## 1. The Netherlands: Summary Compliance with the Basel Core (_cr11206) ## Source details **Canonical URL:** [1. The Netherlands: Summary Compliance with the Basel Core (_cr11206)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11206.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11206.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11206.pdf.json) --- ### Summary, key findings, and recommendations - Major reforms: Adoption of the Twin Peaks regulatory structure and the Act on Financial Supervision (AFS) addressed many recommendations from the 2003–2004 Basel Core Principles assessment. - Legal/regulatory framework: Now conforms closely to internationally-accepted minimum standards; reflected in this Basel Core Principles assessment. - Supervisory practice shortcomings and initiatives: - DNB historically relied on “moral suasion” with relatively informal supervision; not fully effective in constraining excessive pre-crisis risk taking. - DNB initiated the “VITA” cultural change program to make supervision more “intrusive and conclusive”; assessment team supports this initiative. - Resources: - Total DNB FTE posts: 1572. - FTE posts dedicated to supervisory activities: 645. - Recommendation: Authorities should evaluate allocation of supervisory resources according to the potential systemic impact of regulated firms. ### Institutional structure, mandate, and governance - Twin Peaks model: - DNB: prudential supervisor for credit institutions, insurance companies, pension funds, and investment firms. - AFM: conduct of business supervision, including consumer protection and transparency. - AFS and rulemaking: - AFS came into force on January 1, 2007; DNB’s regulatory framework comprises three levels: AFS, orders in council and ministerial orders/decrees, and DNB-issued rules and policy guidelines. - AFS empowers the minister to overturn DNB rules deemed to constitute an "unreasonable administrative burden"; DNB may "lay down temporary, generally binding regulations in order to contribute to the stability of the financial sector" and must report such regulation to the MoF without delay. - Observation/recommendation: Circumstances for invoking ministerial powers need closer definition (law amendment or public non-exhaustive list). ### Institutional resources, organization, and recent changes - DNB organization: - Four supervision divisions: three operational divisions for (i) banking; (ii) insurance and trust agencies; (iii) pension funds and investment firms; plus a separate supervisory policy division. - Separate Financial Stability Division (FSD) exists; a separate department for macro-prudential supervision was created in 2010 within FSD. - Organizational change: - Plans to create an additional supervisory division centralizing expertise centers and enforcement activities came into effect in January 2011. - Staffing and capability: - DNB staff metrics in BSD: average age 41 years; eight years of working experience with DNB; yearly average of 90 budgeted training hours per employee. ### Macro-financial setting and crisis response - Size of banking sector: - Total financial assets of the banking sector: € 2,852 billion (Q2 2010), equal to almost five times GDP. - A quarter of assets is ultimately held by foreign institutions (mostly within the EEA). - Crisis interventions and restructuring: - Major banks underwent restructuring; state provided capital support to three financial institutions, including ING; state acquired a portfolio of ALT-A mortgages from ING’s U.S. subsidiary. - ABN AMRO: consortium takeover in 2007; Netherlands government later bought Netherlands banking parts of Fortis; new company structure named ABN AMRO created in July 2010. - Macroeconomic outlook and fiscal position: - Budget deficit in 2011 expected to improve but remain at a comparatively high level of 4 percent. - Further fiscal consolidation expected in upcoming years to reduce the deficit and prepare for implications of an ageing population. - Deposit insurance: - Deposit guarantee protects individual depositors up to € 100,000. - Scheme currently financed ex-post; plans to create an ex-ante scheme with risk-based premiums and a more rapid pay out process. ### Supervisory methodology and processes - FIRM methodology and RAP: - Supervisory approach based on the Financial Institutions Risk Analysis Method (FIRM) and the Risk Analysis Process (RAP) with three layers: inherent risks; quality of control mechanisms ("3 lines of defence"); residual risks. - DNB’s banking supervision elements: (1) base program; (2) risk identification program; (3) risk-mitigation program. - Factsheets prepared as part of RAP; outcomes input to SREP and shared with bank senior management and auditors. - On-site and off-site supervision: - Off-site relies on standardized periodic returns: COREP and FINREP; supplementary returns as necessary. - On-site inspections are thematic and risk-based for largest banks; frequency determined by resources and risk analysis. - Largest banks: thematic risk-based examinations rather than comprehensive on-site examinations; recommendation to supplement thematic work with broader scope examinations periodically. - Access and information: - DNB has unlimited access to internal management information of each major bank. - Standardized data collection limitations: relatively limited standardized data (e.g., no standardized reporting of nonperforming assets); reporting at differing dates; standardized data mainly at consolidated level and lacks sufficient solo reporting for “relevant entities”. - Recommendation: introduce more standardized and more granular reporting; extend reporting to include sufficient solo reporting for relevant entities; legal powers to collect data may need extension. ### Capital adequacy, ICAAP, and Pillar 1/2 - Pillar 1 minimum: - The standard Pillar 1 minimum solvency ratio for all banks is 8 percent (DPR Section 60 (1)). - In practice, banks operate at capital levels much higher than the legal minimum. - Supervisory application of Pillar 2: - DNB sets capital requirements bank-by-bank using an assessment methodology building on Basel II, Pillar 2. - Banks required to develop ICAAPs assessed against supervisory benchmarks; DNB requires regular stress-testing and conducts an annual macro stress test. - AFS Section 3:111a gives DNB authority to impose higher capital charge, specific provisioning policy or limit risk profile where needed. - Model validation and IRB: - DPR and DNB policies require DNB validation of internal models used for regulatory capital calculations; DNB conducts annual IRB health checks. - Specific numerical and structural provisions: - Legal maximum of non-core elements in Tier 1 is 50 percent, but DNB enforces a de-facto maximum limit of 25 percent of hybrid capital instruments in Tier 1. - Minimum ‘own funds’ for licensing: EUR 5 million (AFS Section 3:53 and DPR Section 48). - Forward-looking stress test requirement: DNB board ruled banks should still maintain a minimum Tier 1 ratio of 6 percent under a DNB stress scenario. ### Liquidity framework and crisis monitoring - Existing framework: - DNB has had comprehensive liquidity rules since 2003; quantitative "stock" concept measures assets to meet immediate liquidity needs over one week and one month time horizons. - Liquid assets include marketable securities eligible for ECB discounting; categories subject to haircuts. - Banks report liquidity monthly via standardized regulatory liquidity report (7029 – Instruction for 8029, Large Exposures Liquidity (2003)). - Enhancements and Basel alignment: - Rules being enhanced to incorporate Basel 3 recommendations; DNB intended to implement September 2008 Basel Principles on Liquidity Risk Management as part of CRD II effective December 31, 2010. - DNB issued draft “Regulation on liquidity” (implementing CRD II) for consultation. - Crisis and high-frequency monitoring: - Crisis monitoring team (since second half 2007) requires high frequency reporting, if necessary nearly daily and at least weekly; wholesale run-off scenarios must be reported in all major currencies. - Standardized liquidity report is in euros only; recommendation: amend standardized liquidity report to permit analysis according to major currencies. ### Problem assets, provisioning, and accounting - Provisioning and accounting: - DNB does not set specific provisioning rules; provisioning level set according to Expected Loss (EL) estimates under the IRB approach and via accounting standards (IFRS or DCC). - External auditor has primary responsibility for assessing adequacy of provisions. - DPR requires a correction on IFRS equity for the difference between IRB expected loss and incurred loss (COREP 1.3 line 1.3.7). - Recommendation: supervisor should provide guidance on the definition of default and expectations concerning provisioning when assets are impaired. ### Large exposures, related parties, country risk - Large exposures: - Large exposure defined as any exposure exceeding 10 percent of own funds. - Actual large exposure limit: 25 percent of own funds (DPR). - Large exposures reported quarterly to DNB on both a consolidated and solo basis (except explicit exemptions); quarterly frequency exceeds minimal CRD requirement. - Exposures to related parties: - DNB does not set specific quantitative limits on related-party exposures; relies on AFS Section 3:17 and DPR Section 11 (arms-length principle) and moral suasion. - Maximum limit for intra-group transactions is set at 25 percent (de-facto). - Assessment: Largely Compliant; recommendation: formal framework of limits and prohibitions to achieve full compliance with CP11. - Country and transfer risks: - DNB Policy Rule on treatment of concentration risk in emerging countries (July 15, 2010) harmonises approach; material country risks over a 5 percent threshold must be taken into account. - Banks with concentrations exceeding 20 percent of their balance sheet are required to wind them down as soon as possible (Policy Rule Section 4, diversification table); large concentrations lead to capital surcharges. ### Supervisory powers, corrective measures, and resolution - Formal powers under AFS (examples and references): - Issue instructions (Section 1:75); appoint special administrator (Section 1:76); impose incremental penalty payments (Section 1:79); impose administrative fines (Section 1:80); public warnings (Section 1:94); modify/withdraw/limit licences (Section 1:104); temporary generally binding regulations (Section 1:28). - DNB empowered to access any necessary information (AFS Sections 1:73 & 1:74). - Historical practice and improvements: - DNB historically preferred moral suasion; project VITA aims to encourage fuller use of formal enforcement powers. - Resolution toolkit gap: - DNB currently does not have the full range of instruments to conduct orderly resolution of banks without shareholder approval (cannot impose restructuring without shareholder approval). - MoF and DNB jointly working on legislation to introduce additional crisis management tools, including the option of transferring deposits of a failing bank to another bank; assessment team encourages timely finalization. - Assessment of corrective powers: Largely Compliant (framework adequate but practice and certain resolution instruments need enhancement). ### Consolidated and cross-border supervision, home-host cooperation - Consolidated and solo supervision: - DNB supervises on consolidated and solo basis in accordance with CRD; AFS Sections and DPR specify rules and information-gathering powers. - AFS Section 3:72 and Section 3:276 authorize DNB to require prudential information from entities within consolidation scope. - Home-host cooperation: - DNB has concluded 37 MoUs with EEA and non-EEA supervisors. - There are currently 14 colleges in place for banks, banking groups or financial conglomerates; for 8 of the largest cross-border banks, a multilateral written agreement is signed between college members. - Observation: examples where DNB appears to have relied heavily on host supervisors; resource constraints may have contributed to this reliance. - Recommendation: strengthen resources devoted to oversight of subsidiaries outside the Netherlands and strengthen practices/procedures for obtaining relevant information on their operations and group risks. ### Supervisory reporting, data limitations and recommended enhancements - Reporting framework: - Standardized reports required: FINREP (quarterly), COREP (quarterly), Liquidity (monthly), Interest rate risk (quarterly), Large exposures and asset concentrations (annual). - Most reports at consolidated group level; solo reporting limited. - Data limitations and needs: - No standardized reporting of nonperforming assets; reporting across different dates complicates aggregation and stress tests. - Recommendation: more standardized and granular reporting forms; extend solo reporting for relevant entities; may require extending legal powers to collect data. ### Grading highlights and recommended action plan (selected) - Selected CP gradings (verbatim): - CP 1 (Objectives, independence, powers, transparency, and cooperation): C — The authorities comply with this CP. - CP 1.2 (Independence, accountability and transparency): LC — The AFS gives the MoF a substantial role in rule-making and powers to overturn DNB rules; circumstances need more precise specification for transparency. - CP 6 (Capital adequacy): C — The minimum solvency ratio is 8 percent; DNB sets bank-by-bank requirements using Basel II. - CP 9 (Problem assets, provisions, and reserves): C — DNB does not set specific rules; provisioning policies set on an individual bank basis in compliance with IFRS and DCC; supervisor should consider guidance on definition of default and provisioning expectations. - CP 11 (Exposure to related parties): LC — Informal but generally effective approach; specific rules on limits and prohibitions needed for full compliance. - CP 14 (Liquidity risk): C — Comprehensive liquidity rules since 2003; reporting currently in euros only; recommendation to standardize liquidity reports by major currencies. - CP 19 (Supervisory approach): C — Authorities comply; pre-crisis methodology did not adequately identify systemic vulnerabilities; measures taken to address shortcomings. - CP 21 (Supervisory reporting): LC — Reliance on internal management reports limits standardized data; needs more standardized and granular reporting and sufficient solo reporting. - Recommended Action Plan (selected verbatim): - CP 1 (2). Independence, accountability and transparency—To spell out more precisely under which circumstances the MoF would use its legal powers to object DNB rule making decisions to make the process more transparent. - CP 9. Problem assets, provisions and reserves—DNB may want to consider providing guidance on the definition of default and outline its expectations concerning the level of provisions appropriate when assets are impaired. - CP 11. Exposures to related parties—DNB to implement specific rules detailing the limits and prohibitions on related party lending. - CP 14. Liquidity risk—DNB to standardize liquidity report to permit analysis according to major currencies. - CP 21. Supervisory reporting—The authorities need to introduce more standardized and more granular reporting forms to facilitate comparative or aggregate macro and micro analysis (stress tests). Solo reporting also needs enhancement. - CP 23. Corrective and remedial powers of supervisors—Make necessary legal changes to provide DNB with a full range of bank resolution tools. - CP 24. Consolidated supervision—The authorities to strengthen resources devoted to oversight of subsidiaries located outside the Netherlands and practices/procedures for obtaining relevant information concerning their operations and the risks they pose to the group. ### Selected numerical and factual items (preserved verbatim) - Total DNB FTE posts: 1572. - FTE posts dedicated to supervisory activities: 645. - Total financial assets of the banking sector: € 2,852 billion (Q2 2010). - A quarter of assets is ultimately held by foreign institutions (mostly within the EEA). - Budget deficit in 2011 expected to remain at 4 percent. - Deposit guarantee: € 100,000. - Standard Pillar 1 minimum solvency ratio: 8 percent. - De-facto maximum limit of hybrid capital instruments in Tier 1 enforced by DNB: 25 percent (legal maximum 50 percent). - Minimum ‘own funds’ for licensing: EUR 5 million. - DNB granted 78 declarations of no-objection for qualifying holdings in banks and 384 declarations in total for 2009. - Large exposure definition: exposure exceeding 10 percent of own funds; large-exposure limit: 25 percent of own funds. - Country concentration policy thresholds: material country risks exceeding 5 percent; winding down required where concentrations exceed 20 percent of balance sheet. - WWFT incidental transaction thresholds: minimum value of € 15,000 (single or aggregate related transactions). ### Authorities’ response (selected) - Authorities welcome the high level of observance and note initiatives already taken: creation of a new supervisory division within DNB since January 2011; Ministry of Finance published draft legislation in March 2011 to strengthen formal DNB powers; DNB published supervisory themes for 2011 and identified strengthening data collection as a priority. - MoF and Ministry of Justice exploring explicit legislative limitation of supervisor liability. - DNB will continue to strengthen international cooperation and increase supervisory resources, while acknowledging resource constraints relative to the size of the financial sector. - On CP 11 exposures to related parties: DNB notes reporting requirements (FINREP standardized table) and ongoing enforcement actions and engagement with external auditors. *Source: _cr11206 - 1. The Netherlands: Summary Compliance with the Basel Core (IMF assessment document).