - AFM and DNB have sufficient powers to supervise securities markets, but limited rulemaking authority can affect responsiveness to market developments. - AFM has limited powers to enforce issuers’ compliance with financial reporting standards. - AFM has had sufficient resources to carry out its mandate. - Resources dedicated by DNB to supervise securities intermediaries appear to be limited. - Decisions of DNB and AFM that affect third parties are subject to judicial review. - Principles for self-regulation (Principles 6–7): - Exchanges and central clearing counterparties perform certain oversight functions over their members. - These infrastructure providers are subject to oversight by AFM (exchanges) and AFM and DNB (CCPs). - Principles for enforcement (Principles 8–10): - AFM and DNB have extensive investigative powers over regulated entities and third parties. - Available enforcement measures include public warnings, instructions, orders for incremental penalties and administrative fines. - Supervision and enforcement appear effective, with limitations in prudential supervision of management companies and criminal enforcement. - Principles for cooperation (Principles 11–13): - AFS requires AFM and DNB to cooperate with each other and with foreign regulators, using their investigative powers for such assistance. - AFM is signatory of the IOSCO Multilateral Memorandum of Understanding (MMoU) and many bilateral MoUs. - DNB is signatory of multiple bilateral MoUs. - International cooperation is largely centralized in the AFM, with evidence of capacity and willingness to cooperate with foreign regulators. - Principles for issuers (Principles 14–16): - Issuers must submit a prospectus for AFM approval; content aligns with IOSCO principles. - Issuers required to submit annual and semi-annual reports and to communicate price-sensitive information. - Financial statements for consolidating issuers must be prepared in accordance with International Financial Reporting Standards (IFRS) as adopted in EU. - Auditors conducting statutory audits are subject to AFM oversight; framework requires auditor independence. - AFM has limited powers to enforce issuers’ compliance with financial reporting standards. - Enforcement of mandatory tender offer obligations or fair price is based on a private right of action; AFM can enforce procedural aspects related to tender offers, including approval of offering memorandum. - Principles for collective investment schemes (Principles 17–20): - Management of CIS is subject to licensing with fit and proper and operational requirements. - Management companies are subject to minimum capital requirements; only UCITS management companies are subject to a solvency ratio and review of qualifying holdings. - CIS constituted as unit trusts required to have an independent depository; other safeguards apply for CIS constituted as investment companies. - Management companies must submit annual and semi-annual records; no additional reporting requirements for prudential supervision. - DNB supervision of management companies is mostly off-site. - AFM has developed a risk-based supervisory program that appears to be working well. - CIS must have a prospectus aligned with IOSCO Principles. - AFM has limited authority to intervene in a non-UCITS offering. - Principles for intermediaries (Principles 21–24): - Provision of investment services or activities requires a license with fit and proper and operational requirements. - Investment firms subject to minimum capital requirements. - DNB receives quarterly and monthly reporting to supervise compliance with prudential requirements. - Both DNB and AFM have risk-based supervisory programs for investment firms that appear to be working well. - Investment firms have obligations to customers on information disclosure and suitability. - Firms required to hold client assets on bank accounts under strict segregation rules. - AFM has developed an insolvency plan for investment firms and there is an investor compensation scheme. - Insolvency of an investment firm is subject to the framework applicable to corporations. *Source: APPENDIX II: IOSCO CORE PRINCIPLES—SUMMARY.* ### 98. Principles for secondary markets (Principles 25–30): Both regulated markets and ### _cr11144 - 98. Principles for secondary markets (Principles 25–30): Both regulated markets and ### Principles 25–30: Key findings and assessments - Principle 25 — Licensing and oversight - The operation of a regulated market or a multilateral trading facility is subject to licensing. - Regulated markets: licensed by the MoF on recommendation of the AFM. - MTFs: licensed by the AFM as part of the license for an investment firm. - The framework provides a level playing field for MTFs vis-à-vis regulated markets in relation to operational requirements. - Principle 26 — Ongoing regulatory supervision of exchanges and trading systems - The AFM conducts real time supervision of Euronext Amsterdam, and T+1 supervision aimed at detecting market abuse and insider trading. - Supervisors of Belgium, the U.K., France, and Portugal signed a revised MoU establishing coordinated supervision arrangements for Euronext N.V., enabling collective approvals and coordinated on-site inspections. - The AFM oversees ENDEX and MTFs licensed by it via reporting obligations and meetings with the Board. - Principle 27 — Transparency of trading - The AFS requires pre-and post-trade transparency on shares for RM and MTFs; post-trade transparency for systematic internalizers and OTC. - A consolidated tape is under review. - Concerns exist about waivers on transparency connected to large trade blocks. - No transparency requirements for other markets, though corporate and government bond markets appear to have a good level of transparency. - Principle 28 — Detecting and deterring manipulation and unfair trading - Insider trading and market manipulation constitute both an administrative infraction and a criminal offense. - Misconduct provisions apply broadly to securities, derivatives, and any financial product. - The AFM coordinates with other supervisors through MoUs and in Europe through CESR-Pol. - Principle 29 — Management of large exposures, default risk, and market disruption - DNB and the AFM jointly supervise securities clearing and settlement. - They do not directly monitor large exposures but receive monthly information from LCH Clearnet S.A. on such positions. - LCH Clearnet S.A. has mechanisms to address large exposures, including intraday margining. - Principle 30 — Clearing and settlement systems oversight - Not assessed. ### Related supervisory and enforcement context (from broader Table 6) - Supervisory responsibilities and arrangements - The responsibilities of the AFM and DNB are clearly established by law, mainly in the AFS; mandates are well understood and a covenant exists for cooperation. - AFM and DNB are operationally independent in practice, but certain legal-framework features could threaten independence; both submit annual reports to the MoF and are subject to judicial review for decisions affecting third parties. - Supervisory powers, resources, and processes - Supervisors have licensing, broad supervisory, investigative, and enforcement powers; AFS requires regulated entities to keep records for a period of five years. - AFM has limited powers vis-à-vis issuers; licensing of regulated markets is retained by the MoF. - AFM has necessary resources; DNB resources for supervision of securities intermediaries appear limited. - Enforcement measures include public warnings, instructions, orders for incremental penalties and administrative fines (which can reach a maximum of €8 million). - Criminal enforcement appears not always effective or visible. - Market intermediary and CIS supervision highlights - Investment firms: license by the AFM; banks may provide investment services but must meet same eligibility requirements and AFM must be consulted. - Management of CIS requires an AFM license; UCITS management companies subject to solvency ratio and review of qualified holdings. - DNB relies largely on off-site supervision for prudential supervision of management companies and CIS. - AFM conducts thematic and institution-based on-site inspections on a one year cycle for high-impact firms; DNB conducts on-site inspections of high-impact firms (roughly 25 percent of the firms) on a one year cycle, others under a three year cycle. - Disclosure and investor protections - Issuers offering securities to the public or admitted to trading must submit a prospectus for AFM approval; admitted issuers must present annual and semiannual reports and communicate material events as soon as possible. - Prospectus and Financial Information Leaflet for CIS must include a risk factor; UCITS prospectus subject to AFM approval; non-UCITS prospectus requires external auditor certification for registration. - Prices of illiquid assets must be evaluated by an independent expert on an annual basis; AFM has issued guidance on valuation of illiquid assets. - Other numeric and procedural points preserved from the assessment - Mandatory tender offer threshold: 30 percent of the shares (or control over them). - Record retention requirement: five years. - Administrative fines maximum: €8 million. - On-site inspection cycles: one year (high-impact), three year (other firms). - DNB on-site coverage: roughly 25 percent of firms. ### Recommended actions (excerpt from Table 7) - Principle 2 - The MoF should consider further clarifying the conditions under which the powers to take back a function or set aside rules of the supervisors would be exercised. - A legal reform should be pursued to incorporate specific provisions for the adequate legal protection of the supervisory authorities against legal suits in the AFS. - Principle 3 - A legal reform should be pursued to expand the rule-making authority of the AFM and DNB. - A legal reform should be pursued to strengthen the powers of the AFM in relation to issuers as described in Principles 15 and *Source: _cr11144 - 98. Principles for secondary markets (Principles 25–30): Both regulated markets and* ### 16. The licensing of regulated markets should be a ### 16. The licensing of regulated markets should be a responsibility of the AFM. ### Key recommended actions (organized by Principle) - Principle 