* ### 1. The Netherlands: Summary Compliance with the Basel Core ### 1. The Netherlands: Summary Compliance with the Basel Core ### Summary, Key Findings, and Recommendations - Major reforms: Adoption of the Twin Peaks regulatory structure and the Act on Financial Supervision (AFS) addressed many recommendations from the 2003–2004 Basel Core Principles assessment. - Legal/regulatory framework: Now conforms closely to internationally-accepted minimum standards; reflected in this Basel Core Principles assessment. - Supervisory practice shortcomings: - DNB historically relied on “moral suasion” with relatively informal supervision; this was not fully effective in constraining excessive pre-crisis risk taking. - DNB has initiated the “VITA” cultural change program to make supervision more “intrusive and conclusive” and to encourage greater use of formal enforcement powers. The assessment team supports this initiative. - Resources: - DNB has fewer full time-equivalent (FTE) posts devoted to banking supervision than to pensions or insurance, despite banking being more systemically significant. - Recommendation: Authorities should evaluate allocation of supervisory resources according to the potential systemic impact of regulated firms. ### Introduction and Scope of Assessment - Assessment process: - Team reviewed legal framework, held extensive discussions with DNB, AFM, MoF, NVB, NIVRA, and private sector participants. - Team examined DNB on- and off-site supervision practices and used a comprehensive self-assessment by DNB in cooperation with MoF and AFM. - Team composition: Thordur Olafsson (IMF) and Michael Taylor (advisor). - Assessment basis: - Observations are generally based on current legislation; prospective legislation considered where relevant. - Assessment provides an internationally consistent measure against the 2006 Revision of the Basel Core Principles. ### Institutional Structure and Recent Changes - Twin Peaks model: - DNB: prudential supervisor for credit institutions, insurance companies, pension funds, and investment firms. - AFM: conduct of business supervision, including consumer protection and transparency. - DNB organization and staffing: - Total DNB FTE posts: 1572. - FTE posts dedicated to supervisory activities: 645. - Four supervision divisions: three operational divisions for (i) banking; (ii) insurance and trust agencies; (iii) pension funds and investment firms; plus a separate supervisory policy division. - Separate Financial Stability Division exists. - Organizational change: - Plans to create an additional supervisory division centralizing expertise centers and enforcement activities came into effect in January 2011. - Past FSAP: - A Financial Sector Assessment Program (FSAP) for the Netherlands was conducted in 2003/2004. - At that time, all BCP criteria were complied with (19 criteria) or largely complied with (6 criteria). ### Information, Methodology, and Legal Framework - Methodology: - Conducted in accordance with the Core Principles Methodology by the Basel Committee of Banking Supervisors (BCBS). - Observation categories used: compliant; largely compliant; materially non-compliant; non-compliant; non-applicable. - Definitions preserved as in source for each category. - Legal basis: - Primary legislation considered: AFS and associated regulations. - AFS contains national implementation of the EU Capital Requirement Directive (CRD), ensuring compliance with the Basel II framework. - Recent CRD changes scheduled for translation into the AFS at the end of 2010 (CRD 2) and in 2011 (CRD 3). - Use of crisis reviews: - Recent reports on the crisis and DNB’s role were used where relevant to describe observance and identify prospective actions. ### Institutional and Macro-Economic Setting – Overview - Size of banking sector: - Total financial assets of the banking sector: € 2,852 billion (Q2 2010), equal to almost five times GDP. - A quarter of assets is ultimately held by foreign institutions (mostly within the EEA). - Crisis impact and restructuring: - Banking sector seriously hit by the global financial crisis with unprecedented write-downs; authorities took far-reaching measures for stability. - Major banks undergoing restructuring: consolidation of balance sheets, reduction of risk profile, increased domestic orientation. - Banking sector returned to profitability in 2009, but profitability remains considerably below pre-crisis levels. - State interventions and restructuring of major institutions: - ABN AMRO: taken over in 2007 by a consortium (Fortis, Royal Bank of Scotland, Banco Santander); Netherlands government later bought Netherlands banking parts of Fortis, including ABN AMRO activities; new company structure named ABN AMRO created in July 2010. - State provided capital support to three financial institutions, including Internationale Nederlands Groep (ING); State acquired a portfolio of ALT-A mortgages from ING’s U.S. subsidiary. - As a condition of support, the European Commission enforced organizational changes at ING; ING announced intention to separate banking and insurance activities, resulting in a smaller organization. - Macroeconomic outlook and fiscal position: - Dutch economy showing gradual signs of recovery after the 2008/2009 recession; growth expected to continue at a moderate pace. - Fiscal position deteriorated significantly due to fiscal accommodation during the crisis and GDP contraction in 2009. - Budget deficit in 2011 expected to improve but remain at a comparatively high level of 4 percent. - Further fiscal consolidation is expected in upcoming years to reduce the deficit and prepare for implications of an ageing population. ### Preconditions for Effective Banking Supervision - Macroeconomic policy framework: - Netherlands has a strong record and solid institutional framework supporting sound macro-economic policies. - Monetary policy conducted by DNB within the ECSB framework. - Budgetary policy conducted within a fiscal framework based on predefined rules and within the Stability and Growth Pact (SGP). - The 2005 IMF ROSC on fiscal policy concluded the Netherlands has a transparent and well understood system of fiscal management that achieves or exceeds accepted standards. *Source: _cr11206 - 1. The Netherlands: Summary Compliance with the Basel Core* ### 25. The recent financial crisis has put severe pressure on financial stability and the ### _cr11206 - 25. The recent financial crisis has put severe pressure on financial stability and the ### Overview - The recent financial crisis has put severe pressure on financial stability and the budgetary situation of the Netherlands. - Measures have been taken in line with the SGP recommendations to ensure that the budget remains on a sustainable path, but "considerable adjustment still needs to be made." ### Institutional responsibilities for financial stability - The Banking Act (DNB Act of 1998 with subsequent amendments) and the AFS explicitly assign to DNB the responsibility to safeguard the stability of the financial system. - Within DNB, the Financial Stability Division (FSD) is primarily responsible for this task. - A separate department for macro-prudential supervision was created in 2010 within the FSD to further improve monitoring of macro-prudential risks. ### Public infrastructure and governance - The Netherlands has a well developed business climate with an adequate legal framework including corporate, bankruptcy and private property laws. - Credit institutions must apply either International Financial Reporting Standards (IFRS) or provisions in Title 9 Book 2 of the Dutch Civil Code (DCC). - Accounts are legally required to be validated by independent auditors. - The auditing profession is subject to self-regulation through the NIVRA and to regulation by the AFM; these bodies ensure licensing and appropriate professional training. - The Netherlands has implemented a corporate governance code applying to all listed companies. ### Payment and settlement systems - DNB participates in TARGET2 (Trans European Automated Real-Time Gross Settlement Express Transfer 2) and operates "TARGET2.NL". - Equens operates 'Equens CSM' (international SEPA compliant transactions) and 'CSS' (domestic transactions), and operates the 'SWITCH' system for POS and 'guest use' ATM transactions. - Currence is the legal owner of the payment products 'PIN', 'iDEAL', and 'Direct Debit'. - Securities traded on Euronext Amsterdam are cleared by LCH Clearnet SA (CCP LCH) and settled in the Central Securities Depository (CSD) Euroclear Nederlands system "ESES". - ESES uses DVP model 1 and is a platform with an integrated settlement model in the Central Bank Money (CeBM); ESES is also used by CSDs in Belgium and France in co-operation with DNB, NBB and BdF. - The (I) CSD Euroclear Bank provides settlement in the Commercial Bank Money (CoBM). - European Multilateral Clearing Facility (EMCF), Amsterdam-based CCP, provides clearing services to trading venues across Europe (the UK, Hungary, and Scandinavia). ### Market discipline and crisis support measures - Market participants have access to essential financial information that is accurate and publicly available; investors are free to engage in financial contracts. - During the financial crisis several exceptional measures were taken, publicly disclosed, including a capital support scheme and a loan guarantee scheme to enable financial institutions to place loans under government guarantee. - Both schemes have sunset clauses and are intended to be wound down as soon as appropriate. ### Deposit insurance - The deposit guarantee scheme protects individual depositors up to € 100,000. - Currently the scheme is financed ex-post by the financial sector; plans are being developed to create an ex-ante scheme with risk-based premiums and a more rapid pay out process. ### Legal framework: Act on Financial Supervision (AFS) - The AFS came into force on January 1, 2007. - DNB’s regulatory framework comprises three levels: AFS (fundamental), orders in council and ministerial orders/decrees, and DNB-issued rules and policy guidelines. - The AFS consists of seven parts and three annexes covering general provisions; licensing and market access; prudential supervision (minimum solvency, liquidity, accounting, and reports); conduct of financial businesses; conduct of business in financial markets; supervision of providers of settlement services; and final provisions. ### Supervisory approach (FIRM methodology) - DNB’s supervisory approach is based on the Financial Institutions Risk Analysis Method (FIRM) methodology; the FIRM manual is publicly available on DNB’s website. - As part of the culture change project "VITA", FIRM tools will be improved to align with supervisory best practice. - DNB’s banking supervision consists of three elements: - (1) the base program; - (2) the risk identification program; and - (3) the risk-mitigation program. - Off-site examinations rely on standardized periodic returns: Common Reporting Program (COREP) and Financial Reporting Program (FINREP) reports; supplementary quantitative returns are required as necessary. - Standardized returns are certified each year by the institution’s external auditor; management letters from internal and external auditors are made available to DNB. - DNB has unlimited access to internal management information of each major bank. - The risk analysis process (RAP) consists of three layers: - The inherent risks of the individual bank; - Assessment of the quality of the control mechanism (internal control, governance, control functions, and the "3 lines of defence" model); - Residual risks from failures of management or internal control. - On-site inspections are thematic and risk-based for largest banks; frequency is determined by resources and risk analysis. - Supervisory processes are described in the quality manual (Handboek Kwaliteit–in Dutch only) and assessed via internal audits according to procedures in Section 9.6 of the quality manual. - On-site examination results are discussed with the bank, recorded in a senior management letter detailing required improvements; progress is monitored regularly and internal DNB evaluations are performed after each examination. ### Main findings (selected) - CP1 — Objectives, Independence, Powers, Transparency and Cooperation: - The AFS (2007) resulted in substantially improved clarity of mandates and objectives for supervisory authorities compared to 2004. - DNB and AFM have a clear understanding of their roles under the Twin Peaks system; cooperation and coordination functioned well, including during the crisis. - The AFS provides a larger role for the MoF than in many comparable systems: DNB has relatively limited rule-making authority since most regulation is in the AFS or ministerial decrees. - The AFS empowers the minister to overturn DNB rules deemed to constitute an "unreasonable administrative burden"; DNB may "lay down temporary, generally binding regulations in order to contribute to the stability of the financial sector" and must report such regulation to the MoF without delay. - The circumstances for invoking ministerial powers need closer definition, either by law amendment or a public non-exhaustive list from the MoF. - There may be a case for greater DNB involvement in rule-making to inform policy by enforcement experience. - The MoF has a role in approving DNB’s supervisory budget; the extent of MoF influence and the adequacy of supervisory resources (notably fewer FTEs devoted to banking supervision than to insurance or pensions) warrant a joint DNB–MoF review, including benchmarking against comparable countries. - DNB has an extensive range of legal sanctions and powers but has historically relied on "moral suasion"; the "VITA" culture change project aims to encourage fuller use of formal powers. - The AFS provides adequate legal protection to individual DNB staff; limitation of liability for the regulatory agencies is not a CP component and the team is satisfied the relevant CP is fully complied with. - CPs 2–5 — Licensing and Structure: - The AFS clearly defines permissible banking activities and prohibits unlicensed use of the word "bank". - Licensing conditions are set out in the AFS and the Decree on Prudential Regulation (DPR); DNB has discretion to assess conditions, including owners and senior management being "fit and proper". - A change in the AFS is being prepared to replace separate