6 - The DSI is performing a critical role for the securities industry, although currently on a voluntary basis. In the medium term the AFM could evaluate whether a more formal SRO arrangement is necessary. That would allow the AFM to rely more on the DSI, while at the same time subjecting it to oversight. In such case, a reform to the AFS—to incorporate a regime for SROs—would be warranted. - Principle 9 - The MoF jointly with the AFM might wish to review whether assignment of some of additional investigative powers to the AFM as detailed in Principle 9 could further enhance its enforcement capacity. - The AFM should review whether to allow for disclosure of enforcement actions, even before a decision has been taken, on a more general basis. - Principle 10 - DNB should strike a better balance between off and on-site supervision of management companies. - DNB should periodically assess the balance between visits and on-site inspections for investment firms. - The AFM, DNB and the MoF should coordinate with the PPO to review whether enough disclosure exists in connection with criminal enforcement, and whether additional resources are needed for criminal enforcement of securities laws. - Principle 14 - A legal reform should be pursued to increase the threshold of €50,000 used for purposes of exempting an issue from the requirement of a prospectus. The authorities informed that EU members have agreed to increase the amount to €100,000. - Principle 15 - A legal reform should be pursued to establish additional mechanisms to enforce compliance with the mandatory tender offer and the fair price obligation, e.g., providing the AFM directly with the authority over these issues or the authority to file suits before the Enterprise Chamber of the Amsterdam Court of Appeals. - Principle 16 - A legal reform should be pursued to strengthen AFM’s authority to enforce compliance with accounting standards. Such reform should properly address the limitations described in this Principle, in particular: (i) the limitations in the authority of the AFM to request information from issuers; (ii) the tight schedule under which the AFM has to file the suits before the Enterprise Chamber of the Court of Appeals; (iii) the limitations to share information among departments of the AM, and (iv) the need to request the review of the whole financial report when filing a suit to enforce compliance with the publication of a recommendation. - The MoF jointly with the AFM should consider extending IFRS to issuers that are not required to consolidate. - Principle 17 - A legal reform should be pursued to remove the licensing exemption for management companies who only offer units below €50,000. The authorities stated that this exemption will be removed with the implementation of the Alternative Investment Fund Managers (AIFM) Directive. - A legal reform should be pursued to eliminate the differences in capital requirements and review of qualifying holdings for UCITs management companies’ vis-à-vis non-UCITs management companies. - A legal reform should be pursued to provide DNB with the authority to impose reporting requirements on CIS and their management companies for purposes of prudential supervision. - The MoF jointly with the AFM should consider extending IFRS to all CIS. - DNB should reach a better balance between off-site supervision and on-site inspections of management companies. - The AFM should periodically assess the balance between thematic and institution based inspections. - Principle 18 - A legal reform should be pursued to require all CIS to have an independent depository. In adopting a common approach for all CIS the authorities might wish to consider strengthening the requirement to have a “depository” by imposing that it be a licensed entity, such as a credit institution, and providing it with broader oversight/custodial functions. - Principle 19 - A legal reform should be pursued to provide the AFM with more clear powers to “intervene” or “hold-back” an offering as required by the Principles. In connection with it, the AFM jointly with the MoF should review whether the system of “certification” by external auditors has provided a comparable level of “oversight” as the vetting process of the AFM. - Principle 20 - The AFM and the MoF might wish to explore whether rules on the conditions for open-end funds should be developed. The authorities should also explore whether specific rules are needed in connection with suspensions of redemptions. - Principle 21 - The assessor welcomes the legislative initiative to establish a suitability requirement for directors, which would strengthen the current fit and proper requirements by allowing the supervisors to carry out a more comprehensive assessment that includes specific competences. - Principle 24 - The assessor welcomes the initiative of the AFM to seek mechanisms to receive timely information from KIFID in relation to complaints received against individuals and firms, since this is critical input for a risk-based supervisory approach. - The AFM and DNB should conduct scenario analysis and crisis simulations exercises, which could eventually help them to determine whether