fitness and properness assessments with a single suitability assessment covering fitness, properness and other relevant facts/circumstances. - The AFS provides for DNB or, in certain cases, the minister of finance to issue a "declaration of no objection" for significant changes in control or acquisitions; DNB undertakes detailed scrutiny of such applications. - CPs 6–18 — Prudential Regulation and Requirements: - Capital adequacy rules are based on Basel II as transposed by the CRD, covering credit, market, and operational risks. - The DPR and DNB rules closely follow CRD requirements; the Netherlands generally did not adopt higher national standards where possible, with one exception: - DNB enforces a de-facto maximum limit of 25 percent of hybrid capital instruments in Tier 1 (the CRD imposes a 50 percent limit). - Netherlands legislation provides the full range of options for advanced and standardized approaches under the CRD; banks face detailed assessments before adopting advanced approaches for credit, market, and operational risks. *Source: _cr11206 - 25. The recent financial crisis has put severe pressure on financial stability and the* ### 56. The standard Pillar 1 minimum solvency ratio for all banks is 8 percent. In ### _cr11206 - 56. The standard Pillar 1 minimum solvency ratio for all banks is 8 percent. In ### Capital adequacy and ICAAP - The standard Pillar 1 minimum solvency ratio for all banks is 8 percent. - In practice, banks operate at capital levels that are much higher than the legal minimum. - DNB sets capital requirements on a bank-by-bank basis using an assessment methodology that builds on the Basel II, Pillar 2 process. - Banks are required to develop their own Internal Capital Adequacy Assessment Program (ICAAP), which is assessed against independently developed supervisory benchmarks. - DNB requires banks to engage in regular stress-testing exercises and conducts an annual macro stress test of its own. ### Supervisory assessment, reporting, and off-site supervision - Banks’ compliance with prudential requirements is assessed through: - Regular supervisory returns based on the standard format developed by the CEBS. - Regular on-site contacts with bank management and risk control functions. - Increasing use of thematic examinations by expert teams. - DNB makes substantial use of banks’ internal management reports for off-site supervision. - Current standardized data collection limitations: - Amounts of data collected in standardized form are relatively limited (e.g., there is no standardized reporting of nonperforming assets). - Reporting is at different reporting dates, making comparative or aggregate analysis (stress tests) difficult. - Standardized data is mainly at the consolidated level and does not contain sufficient solo reporting for “relevant entities” that are part of the consolidation group. - Recommendations: - Introduce more standardized and more granular reporting to facilitate macroprudential analysis. - Extend standardized reporting to include sufficient solo reporting for relevant entities. - The required extension of the supervisory reporting framework may imply that DNB’s legal powers to collect data need to be extended. ### On-site inspections and supervisory techniques - On-site inspections: - Are not held according to a fixed schedule. - Frequency of visits to individual banks is determined according to available resources and risk analysis. - Examination findings are discussed with the bank and recorded in a senior management letter. - Largest banks: - Comprehensive on-site examinations are not conducted on the largest banks. - Largest banks are subject to thematic risk-based examinations on specific aspects (governance structure, risk management, asset and liability management, internal audit, integrity and compliance, IT). - Recommendation: - Supplement thematic examinations with periodic broader scope examinations to gain a comprehensive understanding of the interaction of risks within a financial group. ### Risk-assessment framework and macroprudential integration - DNB’s supervisory approach is risk-based, drawing on a comprehensive risk analysis framework, FIRM, and an associated RAP. - FIRM methodology is under review to reflect lessons from the financial crisis. - Pre-crisis shortcomings: - Risk-assessment methodology did not adequately identify systemic vulnerabilities such as increased leverage, increased reliance on wholesale funding, and acquisition of substantial portfolios of structured securities. - Measures being adopted: - Closer integration of macroprudential and microprudential supervision. - Project “VITA” to enhance intrusiveness of supervision and ensure adequate follow-up and enforcement actions (“conclusiveness”). ### Liquidity rules - DNB has had a comprehensive set of liquidity rules since 2003. - These rules are being enhanced in light of lessons from the crisis and will be amended to incorporate recommendations contained in Basel 3. - Current reporting limitation: - Reporting forms do not distinguish between liquidity in the major currencies (reporting is in euros only). - Recommendation: - Amend DNB’s standardized liquidity report to permit analysis according to major currencies. ### Problem assets, provisioning, and accounting - DNB does not set specific rules with respect to problem assets, provisioning and reserves. - The level of required provisions is set according to the Expected Loss (EL) estimates calculated in accordance with the Internal Ratings Based approach under Basel II/Capital Requirements Directive (CRD). - The EL methodology does not conceptually distinguish between provisions and capital; required capital increases in line with increasing EL (in accordance with Basel II/CRD). - Provisioning policies: - Set on an individual bank basis in compliance with IFRS or the DCC that broadly conforms to IFRS. - The primary responsibility for assessing the adequacy of provisions resides with the external auditor. - Assessment and recommendation: - Reliance on accounting standards for loan valuation and provisioning may be reasonable given high levels of competency and integrity in the Dutch accounting profession. - The supervisor should aim to provide guidance on the definition of default and outline expectations concerning the level of provisions appropriate when assets are impaired. ### Exposure to related parties - DNB does not set any specific limits on exposures to related parties. - DNB’s position: - Argues that provisions of the AFS Section 3:17 provide an adequate legal basis for controlling related party lending, though this section does not make specific reference to such lending. - The definition of a related party is based on the Dutch Commercial Code. - Uses “moral suasion” to ensure transactions are appropriately arms length. - Observations and recommendation: - Assessors found no evidence that related party lending is, or has been, a significant issue in the Netherlands. - For purposes of full compliance with CP11, DNB needs to put in place a more formal framework of limits and prohibitions on lending to related parties. - DNB adopts a principles-based approach aimed at addressing conflicts of interest and preventing abuse arising from exposures to related parties, rather than detailed formal requirements. - Maximum limit for intra group transactions is set at 25 percent. ### Corrective, remedial, and resolution powers - The AFS provides DNB with a comprehensive set of intervention powers. - Historical practice: - DNB has often preferred “moral suasion” rather than invoking formal enforcement measures. - Moral suasion has become less effective in recent years due in part to changes in structure and ownership of the Netherlands financial system. - DNB actions: - Recognized shortcomings and embarked on project VITA to make supervision more “intrusive and conclusive.” - Recommendation: - Ensure supervisory staff are fully aware of the legal powers available and prepared to use them when necessary. - Resolution powers: - DNB currently does not have the full range of instruments necessary to conduct orderly resolution of banks without shareholder approval. - DNB is empowered to give directions or appoint a special administrator to a problem bank but lacks instruments to force an orderly resolution without shareholder approval. - MoF and DNB are jointly working on legislation to introduce additional crisis management tools, including the option of transferring deposits of a failing bank to another bank. - The assessment team supports and encourages DNB and MoF to finalize this work as soon as practicable. ### Consolidated and cross-border supervision - DNB undertakes banking supervision on both a consolidated and a solo basis in accordance with the CRD. - Supervisory activities performed on both consolidated and solo basis include quarterly returns, capital adequacy calculations, large exposures, exposures to related parties, and the supervisory review process. - DNB possesses extensive information-gathering powers with respect to subsidiaries and affiliated companies and can review overall activities of a banking group, both domestic and cross-border. - Cooperation mechanisms: - Memoranda of understanding (MoUs) with foreign supervisors or colleges of supervisors facilitate exchange of information. - There are currently 14 colleges in place for banks, banking groups or financial conglomerates; they have regular exchanges and meet at least once a year. - For eight of the largest cross-border banks, a multilateral written agreement is signed between members of the respective colleges providing further formal arrangements for home and host supervisors. - Observations and recommendation: - There have been examples where DNB appears to have relied heavily on host supervisor supervision. - DNB may wish to consider strengthening resources devoted to oversight of subsidiaries located outside the Netherlands and strengthen practices and procedures for obtaining relevant information on their operations and group risks. - Resource constraints under the risk-based approach may have contributed to reliance on host supervisors. ### Summary compliance highlights (selected from Table 1) - CP 1 (Objectives, independence, powers, transparency, and cooperation): Grading C — The authorities comply with this CP. - CP 1.2 (Independence, accountability and transparency): Grading LC — The AFS gives the MoF a substantial role in rule-making and powers to overturn DNB rules; circumstances need more precise specification for transparency. - CP 6 (Capital adequacy): Grading C — The minimum solvency ratio is 8 percent; DNB sets bank-by-bank requirements using Basel II. - CP 9 (Problem assets, provisions, and reserves): Grading C — DNB does not set specific rules; provisioning policies set on an individual bank basis in compliance with IFRS and DCC; supervisor should consider guidance on definition of default and provisioning expectations. - CP 11 (Exposure to related parties): Grading LC — Informal but generally effective approach; specific rules on limits and prohibitions needed for full compliance. - CP 14 (Liquidity risk): Grading C — Comprehensive liquidity rules since 2003; reporting currently in euros only; recommendation to standardize liquidity reports by major currencies. - CP 19 (Supervisory approach): Grading C — Authorities comply; pre-crisis methodology did not adequately identify systemic vulnerabilities; measures taken to address shortcomings. - CP 21 (Supervisory reporting): Grading LC — Reliance on internal management reports limits standardized data; needs more standardized and granular reporting and sufficient solo reporting. *Source: Excerpt from the IMF assessment document provided in the content unit.* ### 22. Accounting and disclosure C The authorities comply with this CP. ### _cr11206 - 22. Accounting and disclosure C The authorities comply with this CP. ### Accounting and disclosure - Assessment: C — The authorities comply with this CP. ### Corrective and remedial powers of supervisors - Assessment: LC. - Findings: - The law provides DNB with a comprehensive set of intervention powers. - In practice, DNB has preferred to employ “moral suasion” rather than formal enforcement actions. - DNB recognizes that moral suasion is becoming increasingly ineffective and has an internal project underway to ensure formal powers are more widely used. - The AFS does not provide DNB with a full range of resolution tools (example: cannot impose restructuring on a bank without shareholder approval). - A joint MoF/DNB project is developing amendments to the legislation to provide for a full range of powers. ### Consolidated supervision - Assessment: LC. - Findings: - DNB has the necessary legal and regulatory powers to apply effective consolidated supervision of cross-border banking groups. - There have been examples where DNB appears to have relied to a large extent on supervision exercised by host supervisors. - Supervision of large, diversified cross-border groups could be intensified to the degree of intensive scrutiny that their risk profiles warrant. - Constraints on supervisory resources (noted in relation to CP 1(2)) may have contributed to reliance on host supervision. - Recommendation: - DNB may wish to consider strengthening the resources it devotes to oversight of subsidiaries located outside the Netherlands and its practices and procedures for obtaining relevant information concerning their operations and the risks they pose to the group. ### Home‑host relationships - Assessment: C — The authorities comply with this CP. ### Principle 1 — Objectives, independence, powers, transparency and cooperation - Assessment: Compliant. - Description summary: - The Dutch system assigns prudential supervision to DNB and conduct-of-business supervision to AFM (the Twin Peaks model). - Relevant legislation includes the Bank Act of 1998 and the Act on Financial Supervision (AFS) which came into effect in 2007. - Sections 1:24 and 1:25 of the AFS assign responsibilities to DNB and AFM respectively; Sections 1:46–1:50 and 1:54 determine collaboration. A covenant between DNB and AFM arranges cooperation and information sharing. - DNB’s “Open Book” section on its website contains links to relevant legislation, implementation of European directives, fact sheets, publication of enforcement measures, criteria for market access, and a description of the supervisory method (the “FIRM-method”). - Under the AFS there are 19 decrees, 19 ministerial decrees, and 12 supervisory regulations. DNB issues policy supervision rules containing guidance and best practice. - Banking regulation is regularly updated (example: “Reparatiebesluit Wft” effective January 1, 2009). First amendment submitted to parliament in August 2009; further amendments planned at one or two year intervals. - DNB publishes information on financial strength and industry performance on its website, including supervisory information about balance sheets and profit and loss accounts. - Supervisory programmes are determined on a risk-based assessment of financial risks (probability and impact), which determines the supervisory program for each financial institution. ### Principle 1(1) — Responsibilities and objectives - Findings: - EC 1: DNB’s duties and powers follow from the Bank Act 1998 and the AFS (2007). Section 4(1) Bank Act: DNB tasked with supervision; Section 3(2) Bank Act: contribution within ESCB to financial supervision policies and stability. - EC 2: Credit institutions fall under AFS; DNB is main and primary supervisor for market access, licensing and financial regulation; AFS contains implementation of the capital requirement directive. - EC 3: Technical changes incorporated (example: “Reparatiebesluit Wft” effective January 1, 2009); DNB sends an annual letter to the Minister of Finance indicating legislation to be taken up or amended. - EC 4: DNB publishes financial market and institution information, financial stability indicators, household financial position, balance of payments, and IMF SDDS statistics. - AC 1: Supervisory programmes are assigned on the basis of a risk-based assessment. - Assessment: Compliant. ### Principle 1(2) — Independence, accountability and transparency - Assessment: Largely Compliant. - Findings on independence: - EC 1: DNB is fully independent in operational activities as embedded in the AFS. - Section 1:24 Paragraph 2: DNB may exercise supervisory activities and decide on admission of financial enterprises. - Section 1:29: the Minister can only revoke DNB binding regulations if contrary to law/treaty/binding decree or if they impose an unreasonable burden on financial markets; supervisor must have failed to remove shortcoming after consultation. Exceptional ministerial measures under AFS Section 1:43; these powers have never been exercised and would be subject to public disclosure. - Governing board appointments: members appointed by the crown for renewable terms of seven years (Section 12(3) Bank Act 1998: suspension/relief only for failure to meet conditions or serious misconduct). - Budgetary independence: - Section 1:32: minister may lay down rules on budget structure. Priorities and allocation determined by DNB. Budget discussed with supervisory board and sent to Minister of Finance and Minister of Social Affairs and Employment. Ministers can withhold approval if contrary to law or public interest (Section 1:30 Paragraph 5). Notification required if substantial differences arise during year (Section 1:31). - Dialogue with Minister of Finance on budget size; consequences of recent action plan for adequacy of resources under consultation with Minister of Finance. - Accountability: - EC 2: DNB must draw up an accounting report at year end (Section 1:34 Paragraph 1) accompanied by auditor statement; ministers approve unless contrary to law or public interest. Budget and annual report available on DNB website. - Human resources and capability: - EC 3: DNB staff metrics: average age in BSD is 41 years; eight years of working experience with DNB; yearly average of 90 budgeted training hours per employee. - DNB staff have high analytical skills and academic qualifications; DNB Supervisory Strategy 2010--2014 highlights focus on application of analysis. - Funding and compensation: - EC 4: Cost of supervision paid by supervised entities and MoF; industry pays on average three quarters of the budget. Section 1:39: industry consulted in budget preparation but does not have ultimate decision-making power. Salary scales based on agreement negotiated in accordance with collective benefit agreement of the banking sector. - Observations and recommendations: - Observation: The law provides broad grounds for Ministerial intervention (e.g., “unreasonable burden on the financial markets” and “public interest”), which could be open to misuse; assessment team suggests more precise definition of grounds either in law or by a public MoF statement of non-exhaustive circumstances. - DNB authorized by law to “lay down temporary, generally binding regulations in order to contribute to the stability of the financial sector.” Such regulation must be reported to MoF without delay. - DNB is exempted from the Dutch Independent Administrative Authorities Act (ZBO’s) provision allowing minister to set policy rules for independent administrative authorities. - Resource observation: Resources devoted to banking supervision do not appear proportionate to the size and complexity of the supervisory task. Netherlands banking system is one of the largest in the world relative to GDP and contains large, diversified, internationally active financial conglomerates. - DNB devotes fewer FTE posts to banking supervision than to insurance or pensions supervision. - Recommendation: DNB and MoF should jointly conduct a review of the adequacy of human resources devoted to banking supervision, for example by benchmarking against other countries with banking systems of comparable size and complexity. - AC 1: MoF has recently announced legislation to change governance aspects at DNB (strengthening role of supervisory board Raad van Commissarissen (RvC); RvC to have supervisory tasks regarding supervisory policy; Governing Board appointments renewable only once, determining total tenure minimum of 7 years and maximum of 14 years). Note: this AC had not been enacted at time of assessment and was not part of the CP assessment. ### Principle 1(3) — Legal framework - Findings: - EC 1: AFS assigns DNB sole authority to grant and withdraw licenses to pursue the business of a credit institution in the Netherlands. - Section 2:11 AFS: no person may carry on the business of a bank without being authorized by DNB. *Source: _cr11206 - 22. Accounting and disclosure C The authorities comply with this CP.* ### Section 2:12 determines the provisions to which an applicant will have to apply. The aspects ### _cr11206 - Section 2:12 determines the provisions to which an applicant will have to apply. The aspects ### Aspects listed in Section 2:12 - Expertise - Properness of persons - Policy on the sound conduct of business - Minimum number of persons determining day to day policies - Control structure - Operational structure - Minimum number of members of the supervisory board - Consolidated supervision - Minimum equity capital - Solvency - Liquidity ### DNB rulemaking and consultation - Within the AFS and EU legislation, DNB has the power to set prudential rules regarding the aspects in Section 2:12. - DNB has a long-standing practice of consulting drafts of new regulations with the industry. - DNB has ultimate decision-making power and does not need sector consent. - Consultations and industry reactions are publicly available in the ‘Open Book’ section of DNB’s website. ### DNB supervisory information and powers (AFS references) - AFS Section 1:72: employees of DNB have supervisory powers as defined by the General Administrative Law Act (“Algemene wet bestuursrecht”, Awb). - AFS Section 1:74: DNB, as an entity, may request information from any party for supervision of compliance with AFS rules. - Assessment: Compliant. ### Legal powers to take action (Principle 1(4)) - DNB instruments under the AFS (explicit formal measures and references): - Issuing an instruction to adhere to a particular line of conduct (Section 1:75). - Appointing a special administrator (Section 1:76). - Imposing an order for incremental penalty payments (Section 1:79). - Imposing an administrative fine (Section 1:80). - Requesting the court to declare emergency regulations applicable with respect of the credit institution (Section 3:160). - Issuing a public warning (Section 1:94). - Deciding that a particular auditor or actuary is no longer authorized to issue the statements referred to in this Act in relation to that financial enterprise (Section 1:78). - Modifying, withdrawing or limiting, either fully or in part, or attaching further conditions to the license (Section 1:104). - Bringing criminal proceedings against the offender. - Section 1:28: enables DNB to lay down temporary, generally binding regulations in special circumstances to contribute to financial sector stability. - AFS Section 1:73 in conjunction with Section 1:74: empowers DNB to access any information deemed necessary, including banks’ Board, management, staff, and records. - Custodian appointment: If non-compliance (Section 1:76, Paragraph 1) or signs jeopardizing own funds, solvency, or liquidity (Section 1:76, Paragraph 3), DNB may appoint a custodian. - DNB practice: - Decisions between formal and informal instruments depend on multiple factors and qualitative judgment; “moral suasion” may be used but formal measures are available. - DNB and AFM issued a common paper (“Nota handhavingsbeleid”) on enforcement policy. - Assessment: Compliant. - Comments: DNB introduced internal project “VITA: From Analysis to Action” to enhance willingness to use legal powers; assessment team encourages full use of AFS-provided legal powers. ### Legal protection for supervisors (Principle 1(5)) - No explicit statutory provision in AFS or other law providing absolute protection for DNB or employees against third-party claims for damages. - Volume 6, Chapter 3 of the DCC contains conditions for honoring third-party claims for imputable and culpable actions or negligence; interpreted restrictively in case law and literature, making supervisor liability difficult to establish in practice. - Section 6:170 DCC: employer liable for actions of employees — employees of supervisory authority enjoy legal protection against liability suits connected with supervisory activities. - Ministries exploring possibilities to limit financial liability of DNB and AFM by explicit legislative limitation. - Assessment: Compliant. - Comments: Assessment team satisfied that individual staff are adequately protected for this CP component. ### Cooperation and confidentiality (Principle 1(6)) - AFS Part 1.3 dedicated to domestic and international collaboration. - AFS Part 1.3.1: national coordination between DNB and AFM (Sections 1:46–1:50, 1:54); covenant in place; regular formal and informal meetings; evaluation of collaboration three years after AFS inception (report available at MoF). - Report conclusion: practical cooperation between supervisors effective; financial institutions do not experience major problems. - AFS Part 1.3.2 and 1.3.3: collaboration with other EU Member States and non-Member States; exchange of data and information (1:51–1:54; 1:65), compliance (1:55–1:57; 1:66), enforcement (1:57–1:59; 1:67–1:68). - DNB has concluded 37 MoU’s with relevant EEA and non-EEA supervisors. - Supervisory colleges: - 14 colleges in place for banks, banking groups or financial conglomerates; regular exchange of information, conference calls and meet at least once a year. - Confidentiality: - AFS Section 1:89: information received by DNB from financial institutions is to remain secret. - Derogations permit supply of confidential information to supervisors of other EU Member States (1:90) or non-Member States (1:65) under conditions, including guarantees of professional secrecy at least equivalent to Dutch standards and use for supervisory tasks. - AFS Section 1:89 empowers DNB to refuse any demand for confidential information in its possession. - AFS Section 1:42, Paragraph 7: Government Information (Public Access) Act, National Ombudsman Act and Title 9.2 of the General Administrative Law Act shall not apply to data held by the Minister or third parties working on his instructions. - Assessment: Compliant. ### Permissible activities and name usage (Principle 2) - AFS Section 1:1 defines “bank”: institution that obtains disposal of callable funds beyond a restricted circle from parties other than professional market parties and extends loans at its own expense. Separate definitions for “restricted circle”, “callable funds” and “professional market party”. - Through licensing, DNB controls full scope of activities of a credit institution, including Annex I CRD activities and others. - AFS Section 3:32: licensed Dutch banks allowed to carry out at least activities listed in Annex I to the CRD, unless license states otherwise; universal bank concept. - Corporations/institutions without credit institution license are prohibited by AFS Section 3:7 from using the word ‘bank’ and derived forms/translations, except where context clearly shows non-financial market operation. - DNB actively searches for unlawful unlicensed activity; sanctions include administrative fine, cease and desist, or prosecution under the Economic Offences Act. - DNB can grant dispensation under AFS Section 3:7 subsection 4. - AFS Section 3:5: receiving repayable funds on demand (deposits) may only be carried out by licensed banks (Dutch-licensed, EEA-licensed, or institutions receiving funds via offering securities to the public under AFS). - AFS Section 1:107: all banks with a DNB license entered in a public register listing permitted activities if restricted. - Assessment: Compliant. ### Licensing criteria and process (Principle 3) - DNB is licensing and supervisory authority for banks with registered office in the Netherlands (AFS Section 2:11). AFM competent for conduct-of-business aspects and investment activity elements (AFS Section 1:48); AFM assessment incorporated into DNB decision. - Detailed criteria in AFS Sections 2:12 and 2:13; DNB has discretion within general administrative law. - Same criteria apply on an ongoing basis; DNB can withdraw license (AFS Section 1:104). - Section 2:12 AFS: license granted if criteria in 2:12 (1) (a) through (k) met. Further detail in Decrees and Regulations; incomplete applications rejected. - DNB conducts extensive dialogue with applicants; assesses qualifying holdings (10 percent or more) under Section 3:95 requiring declaration of no-objection; refusal of declaration leads to refusal of bank license (Section 2:12 (2)). - Minimum capital requirement: banks must hold minimum ‘own funds’ of EUR 5 million (Section 3:53 AFS and Section 48 of the DPR). - Fitness and properness requirements for management and supervisory board: AFS Sections 3:8 and 3:9; procedures for conflicts of interest (AFS Section 3:10); DPR contains further provisions. - Business plan requirement: projection covering at least three financial years (Section 8 (1)(f) of the Decree on Market Access under the AFS — BMT); must detail control structure, administrative organisation, financial administration and internal control (AFS Sections 3:17 and BMT Section 8). DNB assesses solvency, liquidity, administrative organisation and internal control. - Branches and cross-border: branches of non-EEA institutions must meet similar criteria; branch bookkeeping separate (AFS Section 2:21); written statement by foreign supervisor required. EEA institutions may obtain a “passport” (AFS Sections 2:14 and 2:18). - License withdrawal if information/documents were incorrect or incomplete to an extent that decision would have differed (Section 1:104 (1) (b)). - Supervision assumes collective responsibility of management board for organisational and risk control measures. - Additional assessments and practices: - AC 1: assessment includes ability of shareholders to supply additional financial support; no firm AFS obligation for shareholder support but often addressed via letters of comfort or discussions. - AC 2: DNB monitors progress of new entrants against business and strategic goals and performs feasibility studies on those goals. - Assessment: Compliant. - Comments: Draft Policy Rule on fitness and propriety issued for public consultation on 1 September 2010; expected entry into force January 1, 2011. Legislative change planned to replace fitness and properness assessments with a single suitability assessment (covering fitness, properness, and other circumstances), proposal expected to be submitted to Parliament soon. ### Transfer of significant ownership (Principle 4) - AFS Section 3:95: qualifying holding requires obtaining a “declaration of no-objection” from DNB (or Minister of Finance in certain cases). - DNB (or Minister) will issue declaration unless acquisition would: - lead to influence running counter to sound and prudent banking policy (Section 3:100 (a)); - lead to inclusion in a group whose control structure lacks transparency impeding supervision (Section 3:100 (b)); - lead to undesirable development of the financial sector (Section 3:100 (c)). - Qualified shareholding defined (AFS Section 1:1) as: - interest of 10 percent or more in share capital (threshold increased from 5 percent since previous FSAP and now includes group-declaration of no-objection); - right to exercise 10 percent or more of voting rights; - form of control comparable to above. - Acquisitions Directive (2007/44/EC) entered into force September 5, 2007; implementation due March 21, 2009 but not yet achieved in Netherlands law; DNB uses Acquisitions Directive procedure since March 21, 2009 in practice. - Acquisitions Directive–aligned assessment criteria (to be reflected in AFS amendment) include: - reputation of proposed acquirer; - reputation and experience of any person who will direct business post-acquisition; - financial soundness of proposed acquirer in relation to envisaged activities; - ability of financial institution to comply on an ongoing basis with applicable prudential