improvements are needed to the plan developed by the AFM, or to their covenant. - Principle 25 - The AFM should include the guidance on licensing of regulated markets in its website, once it is finalized. - Principle 27 - The AFM should continue to actively engage in the MiFID review process to improve market quality and transparency of equity market trading in a competitive multi trading venue environment. In particular, the AFM and MoF should continue to contribute to the European reforms pursued to address concerns regarding the waivers on transparency for block trades. In the same manner, a consolidated tape should also be pursued to enhance post trade transparency. - A legal reform should be pursued to impose reporting requirements on OTC derivatives markets. The MoF jointly with the AFM should review whether addition transparency is needed in other markets, including government and corporate bond markets. - Principle 28 - A legal reform should be pursued to allow for the implementation of the client-ID in the Netherlands in order to help the AFM to reduce the duration of its investigations; therefore contributing to the overall effectiveness of its market surveillance. - The AFM jointly with the MoF should consider whether additional investigative powers for the AFM to access telephone and internet service providers’ records are desirable. - Strengthening of CESR- Pol is desirable. In the long run further centralization of supervision might be necessary. - Principle 29 - A comprehensive legal framework for clearing and settlement should be adopted. ### Operational and resource recommendations - DNB should review whether enough resources have been allocated to the prudential supervision of securities intermediaries. - DNB should strike a better balance between off and on-site supervision of management companies and periodically assess the balance between visits and on-site inspections for investment firms. - The AFM should review the disclosure regime for enforcement actions, including whether disclosure before a final decision should be permitted more generally. - AFM, DNB and the MoF should coordinate with the PPO to review disclosure and resourcing for criminal enforcement of securities laws. - The AFM should include finalized guidance on licensing of regulated markets on its website. ### Authorities’ response — summary of views and follow-up - The authorities of the Netherlands express appreciation for the IMF assessment and view the FSAP as a useful exercise that provided insight on the regulatory framework, supervisory practice and risks in the financial sector. - The authorities are pleased that the Netherlands exhibits a high level of implementation of the IOSCO Principles and that the AFM has gained a reputation as a credible and effective enforcer in conduct-of-business. - The assessment identified areas for improvement; these are under review by the AFM, DNB and the Ministry of Finance. The Ministry of Finance will send Parliament an official statement on specific areas where the authorities will take action in response to the recommendations. - With a single exception, all principles are fully or broadly implemented. The authorities note that principles 3, 10, 15, 16, 17, 18, 19 and 27 are not fully implemented in this assessment compared with the FSAP in 2004; they attribute this to a more stringent assessment in light of the financial crisis. - The authorities emphasize that supervision has been strengthened over the years: the AFM has since 2006 been given more supervisory tasks and broader powers, for example in financial reporting and supervision of auditors. ### IAIS / insurance sector context and timing - The IAIS assessment update covers legislative changes and regulatory developments in the insurance sector of the Netherlands since 2004. The current assessment was conducted from November 22–December 14, 2010. - Notable timelines and items: - The Wft came into force on January 1, 2007. - DNB’s Supervisory Strategy covers 2010-2014. - The impending implementation of Solvency II in 2013 is expected to enhance DNB’s risk-based supervision. - The Assessment notes the 2004 FSAP and that the 2006 Act for Financial Services is incorporated into the Wft. *Source: _cr11144 - 16. The licensing of regulated markets should be a responsibility of the AFM.* ### 113. DNB has articulated clearly its supervisory expectation of insurers in implementing ### _cr11144 - 113. DNB has articulated clearly its supervisory expectation of insurers in implementing ### Ongoing supervision (ICP 11–ICP17) - DNB has articulated clearly its supervisory expectation of insurers in implementing appropriate internal controls tailored to the nature, scale and complexity of their operations. - DNB proactively monitors insurers’ internal controls systems and has promoted greater awareness and buy-in from insurers. - DNB takes a proactive and transparent approach in market analysis to identify, assess and mitigate risks to the insurance sector. - DNB takes appropriates measures to strengthen insurers’ resilience to systemic risks. - The publication of comprehensive insurance and other market statistics facilitate