requirements, including group structure allowing effective supervision and information exchange; - reasonable grounds to suspect money laundering or terrorist financing related to the acquisition. - Notification obligations (AFS Section 3:103): - holders obliged to inform DNB when holdings reach, exceed, or fall below 10, 20, 33, 50, 95, or 100 percent. - banks must inform DNB annually of identity of every person holding a qualifying holding and report changes causing thresholds (10, 20, 33, 50, 95, 100 percent) or change in subsidiary status as soon as informed. - DNB may attach restrictions or conditions to declarations (AFS Section 3:104 (1)); may impose penalties for holdings without declaration (AFS Section 1:80 and 1:79); may request District Court to nullify shareholder decisions made without mandatory declaration (AFS 3:104 (2)); may attach restrictions, conditions, or revoke existing declaration if circumstances change (AFS Section 3:105 (4)). - AC 1: banks and/or external auditors must notify DNB of material issues negatively affecting bank operations. - Assessment: Compliant. - DNB practice evidence: - DNB granted 78 declarations of no-objection for qualifying holdings in banks and 384 declarations in total for 2009. ### Major acquisitions and bank actions requiring prior approval (Principle 5) - AFS Section 3:96: banks must obtain a ‘declaration of no-objection’ before engaging in specified activities, including: - reducing equity capital through dividend or reserve distributions; - acquiring/increasing a qualifying holding in another financial institution where value exceeds 1 percent of bank’s consolidated balance sheet total; - acquiring/increasing a qualifying holding in a non-financial enterprise if value exceeds 1 percent of bank’s consolidated equity total; - acquiring assets or liabilities which in value exceed 1 percent of bank’s consolidated balance sheet total; - a merger with a company whose balance sheet total exceeds 1 percent of the bank’s consolidated balance sheet total; - financial or corporate reorganisations; - allowing a general partner to accede to the bank if the bank is a limited partnership. - Establishment of foreign subsidiaries (separate legal entity) and foreign branch-offices distinguished: - foreign subsidiary establishment subject to declaration of no-objection per Section 3:96 (1) (b) or (c); - branch-office regulated by Section 2:108 (EEA) and Section 2:111 (non-EEA); prior DNB approval required for both types. - CRD provides specific procedural rules for establishing a branch office in an EEA member state. - Assessment criteria for bank declarations of no-objection set out in AFS Section 3:101; declaration granted unless proposed activity would conflict with capital requirements (text continues in source beyond provided excerpt). - Assessment: (implicit in source) compliant status of framework and procedures described. *Source: _cr11206 - Section 2:12 determines the provisions to which an applicant will have to apply. The aspects* ### Section 3:57; ### Section 3:57; ### Declarations of no-objection, branches, and acquisitions - DNB may prohibit the establishment by Dutch banks of foreign subsidiaries or joint ventures in a particular country if the flow of supervisory information from that country is likely to be insufficient under local legislation or other regulations. - Establishment of a branch office of a bank is regulated through a different procedure than a declaration of no-objection. The main assessment criterion is that from the outset, adequate financial and organisational resources are in place at the respective bank to manage the proposed activities deployed in such foreign branch office as set out in AFS Sections 2:109 and 2:111. - Should the proposed activity concern a full acquisition/obtaining a qualifying holding by a bank in another bank/financial institution in an EEA member state the Acquisitions Directive would be the regulatory framework under which the assessment would take place. An integral part of the assessment procedure is the obligation to co-operate between the respective competent supervisors (home or host). - The EU Acquisitions Directive primarily covers qualified shareholdings in financial institutions; there could be overlap if an acquisition is made by a bank in another bank/financial institution in another EEA member state. In such case the Acquisitions Directive would take priority over national laws as provided in the proposal for implementation of the Acquisitions Directive in the AFS. - DNB may attach restrictions and/or conditions to a declaration of no-objection in accordance with AFS Section 3:104(1) if assessment of criteria in AFS Section 3:101 identifies issues/risks. Restrictions/conditions may be imposed where rejection would be disproportionate. - DNB may, in accordance with AFS Section 3:105, attach restrictions and/or conditions to an existing declaration of no-objection or revoke such declaration if circumstances occur or facts become known that would have resulted in a different assessment. - Should a bank granted a declaration of no-objection not comply with the relevant provisions of the AFS, DNB has the authority to give an instruction (aanwijzing) to have the bank act in compliance with the AFS. - Enforcement measures for (the absence of) declarations of no-objection for the activities mentioned are available to DNB; for the enforcement measures see CP 4 (above). - AC 1: For acquisition of a significant shareholding in a bank in a non-EEA member state, the assessment generally requires the supervision in such other country to be reviewed. See descriptions under CP 24 and 25 for consolidated supervision and international co-operation. ### Capital adequacy (Principle 6) — findings and supervisory framework - Assessment: Compliant. - Description highlights: - All banks with registered office in the Netherlands are required to calculate and report their solvency level on a quarterly basis in accordance with rules laid down in DPR chapter 10. No distinction is made between internationally active or domestic institutions. - All banks must submit supervisory returns except for those benefiting from a guarantee provided in accordance with Section 403 of the DCC by a parent company that in itself is subject to consolidated supervision. - AFS Section 3:57 and DPR Section 60 require banks to maintain a minimum solvency level of 8 percent. - Rules on the calculation of risk weighted assets: DPR Sections 60a-64. - Rules on the composition of eligible capital: DPR Sections 89-94. - These rules are based on the EU CRD and are compliant with the Basel II standards. - The ‘Supervisory Regulation on the Recognition of Hybrid Instruments as Regulatory Capital Components’ implements the Basel Press Release of October 1998 for hybrid instruments. - Legal maximum of non-core elements (e.g., hybrids or preference shares) in Tier 1 capital is 50 percent; the de facto maximum enforced by DNB is 25 percent (see Section 4:2 of the Hybrid Regulation). - Pillar 1 / Pillar 2 framework: - EC 3: The standard pillar 1-minimum solvency ratio for all banks is 8 percent (DPR Section 60 (1)). In practice, banks operate at capital levels much higher than the legal minimum. - AFS Section 3:111a gives DNB authority to impose a higher capital charge, pursue a specific provisioning policy or limit the risk profile of the institution if DNB determines the institution cannot ensure its business is conducted in a controlled and sound manner. DNB can impose a higher capital charge based on SREP conclusions. - Each bank required to submit a quarterly solvency report is subject to an annual pillar 2-assessment reviewing the entire risk profile, composition and amounts of required, available and economic capital, and capital management quality. - Banks are required to have a sound ICAAP; ICAAP includes setting capital adequacy targets in excess of minimum requirements. DNB’s SREP-panel reviews ICAAP quality and outcomes. - In some cases where internal targets were insufficient, a formal higher minimum ratio has been imposed and these banks were prohibited from distributing earnings. - Forward-looking and stress-testing requirements: - AC 3: DPR Section 24a and ICAAP principle 8 require ICAAP to be forward-looking. Since 2008 stress testing has been an integral part of discussions; banks must demonstrate solvency under severe but plausible stress scenarios. - DNB’s board ruled that even under a stress scenario set by DNB, banks should still be able to maintain a minimum Tier 1 ratio of 6 percent. Banks unable to meet this test were required to raise fresh capital or were prevented from dividend payments. - Supervisory powers when solvency is endangered: - EC 6: Under AFS Sections 1:75 and 1:76 DNB may issue instructions on the course of action or appoint a special administrator if developments may jeopardise solvency (or liquidity). - Model validation and supervision: - EC 7: DPR and DNB policies contain detailed requirements for internal risk models. All models used for regulatory capital calculation need DNB validation before use; regular supervisory inspections ensure ongoing compliance and closure of non-material gaps. - Consolidation and scope: - AC 1, 2: No distinction between internationally active and domestic banks. Capital regulation and scope of consolidation comply with Basel requirements. The Policy Rule “Scope of consolidated and solo-supervision for banks and securities firms” details entities within/outside solvency regulation. - Banking entities benefiting from a 403-guarantee by a parent company subject to consolidated regulation are usually not tested stand-alone, but these are exceptional; most banks are subject to stand-alone capital adequacy assessments. - Parent banking companies with international activities are subject to regular standalone capital adequacy testing as free transferability of capital cannot be assumed. - Capital distribution across groups: - AC 4: Policy Rule on Pillar 2 requires reporting on distribution of required, available and economic capital throughout the group. This has led to discussions and redistribution of capital to better align local capital with local risk profiles. - AC 5: No legal or practical impediments for supervisors to require capital above the minimum. ### Risk management process (Principle 7) — supervisory expectations - Assessment: (implied Compliant within surrounding text). - Description highlights: - DPR Paragraph 4.2 (“Risk Management”) pursuant to AFS Section 3:17 requires banks to have adequate policies, systems, and procedures to identify, measure and manage their risks. - DPR Chapter 4 “Controlled pursuit of the business operations” sets high level standards for qualitative requirements on risk management, organization and control for all types of risk. - An independent risk management function is required to systematically identify, measure and manage risks. - Based on principle-based standards, more detailed guidance is used in supervisory practice. - Supervisory approach: - It is up to the bank to justify why a particular risk management framework is adequate for its type of business and it is the role of DNB to assess the adequacy of this arrangement. - DNB’s assessment of the risk management framework is a central component of its supervisory process. *Source: _cr11206 - Section 3:57;* ### Section 403 of Book 2 of the DCC determines under what conditions an entity may be exempted from the ### _cr11206 - Section 403 of Book 2 of the DCC determines under what conditions an entity may be exempted from the ### Section 403 (DCC) exemption - Section 403 of Book 2 of the DCC determines under what conditions an entity may be exempted from the requirement to establish annual accounts according to the provisions of the DCC. - One of these conditions is that another entity (i.e., the parent company) is severally liable for obligations stemming for the entity’s legal actions. ### Supervisory assessment of risk management (DNB) - DNB evaluates the functioning of risk management on an on-going basis through: - regular meetings, - targeted examinations, - analysis of reports. - Assessment includes the ability of the risk manager to provide sufficient countervailing power to the business. - Functioning of risk management is assessed when examining a specific risk category (e.g., credit or liquidity risk). - Overall assessment of risk management is taken into account when performing the SREP. ### Key risk-management assessment issues - DNB’s assessment focuses on whether: - the Board is responsible for risk management and is capable of this task; - risk culture or risk awareness exists in the bank; - the risk management function is independent; - the risk management function has access to senior management and the Board; - a holistic approach to risk management is applied; - risk appetite is set by top management, based on the business strategy and chosen business model, translated into adequate policies and a limit setting structure; - risk reporting to senior management and the Board is in place; - models and methods used by the bank to measure risks are reviewed, including independent validation of models; - major initiatives regarding the risk profile and/or the risk management framework are discussed. - Non compliance is enforced with reference to AFS Section 3:111a and DPR 23. ### Market, credit and operational risk: model frameworks and new products - DNB performs periodic evaluations of frameworks governing risk models, assessing: - internal validation, - regular monitoring, - reviews of models. - EC 8: New products do not need to be reviewed by DNB ex-ante; new products are discussed through risk management reports and regular meetings with senior management. Examinations are conducted when product approval processes are identified as an area of risk. ### DPR requirements and supervisory assessments (AC references) - AC 1: DPR Section 23(6) requires that the financial undertaking has an independent risk management function that carries out independent risk management in a systematic manner aimed at identifying, measuring and evaluating risk for the undertaking or branches and separate business units. - Explanatory notes to the DPR: the structure of the risk management function should depend on the size and complexity of the undertaking; larger and more complex banks customarily have independent risk management units. - In practice: all complex banks are expected to have specific units for risk management of material risks. ### Stress testing, ICAAP and pillar 2/SREP - AC 2: On a yearly basis a macro stress test is conducted by DNB. - Banks are expected to conduct rigorous, forward looking bank specific stress tests as part of their own risk management; this is evaluated annually as part of the SREP or at a higher frequency if necessary. - AC 3: Other material risks are taken into account in an institution’s ICAAP, based on AFS Section 3:111a and DPR Section 23. ### Principle 8 — Credit risk (assessment: Compliant) - DPR Section 24a requires banks to have adequate strategies and procedures to align own funds with current and potential risk profile. - DPR Section 23a requires banks to: - establish procedures regarding acceptance, adjustment, renewal and refinancing of credit facilities; - have an effective credit administration and monitoring framework, including detection and management of problem assets, indexation and provisioning; - ensure credit portfolio diversification in line with general credit strategy. - Under pillar 2, DNB assesses ICAAP through the SREP (AFS Section 3:18a and DPR Section 4.2); assessment uses the FIRM process and stress testing. - EC 2: Control environment assessed at least yearly in the Risk Assessment Process (RAP) cycle using the FIRM methodology producing scores for inherent credit risk, control environment and resultant net score; supervisory follow-up varies with materiality from off-site reviews to in-depth on-site reviews. - DNB documents FIRM scores for credit risk in bank-specific fact sheets and shares supervisory risk assessment with the bank’s Board. - Examples of special examinations: - thematic credit portfolio review on institutions with relatively large foreign exposures and investments; - sector wide periodic data request on exposures in restructuring, arrears and default; - sector wide examination on financing of and investment in commercial real estate. - EC 3–4: DPR Sections 11, 12, 14 and 16 require integrity in credit decisions, procedures to manage and report integrity issues, and customer due diligence; DNB can require information under AFS Section1:74 and impose penalties under AFS 1:79 (1d) and 1:80 (1d). In practice, cooperation is generally obtained without legal sanctions. - AC 1: DPR Section 23(4) requires procedures/measures for granting credit, including limit policies and controls; assessment includes risk committee structures, delegation matrices, minutes and credit file reviews. - AC 2: Counterparty credit risk included in EC 2 and covered by expert group for trading book risk; Regulation for Solvency Requirements for credit risk addresses counterparty credit risk. - AC 3: DPR Section 23a (1) and (2) requires procedures for acceptance, adjustment, renewal and refinancing; Regulation on Solvency Requirements for Credit Risk Section 3:76 requires IRB banks to use all relevant information in estimating risk parameters. ### Principle 9 — Problem assets, provisions and reserves (assessment: Compliant) - DPR Section 23 requires banks to have adequate systems and procedures to identify, measure, and manage risks; Section 23a requires effective systems for continuous administration and monitoring, including detection and management of problem loans, value adjustments and provisions. - Since the credit crisis, DNB has required major institutions to report quarterly on exposures in arrears. - Provisioning level is determined by the external auditor in line with accounting principles; DNB discusses adequacy of provisions with external auditors as appropriate. - DNB can require a bank to increase its financial strength under DPR Sections 3:18 and 3:18a (e.g., restrict dividends or raise new capital). DPR Section 89 introduced more direct authority to correct valuations. - EC 9: Regulation on solvency requirements for credit risk, chapter 4 (“credit risk mitigation”) provides methods to value collateral, guarantees and other mitigants using either an estimation of net realisable value or a haircut on market value; valuations are subject to periodical assessment. - EC 10: Asset impairment criteria are contained in accounting principles applied by the external auditor. - EC 11–12: Internal management information on asset quality is discussed with board and senior management; large exposures require individual valuation, classification and provisioning. - AC 1: For IRB banks, DPR Section 1 defines exposures as in default if they are in arrears for more than 90 days. For banks using the standardized approach, payments in arrears exceeding 90 days receive a higher capital charge based on Section 2:33 of the Regulation on solvency requirements for credit risk. - Comments: - External auditor audits adequacy of provisioning for impaired assets; primary responsibility rests with bank management. - NIVRA provides licensing and permanent education for auditors. - Provision methodology based on IFRS (& Dutch GAAP, i.e., the DCC) uses an incurred loss approach. - For assessing adequacy against expected losses, DNB uses the Basel II/CRD IRB framework; DPR (art 94-2-f-1/92-2-c) requires a correction on IFRS equity for the difference between IRB expected loss and incurred loss (see COREP 1.3 line 1.3.7: “IRB provision shortfall and IRB equity expected loss amounts”). - IRB models are approved by DNB and internally validated; DNB conducts an annual IRB health check including off-site and on-site examinations (model governance, use test, monitoring, back testing, model validation, review of expected losses versus provisioning). - For small banks using the Standardised methodology, expected losses are taken into account in the ICAAP/SREP (pillar 2); required capital is increased in accordance with expected (but not incurred) loss. ### Principle 10 — Large exposures limits (opening description) - AFS Sections 57 (6) and (7) in conjunction with DPR Sections 1 and 102 provide the legal basis for DNB’s regulations on large exposures for banks, investment institutions and clearing institutions. - Specific regulations are provided in Section 7 of the Regulation on Solvency Requirements for Credit Risk (RSK) and are based on the CRD. - EC 1, 2 and AC 1: The actual large exposure limit of 25 percent own funds is set in DPR. *Source: _cr11206 - Section 403 of Book 2 of the DCC determines under what conditions an entity may be exempted from the* ### Section 102, while the definitions in DPR Section 1 include those for large exposure is ### _cr11206 - Section 102, while the definitions in DPR Section 1 include those for large exposure is ### Large exposures (EC 3–5) - Definition: large exposure is defined as any exposure which exceeds 10 percent of the own funds of the institution. Exposures include both on- and off-balance sheet items. - Regulatory requirements and reporting: - The large-exposure rule includes exposure limits (in percentages of the actual own funds) and risk reporting requirements (Section 7:5 of the Regulation on solvency requirements for credit risk). - Banks must have management information systems to identify and report concentrations within their portfolios in a timely manner. - Large exposures are reported quarterly to DNB on both a consolidated and solo basis, except where individual banks have been explicitly exempted from solo reporting in accordance with DPR. - Quarterly reporting is more frequent than the minimal requirement set by the CRD. DNB will continue this frequency under adjustments following from Directive 2009/111/EC amending the CRD (CRD II). - Supervisory actions and monitoring: - Concentration and correlation of risks are addressed within each bank’s credit risk analysis and periodical on-site inspections by DNB. - Institutions must perform systematic analysis of concentration, geographical, currency and single risk deriving from large exposures. - DNB can require remedial actions where concentrations present significant risks. Within Pillar 2, banks are required to assess and address risk concentration through the ICAAP. - DNB has published a Policy Rule on country concentrations (see also Principle 12). - Implementation and alignment: - In the context of CRD II, the large exposure regime was adjusted and the new regime implemented by end-2010 will reinforce DNB’s surveillance of large interbank exposures. - CEBS published specific guidelines to achieve consistency across supervisory authorities; DNB is implementing these guidelines alongside the new large exposures regime. - Assessment: Compliant. ### Exposures to related parties (Principle 11) - Regulatory basis and requirements: - AFS Section 3:17 requires banks to pursue an adequate policy that safeguards controlled and sound business operations. - DPR Section 11 requires financial services provided to persons, managers, shareholders, and other related parties to take place only in the course of normal business operations and against usual commercial terms and conditions and collateral (price setting based on at arms length principle). The definition does not include the broad range of related parties referred to in the footnote to this EC. - DPR Section 23 and 23a require banks to pursue a policy and clearly document procedures for acceptance, revision, renewal and refinancing of loans. - AFS Section 3:17 Paragraph 2 obliges banks to prevent offences or transgressions of the law and acts contrary to generally accepted standards in the financial markets. - Supporting legal and governance instruments cited as examples: - The DCC (Sections 2:146 and 256) on conflicts of interest between companies and directors. - The Netherlands’ Corporate Governance Code (Principle 3.6) and the Netherlands’ Banking Code (Principle 2.1). - Capital and large-exposure rules tied to related parties: - Large exposures rules, including CEBS guidance on connected clients, apply to single exposures to related parties. - Under DPR Section 94(2), own funds are deducted by qualified participations in financial holdings where the institution owns more than 10 percent of outstanding shares. - For participations in non financial entities where the institution has 10 percent of outstanding shares, the value of the participation shall not exceed 15 percent of the institution’s regulatory capital. - For the qualified participations as a whole, a limit of 60 percent of the regulatory capital applies (Section 140 of the Decree). Both provisions comply with the CRD. - Supervisory approach and enforcement: - DNB adopts a principles-based approach aimed at addressing conflicts of interest and preventing abuse from related-party exposures rather than detailed formal limits. - DNB can enforce AFS through several instruments and uses moral suasion in day-to-day supervision to ensure independence of supervisory boards and appropriate standards. - Assessment: Largely Compliant. - Comments and recommendations: - DNB does not set specific quantitative limits on exposures to related parties or intra-group transactions; it relies on AFS Section 3:17 as legal basis and on moral suasion. - Assessors found no evidence that related party lending is or has been a significant issue in the Netherlands and judged the informal system effective. - For full compliance with CP11, DNB needs a more formal framework of limits and prohibitions on lending to related parties (examples: hard limits on lending to other group companies; prohibitions on lending to directors and shareholders beyond a specified (low) threshold). ### Country and transfer risks (Principle 12) - Supervisory framework: - Basis for country risk assessment is the ICAAP. DNB evaluates the ICAAP annually via its SREP analysis (AFS Section 3:18a and DPR Section 25a). - The SREP includes assessment of a firm’s country concentration risk control. - Policy development: - DNB published a Policy Rule on “the treatment of concentration risk in emerging countries” on July 15, 2010. The Policy Rule builds on AFS Section 3:17 and DPR Sections 23, 24a, and 25a. - The Policy Rule aims to harmonise approaches across Dutch licensed banks and to change business models of certain entities, especially subsidiaries of foreign banks. - Provisions, thresholds and remedies: - DNB has not set a separate framework for provisions for country and transfer risk but achieves outcomes via Pillar 2 ICAAP/SREP requirements. - Institutions must assess country concentration risks and choose supplementary measures; DNB can require increased own funds where internal controls fail. - Under the Policy Rule, institutions with high concentration in certain emerging economies are required to hold a capital buffer in addition to ICAAP/SREP-assessed capital. - Only material country risks that exceed a 5 percent threshold have to be taken into account. - Although there are no strict per-country limits, banks with concentrations that exceed 20 percent of their balance sheet are required to wind them down as soon as possible (Section 4, diversification table of the Policy Rule). Large concentrations will lead to capital surcharges. - Recognition of certified IRB models as a possible substitute for the Policy Rule limits scope of the Policy Rule largely to smaller institutions. - Reporting: - Reporting of country risk exposures to DNB is via normal supervisory returns (capital adequacy and large exposures) and examination of internally generated risk reports under ICAAP/SREP. - Assessment: Compliant. - Comments: - DNB’s approach, combining ICAAP/SREP concentration assessment with capital add-ons for excessive country risk concentrations, achieves the intended outcomes of EC 3. ### Market risk (Principle 13) - Governance and qualitative requirements: - DPR Section 23 stipulates qualitative requirements for policies and measures to control market risk, including authorisation procedures, limit setting, limit adherence and emergency measures. Policies depend on the nature, size, risk profile and complexity of trading activities. - Each institution must have an independent risk management function to identify, measure and evaluate trading risks. - Limits, strategy and oversight: - Regulation on solvency requirements for market risk requires each bank to have limits approved by the board. - Active management of positions held with trading intent must conform to a documented trading strategy approved by senior management, covering permitted positions, position limits, monitoring, dealer autonomy, reporting to senior management, and active monitoring for marketability or hedgeability. - DNB assesses compliance via targeted on-site examinations. - Valuation and independent verification: - The Regulation requires valuation policies covering frequency of valuation and verification, mark-to-market vs. mark-to-model, and use of market data. - Valuation is subject to independent price verification of market prices and model inputs. - Independent verification must be performed at least monthly, or more frequently depending on the nature of the market or trading activity, by a unit independent of the dealing department. - Risk measurement, modeling and testing: - Regulation requires adequate risk measurement programs including stress testing, scenario analysis, validation and testing of market risk measurements. - At least once a year firms must evaluate the entire risk management processes, including documentation of policies, management information systems, valuation processes and independent valuation verification, measurement of market risks and back testing. - All models used for solvency calculations need DNB approval. The back testing programme needs DNB approval and its results are submitted quarterly. - Assessment: Compliant. ### Liquidity risk (Principle 14) — introductory material - DNB sets both qualitative and quantitative guidelines for liquidity management. - Legal basis: AFS Chapter 3, Part 3.3.7, Sections 3.63, 3:64, 3:65, 3:66; Chapter 11 DPR; Section 3:17, second subsection AFS and DPR. - (Source text stops at this point for Principle 14 in the supplied excerpt.) *Source: _cr11206 - Section 102, while the definitions in DPR Section 1 include those for large exposure is* ### Chapter 4. The quantitative requirements measure the assets available to the institution to ### Chapter 4. The quantitative requirements measure the assets available to the institution to meet its immediate liquidity needs (a “stock” concept) ### Quantitative liquidity requirements and reporting - Liquid assets are defined to include marketable securities, including those eligible for discount with the ECB. - Different categories of marketable instruments are subject to a range of haircuts to reflect their liquidity. - Banks report their liquidity position on a monthly basis using a standardised regulatory liquidity report (7029 –Instruction for 8029, Large Exposures Liquidity (2003)). - The quantitative requirements measure assets available to meet immediate liquidity needs against standardised assumptions of net negative cash outflows based on the maturity profile of liabilities over both a one week and one month time horizon. ### Qualitative liquidity risk management framework - The qualitative requirements are based on DPR “Controlled pursuit of the business operations,” setting high level principle-based standards for risk management, organization and control across all types of risk. - Guidance used in supervisory practice is based on the updated Basel Principles for sound liquidity management and supervision (BCBS September 2008). - DNB monitors banks’ internal liquidity management strategies and processes by means of the FIRM framework: - Liquidity risk is a component of the FIRM score. - For each institution there is a factsheet dedicated to liquidity risk scoring the liquidity position and liquidity controls/management. - Supervisory responses over the coming year are determined by this score and can range from regular talks with the Treasurer, the CRO