insurers’ better understanding of their potential macro-economic risk exposures. - DNB has a systematic process in reviewing regulatory returns and other information provided by insurers as part of its offsite surveillance. - The quarterly returns introduced informally in 2009 should form part of DNB’s routine supervisory tools to ensure timely supervision and intervention. - DNB conducts thematic inspections of insurers, which are prioritized, based on holistic analysis of insurers’ risk profiles, to complement its regular meetings with insurers. - DNB has conducted joint inspections with foreign supervisors to address specific supervisory issues. - DNB is empowered to take a wide range of preventative measures and adopts an Intervention Ladder to calibrate its supervisory responses to emerging supervisory concerns. - DNB takes a proportionate approach in exercising enforcement and sanction powers under the Wft. - The Wft provides for orderly exits of insurers and a high degree of protection for policyholders in the event of insolvency. - The Netherland’s regulatory frameworks for insurance groups and conglomerates are broadly in line with EU Directives. - As an integrated prudential supervisor, DNB has the capacity to effectively coordinate group/conglomerate supervision internally. - The impending implementation of Solvency II will strengthen DNB’s supervision of insurance groups, subject to the adequacy of supervisory resources. ### Prudential requirements (ICP 18–ICP 23) - The Wft has established high-level requirements relating to insurers’ risk management, supplemented by DNB’s supervisory expectation under the Decree on Prudential Rules. - The effectiveness of insurers’ risk management system is assessed by DNB as part of its FIRM framework. - DNB monitors insurers’ insurance risks through assessment of their risk management systems, technical provisions and solvency. - DNB reviews the adequacy of insurers’ reinsurance programs and the collectability of reinsurance recoverables. - There are clear legal principles and regulatory guidelines for insurers in estimating their insurance liabilities, the adequacy of which is to be supported by the Netherlands Liability Adequacy Test. - DNB monitors insurers’ technical provisions and has the power to require insurers to remedy any shortfall. - Insurers are required to manage their investment risks in a manner proportionate to the nature, size, complexity and risk profile of their operations. - The regulatory policy and requirements for the use of derivatives by insurers are aligned with international best practice. - The current solvency regime for insurers is largely based on Solvency I, with some enhancements. - Paving the way for the implementation of Solvency II, DNB has introduced the RiSK tool in 2009, through which insurers report their solvency position based on the Quantitative Impact Study of Solvency II. - The implementation of Solvency II will result in a more robust and risk-sensitive solvency regime that will enhance DNB’s risk-based supervision. ### Markets and consumers (ICP 24–ICP 27) - The AFM administers the licensing of intermediaries with clear and transparent criteria. - The AFM actively monitors intermediaries’ compliance with the regulatory requirements on professional conduct under the Wft and the Decree on the Supervision of the Conduct of Financial Enterprises pursuant to the Wft. - The Wft requires insurer and intermediaries to ensure fair treatment of consumers including the provision of adequate information for informed decision. - The reputation of the life insurance industry had been tarnished by the sale of policies with excessive costs to policyholders. - While the authorities have since strengthened supervision of intermediaries, there is scope for improving insurers’ product development process. - It will take time to strengthen consumer protection, which requires changes in culture, mindset and competency level of intermediaries. - DNB and the AFM publish extensive market data and analysis, including key performance data of individual insurers. - Selected regulatory information is easily accessible by the public through their websites or public inspection of regulatory returns. - DNB, as well as industry participants have taken a proactive approach to combating insurance fraud. - There is close cooperation and information exchange with enforcement agencies and other supervisors, both locally and internationally, to address fraud to preserve the integrity of the insurance sector. ### AML/CFT (ICP 28) - The AML/CFT requirements applicable to insurers are broadly in line with the FATF recommendations although there is scope for updating the AML/CFT legislative framework in some areas. - DNB’s inspections cover life insurers’ compliance with their AML/CFT obligations. ### Recommendations to improve observance of ICPs (selected items from Table 8) - Principle 2 Supervisory objectives - The authorities are advised to consider articulating more clearly how their supervisory mandates apply to their respective roles in protecting policyholders. - Principle 3 Supervisory authority - The authorities are advised to consider: - a) Broadening the legal authority of DNB and the AFM to enhance the effectiveness of their supervision; - b) Providing explicit legal protection to DNB and the AFM, as well as their staff members, against lawsuits for actions taken in good faith while discharging their duties, provided they have not acted illegally; - c) Publication of reason for removal of Board members; and - d) Review the adequacy of supervisory resources particularly for effective supervision of internationally active insurance groups and implementation of Solvency II. - Principle 7 Suitability of Persons - DNB could consider strengthening collaboration with the professional associations to promote more robust quality control over the work of the auditors and actuaries without compromising its duty to preserve confidentiality of official information. - Principle 12 Reporting to supervisors - DNB should be empowered to require insurers to submit quarterly returns as a routine supervisory practice, with appropriate powers for enforcement and sanctions. - Principle 17 Group-wide supervision - The authorities are advised to consider: - a) removing the explicit legal restriction against DNB to impose qualitative and quantitative limits on intra-group transactions and balances under the Bptfg; - b) reviewing the adequacy of supervisory resources, particularly for the effective supervision of international active groups/conglomerates; - c) harmonizing the supervisory approach for insurance groups and conglomerates in the area of risk concentration and solvency requirements; and - d) formulating appropriate regulatory requirements applicable to non-regulated holding companies, in line with Solvency II and international regulatory developments. - Principle 25 Consumer Protection - The authorities are advised to carefully consider the trade-offs between self-regulation and robust supervision to protect the interests of policyholders. - Principle 28 Anti-money-laundering, combating the financing of terrorism - The authorities are advised to update the legal provisions on record retention, appointment of anti-money laundering compliance officers and the requirements where insurers rely on intermediaries to perform customer due diligence, to bring these in line with FATF Recommendations. ### Authorities’ response to the IAIS assessment - The Dutch authorities express appreciation to the IMF and the assessment team for their comprehensive work and view the FSAP as a useful exercise. - The authorities welcome the overall assessment that indicates a high level of observance of insurance supervision with the IAIS Insurance Core Principles. - The recommendations of the IMF are well received and will be considered carefully in continuous efforts for strengthening supervision. - Several initiatives have already been taken up since the conclusion of the FSAP mission. - Most recommendations will be addressed with the upcoming implementation of the European Solvency II framework. - Capital adequacy standards will be more robust and risk-sensitive under the new framework. - The quarterly returns that are now received from the institutions on an informal basis, will then be formally required. - Solvency II will strengthen DNB’s ability for group-wide supervision, including more stringent rules on intragroup transactions. - The introduction of Solvency II will thus bring supervisory practice even further in line with the IAIS core principles. - Effective supervision of international active groups will remain a priority; DNB actively seeks cooperation with international supervisors both bilaterally and through colleges of supervisors. - The scope of supervision with regard to holding companies will be strengthened under Solvency II and the review of the financial conglomerates directive. - DNB will increase its supervisory resources to intensify its supervision and already started to do so in recent months, although its approach will remain risk-based and priorities will need to be made. - The Minister has recently announced proposals with regard to the institutional framework and the division of responsibilities between the Ministry of Finance and the supervisors. - The Ministry of Finance and the Ministry of Justice are exploring the possibilities to limit the liability of the financial supervisors by explicitly laying down the limitation in legislation. - The report acknowledges the insurance sector is currently under pressure because of adverse market conditions and its damaged reputation; the sector itself must renew its business model and restore its reputation. - Several initiatives have already been taken by the sector and the association of insurers. - The AFM, with its mandate for conduct of business supervision, is responsible for due care in the provision of services to clients and adequate consumer protection. - The AFM has strengthened supervision of intermediaries and is discussing with the Ministry of Finance whether its mandate in this respect should be strengthened. *Source: _cr11144 - 113. DNB has articulated clearly its supervisory expectation of insurers in implementing (PDF).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11144.pdf_