and the CFO and a monthly standardised liquidity report (basis programme) to specific actions intended to mitigate specific risks. - The supervisor’s assessment is benchmarked within DNB by a group of risk experts (including inspectors and policy advisors) and the management of the BSD, and is shared with the Board of the supervised institution. ### Integrated approach, ILAAP/SREP and Basel alignment - DNB proposes a more integrated approach to assessing liquidity risk that will include both an ILAAP and a SREP-like approach for firm-level assessment and minimum liquidity requirements. - According to that process extra liquidity requirements may be formally set for an individual firm in addition to the standard minimum liquidity requirements. - Stress testing will be part of the ILAAP (Pillar 2 requirement). - The Basel Principles will be used in the context of the SREP-like procedure with regard to liquidity risk management. - The ILAAP/SREP procedure, the Basel Principles and a revised reporting and test system—taking into account CEBS guidance and Basel standards—and a data interface system should be integrated in a reviewed liquidity supervision system. - DNB intends to introduce these procedures from December 31, 2010 as part of the CRD II implementation. - On December 31, 2010 DNB intends formally to implement the September 2008 Basel Principles on Liquidity Risk Management as part of its implementation of CRD II. - DNB has issued a draft version of the proposed “Regulation on liquidity” (implementing CRD II) for consultation. - The revised guidance also takes account of CEBS’s technical advice to the European Commission on liquidity risk management (CEBS September 2008) and CEBS’s ‘Guidelines on Liquidity Buffers & Survival Periods’ (CEBS December 2009). ### Crisis monitoring, currency and high-frequency reporting - The standardised liquidity report is in Euro only and does not distinguish between major currencies. - Commencing in the second half of 2007, DNB started closer monitoring (via the implementation of a crisis monitoring team) of the liquidity position of a selected group of firms, including all large banks. - High frequency reporting has been required, if necessary nearly daily and at least weekly. - Wholesale run-off scenarios must be reported, in all major currencies. - Monitoring includes close monitoring of possible run-offs and the application of stricter requirements with regard to the definition of wholesale funding, e.g., a 100 percent run-off of fiduciary funds, more restricted recognition of received collateral (e.g., not recognized as liquidity buffer component if it is not already registered at the respective central bank) and stricter monitoring of liquidity positions (mismatch) in foreign currencies. - As part of the enhanced liquidity monitoring regime introduced in the second quarter of 2007: - Some banks have been encouraged to strengthen their liquidity positions, e.g., upgrading contingency positions, hedging FX positions, reconsidering usage of ECB tender programs or state guaranteed funding programs. - A reverse stress treatment has been applied on the assumption of a full run off during a 2-3 month period. - Where necessary supervision has set individual liquidity requirements (above the regulatory minimum) for individual institutions. - The crisis monitoring team initiated thematic qualitative assessments (e.g., assessment of liquidity funding plans, adequacy of liquidity contingency plans and analyses of actual funding profiles) and discussed outcomes with top management. ### Funding mix, liquidity buffers and ILAAP integration - Ongoing supervision discusses funding mix and strategic (money and capital) market access with banks. - In the semi-annually performed funding profile analysis, market access and liability diversification are reviewed; special attention is paid to the liquidity of assets used as liquidity buffer. - The capacity to sell assets in stressed markets is assessed. - All these elements will be integrated in the ILAAP assessment that will be performed at least annually, starting 2011. ### Assessment and recommendations - Assessment: Compliant. - Comments: - Given the experience of the financial crisis and taking into account the liquidity requirements envisioned in Basel III, DNB is in the process of enhancing the minimum quantitative liquidity standards. These new minimum standards are planned to become effective as of December 31, 2010. - The new requirements refine, but do not fundamentally change the basic framework for liquidity management that DNB has operated since 2003. - The assessment team recommends that DNB’s standardised liquidity report be amended to permit analysis according to major currencies. This could replace the ad hoc reporting system introduced during the crisis. --- ### Principle 15 — Operational risk: supervisory expectations and practices - Principle: Supervisors must be satisfied that banks have in place risk management policies and processes to identify, assess, monitor, and control/mitigate operational risk, commensurate with the size and complexity of the bank. - Description and supervisory practice: - Each authorized bank in the Netherlands is required to organize its operations to safeguard controlled and sound business operations (AFS Section 3:17 and 3:18). Further rules are laid down in DPR Chapter 4, 5 and 10. - DPR Chapter 4 concerns control of business processes and business risks, integrity and the soundness of the financial enterprise, including operational risk. Chapters 5 and 10 concern outsourcing and operational risk solvency requirements respectively. - DNB has implemented CRD and CEBS-guidelines through supervisory rules (“Regulation on solvency requirements for operational risk”). Firms are required to meet general risk management standards including ‘robust governance arrangements’ that are ‘comprehensive and proportionate to the nature, scale and complexity’ of activities. - The board of each bank is responsible for strategies, policies and processes for managing operational risk; DNB holds the board responsible for compliance with these strategies and policies, reflected in assessment frameworks (IT, AMA, etc.). - DNB periodically assesses strategies, procedures and measures pursuant to Section AFS 3:17 AFS. These assessments form a component of the FIRM methodology and inform supervisory priorities. - Specific instruction sets exist for IT risk (e.g., change management, information security and monitoring), outsourcing risk and operational risk. - In Spring 2010 an extensive examination of banks that have implemented the Advanced Measurement Approach for Operational Risk (AMA) took place; a specific highly detailed evaluation scheme was prepared and will be continually revised and updated. - Business Continuity Management (BCM) for systemically relevant banks is assessed annually using the Assessment Framework for Business Continuity Planning (BCP) Financial Core Infrastructure (Ref .TRIM 2008/316107) and the BCM assessment framework (Ref. TRIM 2005/63169). For other banks BCM is assessed periodically on a risk-based (FIRM) approach. - DNB organizes a yearly Market Wide Exercise to help banks test internal and external crisis management and crisis communications processes. - Information Technology Risk is integral to DNB’s risk assessment methodology; requirements in Section AFS 3:17 and DPR Chapter 4 apply to IT risk. IT risks are supervised by Expert Centre ICT supervision, consisting of 16 FTE posts, focusing on IT-governance, IT-security, systems availability, and management. - DNB’s “three lines of defense” model informs supervisory emphasis; DNB regularly requests information from Internal Audit, Operational Risk Management, Information Risk Management, Legal & Compliance, etc. - The adequacy of control systems for operational risk are assessed during initial approval for AIA and on-going assessments of compliance with relevant criteria. - Legal risk and outsourcing risk are integrated parts of the FIRM risk assessment methodology; specific DPR chapters and AFS sections apply, with detailed frameworks and benchmarking (e.g., Outsourcing Risk Knowledge Network annual benchmarking). - DNB expects large, internationally active banks to implement the AMA on a group-wide basis; group-wide supervisory activities are coordinated through supervisory colleges. Additional operational risk categories for operationally intensive business (e.g., custody and correspondent banking) are included in the FIRM definition of Operational Risk. - Assessment: Compliant. - Comments: - DNB’s current FIRM operational risk definition differs from the supervisory framework provided by Basel and related guidance (CEBS). However, DNB’s risk assessment methodology addresses all relevant items of operational risk and these are addressed in supervisory activities. - As part of DNB’s VITA project, a new or revised version of the RAM is being introduced. --- ### Principle 16 — Interest rate risk in the banking book (introductory description) - Principle: Supervisors must be satisfied that banks have effective systems to identify, measure, monitor, and control interest rate risk in the banking book, including a well defined strategy approved by the Board and implemented by senior management, appropriate to the size and complexity of the risk. - Description (beginning): - DPR Chapter 4 requires banks to have adequate systems and procedures to identify, measure and manage their risks. - The requirements for the bank’s board to approve, review and implement an interest rate risk strategy and policy are laid down explicitly in DPR. *Source: _cr11206 - Chapter 4. The quantitative requirements measure the assets available to the institution to meet its immediate liquidity needs (PDF).* ### Section 23 (2). The FIRM methodology contains a factsheet for interest rate risk in the ### _cr11206 - Section 23 (2). The FIRM methodology contains a factsheet for interest rate risk in the ### Interest rate risk in the banking book — supervisory framework and tools - The FIRM factsheet requires supervisors to score the bank’s inherent risks, internal controls (including policies, systems, and the involvement of the bank’s board) and vulnerabilities. - Each bank’s assessment is benchmarked within DNB by: - a group of interest rate risk experts (including inspectors and policy advisors); and - the management of the BSD. - The supervisory risk assessment is shared with the bank’s board. - Possible supervisory follow-up, depending on the assessment outcome: - regular talks with ALM management of the bank; - off-site examinations of the bank’s management information (ALM reports, minutes of ALCO meetings); - full on-site inspection of the ALM function (including governance and involvement of the Board). ### Reporting requirements, stress testing, and outlier criteria - DPR Section 23(d) requires banks to have adequate systems to assess and manage interest rate risk in the banking book and to report on a consolidated basis: - forecast for the interest rate margin over 1 and 2 years; - the economic value of equity; - the impact of the standard stress scenario on earnings (Earnings-at-Risk/earnings-prospective to interest rate risk) and on economic value of equity (EVE/value perspective); - the present value of a basis point (PV01). - DNB uses this information to test banks against the outlier criterion: loss of 20 percent EVE. - DNB requires banks to calculate a standard stress test: parallel shift of the yield curve with +/- 200 basis points. - Banks must calculate and report the results of this standard stress test on a quarterly basis under DNB reporting framework. - Stress-test reporting covers both potential loss of economic value and earnings-at–risk. - DNB expects banks to include additional stress scenarios, including non-parallel shifts (twists), in internal ALM management information where relevant. ### Supervisory guidance, measures, and benchmarks - DNB has published “Guidelines on interest rate risk in the banking Book” (available on DNB’s website) to assist supervisors. - Supervisory assessment of: - interest rate risk limits; - adequacy of measurement methods and systems; - competence of ALM staff; is covered by FIRM and SREP methodologies. - If necessary, supervisory measures can include: - instructions to the Board to enhance systems and measurement methods and strengthen interest rate risk management and governance (decision making in ALCO, segregation of duties); - measures to reduce the risk position; - imposition of additional capital requirements under Basel II Pillar 2. ### SREP, ICAAP, and Pillar 2 interactions - The SREP includes assessment of risk management and interest rate positions; DNB discusses interest rate risks and controls in the Basel II, Pillar 2 dialogue with the bank’s Board. - In SREP, DNB assesses the bank’s ICAAP and (economic capital) model/methodology and assumptions for interest rate risk in the banking book, considering the size, nature and complexity of the bank’s interest rate risk profile. - Benchmarking: the bank’s modeling/measurement and management practices are benchmarked against practices at other comparable banks. - Under Basel II, Pillar 2 banks are required to implement CEBS guidelines (“Technical aspects of the management of interest rate risk arising from nontrading activities under the supervisory review process” (October 2006)), including calculation of the impact on economic value of equity of the standard shock (+/- 200 basis points). - If a bank fails the standard shock test, DNB would be obliged (DPR Section 25b) and empowered (AFS Section 3:111a) to take measures, which may include requiring additional capital for interest rate risk in the banking book. ### Macro and industry stress testing participation - Larger systemically relevant banks participate yearly in a macro stress test organized by DNB; this stress test includes non-parallel shifts of the yield curve and their impact on interest rate margin and capital. - Several banks participated in the CEBS stress test (July 2010). - Under Basel II, Pillar 2 banks are required to perform own stress tests tailored to their risk profile, including interest rate risk stress tests; DNB Policy Rule on Principles for the Implementation of Pillar 2 (Annex B) explicitly requires implementation of CEBS guidelines regarding stress testing. ### Governance, segregation of duties, and ALM oversight - DPR Section 23 requires segregation of duties and independence of risk functions; DNB assesses ALM governance, adequacy of decision making in ALCO (including Board members), and execution of ALCO decisions by the Treasury function. - Assessment status: Compliant. ### Internal control and audit — legal and supervisory context - Legal/regulatory foundations referenced: - DCC (responsibilities of management; managers’ liability — DCC Sections 2:9 and 2:138); - AFS (Sections 2:12, 3:8, 3:9, 3:17) — expertise, trustworthiness, “clear and adequate organizational structure,” division of tasks aligned with nature, size, risks, complexity; - Netherlands’ Corporate Governance Code and Banking Code (Banking Code incorporated in DCC as from 2010; disclosure per DCC Section 2:391 (5)). - Supervisory practices: - Adequacy of controls is frequently discussed with management and supervisory boards; audit reports (internal and external) are discussed with auditors and management. - On-site examinations focus on design and effectiveness of controls; internal audit and compliance findings are included in reviews. - Specialized supervisors in DNB for corporate governance issues, supported by policy experts. - Annual RAP benchmarks banks against corporate governance standards, calibrates risk scores for categories such as Organization, Management and Audit; FIRM contains detailed assessment criteria and risk scores are shared with management and supervisory boards. ### Specific governance arrangements - Board oversight and fit-and-proper: - DNB grants a personal “license-to-operate” to each board member (AFS Sections 3:8 and 3:9) and can revoke it if the individual is no longer fit-and-proper. - DNB may use moral suasion or formal legal powers to address serious doubts about senior management performance. - Balance of skills and resources in back office/control functions relative to front office is assessed during licensing and ongoing supervision. - DPR Section 21 prescribes an independent compliance function; DNB assesses quality, independence and effectiveness of compliance during supervisory activities and on-site examinations. ### Audit function oversight - DPR requires independent internal audit that audits procedures and measures at least annually; DNB has unlimited access to internal audit files. - DNB periodically reviews internal audit function’s charter, planning, independence, reporting lines, quality assurance, resources and methodology during on-site inspections. - Internal audit function is assessed and scored annually and benchmarked; industry-wide on-site examination of internal audit functions was last performed in 2005/2006 (noting subsequent “financial-crisis-related” workload). ### AML/CFT and abuse of financial services - The Money Laundering and Terrorist Financing Prevention Act (WWFT) (in force August 1, 2008), the AFS and DPR form the framework for Customer Due Diligence (CDD) and integrity supervision; DNB monitors banks’ compliance with AML/CFT provisions and can use AFS, DPR, WWFT sanctions. - WWFT requires CDD and reporting of unusual transactions to the FIU; DPR requires procedures for handling and recording incidents and immediate notification to DNB. - WWFT: CDD is required in the following situations (verbatim): - when entering into a business relationship; - if they conduct an incidental transaction in or from the Netherlands for the customer of a minimum value of € 15,000, or two or more related transactions with a minimum joint value of € 15,000; - if there are indications that the customer is involved in money laundering or terrorist financing, or when the risk of an existing customer’s involvement in money laundering or terrorist financing gives cause to do so; and - if they doubt the reliability of customer identification information previously obtained from the customer. - WWFT requires identification and verification of customer identity and beneficial owner, risk-based enhanced due diligence in higher-risk situations (including non face-to-face business, correspondent banking and politically exposed persons), ongoing monitoring of business relationships, and record retention obligations. - Record retention: DCC obligation for legal entities for seven years; WWFT requires records related to a disclosure to be retained for five years from the time of disclosure and customer records for five years after termination of relationship or transaction. - Correspondent banking: WWFT forbids establishing/continuing correspondent relationships with shell banks; enhanced CDD required for correspondent banks outside the EU. - Supervisory activity: Over a period of four years, 58 Dutch licensed banks were subject to 72 AML/CFT related inspections. - Enforcement powers: DNB can impose administrative penalties under WWFT and administrative sanctions under AFS for breaches of AML/CFT requirements. - Protections under WWFT: - employees are protected from criminal liability for breach of confidentiality when reporting unusual transactions to the FIU; - civil liability protection: an institution that made an unusual transaction report pursuant to the WWFT will not be held liable for damage to a third party unless it is demonstrated that no such disclosure should reasonably have been made. - Information sharing: WWFT requires DNB to inform the FIU of any suspicious transaction; AFS and other provisions allow DNB to share information with domestic and foreign supervisory authorities and prosecutors under certain conditions (supervisory purposes). Formal agreements are not required but are sought where appropriate. ### Supervisory approach, techniques, and risk analysis (FIRM and RAP) - FIRM (risk analysis tool) underpins risk-based supervision: draws up risk profiles recorded in FIRM, permits meaningful comparisons and planning of supervisory work. - DNB distinguishes four main risk categories: - Governance Risks (including strategy risks, quality of management, control functions audit and finance); - Financial Risks (including solvency, liquidity, credit, market and interest rate risk); - Integrity/Compliance Risks; - Operational/IT risks (including outsourcing risk). - RAP (Risk Analysis Process) annual cycle (performed in fourth quarter) produces RBSP (Risk Based Supervision Program) components: - Base Program (BP); - Risk Identification Program (RIP); - Risk Mitigation Program (RMP); - Thematic supervisory work. - Factsheets are prepared as part of RAP describing risk analysis per subcategory, justification for scores, and proposed Supervisory Action. - RAP and RBSP are benchmarked and challenged in Knowledge (Expert) Centres and a “Risk Analysis Panel”; outcomes feed into SREP and are communicated to bank senior management and auditors after senior management approval. - DNB integrates forward-looking views via ICAAP and SREP, and has a comprehensive stress methodology for individual and industry-level stress tests. - DNB established Macro Prudential Analysis (MPA) within FSD to regularly assess banking system developments; Overview of Financial Stability (OFS) is prepared twice yearly and macro stress tests frequency increased from once every six months to once every three months. ### Supervisory techniques and on-/off-site work - DNB supervisory teams conduct both on-site and off-site supervision (not clearly separated) and are responsible for input to annual RAP, designing supervisory work programs, and incorporating macro and policy trends. - Quality assurance: - four-eyes principle for supervisory letters; - full audit trail and authorization in documentation system; - VITA project to create a separate division for quality assurance. - Supervisory interactions and review mechanisms: - periodic “AOT” meetings (Afstemmingsoverleg Toezicht) among Division Directors and Board Members responsible for supervision; - on-site visits assess governance, internal controls, analytical review of management information and sample testing; - DNB may request internal/external auditors to perform investigations with terms of reference set by DNB; - annual discussions with external auditors of each bank; supervisory concerns are communicated in writing to banks and copied to external auditors. - Findings from on-site inspections are reported in writing; bank Managing Board must submit supervisory reports to Supervisory Board and external auditor and provide a written response on remedial actions. - DNB holds regular meetings with Supervisory Board members and organises “Tri-Partite” meetings with external auditors twice a year. ### Supervisory reporting, data, and limitations - DNB authority to require standardized reports (AFS Sections 3:72 (1) and (5); DPR Sections 130 and 131). Periodic reports include: - FINREP (quarterly); - COREP (quarterly); - Liquidity (monthly); - Interest rate risk (quarterly); - Large exposures and asset concentrations (annual). - Most reports are required at the consolidated group level; solo reporting is limited. - Valuation: DNB requires valuation in accordance with bank financial statement methods (IFRS or DCC Book 2 Title 9); prudential filters and adjustments for regulatory capital are applied (DPR Article 91 and DPR Sections 89 to 94). - Reporting submission and validation: - electronic reporting tool (“e-line”) with validity checks and additional DNB plausibility checks; - data stored in database and used for quarterly analysis and supervisory planning. - Methods to confirm validity and integrity of information: - automated consistency checks in e-line; - visual plausibility checks by SID; - external auditor review (external auditor to examine one of the four quarterly supervisory reports per AFS Section 3:72 (7) and DPR Section 133 (1)). - Assessment: Largely Compliant. - Identified limitations and supervisory needs: - Pre-crisis, risk assessment methodology did not adequately identify systemic vulnerabilities (increased leverage, reliance on wholesale funding, large portfolios of structured securities). - Supervisory processes were not sufficiently integrated with Financial Stability Division assessments; authorities are taking measures to improve micro–macro integration and to update FIRM methodology. - DNB relies substantially on banks’ internal management reports which may lack standardization and comparability; standardized data collected are mainly at consolidated level and lack granular solo reporting for relevant entities. - DNB needs more standardized and granular reporting to support macroprudential analysis; extension of supervisory reporting framework may require expanded legal powers. *Source: _cr11206 - Section 23 (2). The FIRM methodology contains a factsheet for interest rate risk in the; https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11206.pdf* ### Section 3:17). ### _cr11206 - Section 3:17) ### Disclosure and publication requirements (EC 2, EC 7–11) - Banks must publish an annual report that includes a management discussion and analysis section and an external auditor’s report (DCC Section 394 of Title 9 of Book 2). - For banks, the AFS requires publication of audited financial statements within four months of the year-end. - Published financial statements should be filed at the AFM, which includes them in its public register. - Similar publication rules apply to: - semi-annual reports (for banks with listed or traded securities), and - quarterly reviews (for banks with traded ordinary shares) (AFS Section 5.25,c-e). - Annual reports, after endorsement by the general assembly of shareholders, should be filed at the AFM within six months after year-end; the AFM then files the reports at the designated Chamber of Commerce. - Banks should submit a copy of their audited annual financial statements to DNB within six months after year-end as well (AFS Section 3.71). - Banks’ financial statements must comply with generally accepted accounting principles: - IFRS is mandatory for the consolidated accounts of all listed banks and some non-listed banks voluntarily use IFRS. - Other non-listed banks’ accounts are governed by DCC Title 9 Book 2, as are solo accounts of banks. - Interpretative guidelines issued by the Council for Annual Reporting in the Netherlands align practices based on Title 9 Book 2 Civil Code as close as possible to IFRS. - Banks must publish Basel II, Pillar 3 disclosures at least annually and adhere to AFS Article 3:74a; Basel II, Pillar 3 requires banks to have a formal disclosure policy. - The AFM is responsible for ensuring compliance of annual reports and solo/consolidated financial statements with IFRS and DCC Title 9 Book 2; listed banks must follow relevant Stock Exchange disclosure requirements. - DNB reviews Basel II, Pillar 3 disclosure policies and practices for all supervised banks and reviews disclosures of selected banks through their annual accounts. - Required disclosures (IFRS or DCC) include qualitative and quantitative information on financial performance, financial position, risk management strategies and practices, risk exposures, related-party transactions, accounting policies, and governance; scope and disaggregation should be commensurate with size and complexity. ### Auditor scope, oversight, and interaction with supervisors (EC 3–6; EC 4; AC 1–5) - Valuation requirements originate from accounting principles (IFRS or DCC Title 9 Book 2); DPR adjusts accounting information for regulatory capital under Basel II / CRD (DPR Sections 89 to 94). - The external auditor’s audit program scope (loan portfolio, non-performing assets, loan loss reserves, asset valuations, trading and other securities activities, derivatives, asset securitisations) is based on IFRS, DCC Title 9 Book 2 and ISA. - DNB (in cooperation with the Ministry of Finance) has direct power to establish the scope and level of assurance of audits of prudential returns; DNB has indirect influence on the scope and level of coverage of annual financial statement audits through the ministry of finance, the ministry of justice and the Royal NIVRA. - DPR Sections 131(1), 133(1) and the “Ruling on Reporting Statements of Financial Institutions” set out required reports to DNB; Appendix 6 defines reporting frequency and filing deadlines; Appendix 7 defines external auditor’s scope regarding financial statements, reports, and additional information. - DNB may decide that a particular external auditor is not qualified to perform the function at a particular bank (AFS Section 1:78). - Auditors are legally obliged to report matters of material significance to DNB; the AFS requires external auditors to provide DNB with any and all information necessary for DNB's supervisory task (AFS Sections 3:88 and 3:89, DPR Sections 136 and 137). - Communication channels: - DNB meets external audit firms and external auditors periodically; bilateral policy discussions are held annually between DNB and each bank’s external auditor and with large audit firms. - DNB representatives meet frequently with Royal NIVRA groups and participate in the "Vertegenwoordigersoverleg" forum (Netherlands’ Banking Association, Royal NIVRA, supervisors of DNB). - Correspondence from the external auditor to the supervised institution relating to audit findings or internal controls must be made available to DNB. - Oversight over auditor quality is assigned to the AFM, which has the power to access external auditors’ working papers; AFS sets conditions for cooperation and communication between AFM and DNB. - Measures to promote auditor independence include mandatory audit firm partner rotation every seven years (Section 24 of the Act on the Supervision of Audit Firms). - Assessment: Compliant. ### Aggregate information published by DNB (EC 11) - DNB regularly publishes aggregated information including: - DNB’s Statistical Bulletin: published quarterly; contains monetary and financial statistics for the Netherlands. - Financial Stability Overview: published biannually. - DNB Quarterly Bulletin: provides information on financial and economic developments in the Netherlands, Europe and the rest of the world. ### Corrective and remedial powers of supervisors (Principle 23) - Standard supervisory tools and procedures: - Raising supervisory concerns with management or the board at an early stage and requiring timely remediation — described in the Ladder of Intervention (LoI) (phase: increased vigilance). - Requiring that significant remedial actions be addressed in writing to the Board — LoI (phase: increased vigilance, focus on file building). - Requiring regular written progress reports and checking remedial action completion — LoI (phase: increased vigilance, request plan and intensive monitoring). - Supervisor’s role in resolution: - Supervisor participates in deciding when and how to effect orderly resolution (closure, restructuring, merger); emergency regulation intended for liquidation or restructuring, but in practice acts as a gateway to winding up/liquidation due to stay on payments and exercise of close out rights. - Supervisor may withdraw authorization (AFS Article 1:104), but this is not an orderly closure mechanism. - Instruments to effect an orderly resolution without shareholder approval have not been introduced yet; MoF and DNB are jointly working on this. - Specific remedial instruments and constraints: - Restricting current activities or withholding approval of new activities is possible via instruments such as ‘giving a direction’, ‘special measures’ (AFS Article 3:111a) or ‘appointing a special administrator’. - Restricting or suspending payments to shareholders or share repurchases only if own funds diminish as a result (AFS Article 3:96). - DNB has no specific powers to restrict asset transfers beyond enforcing solvency and liquidity requirements. - Barring individuals and replacing managers/board directors: AFS requires a co-policymaker be trustworthy (art. 3:9 AFS); competence test for persons determining day-to-day policy (art. 3:8 AFS); DNB can reassess and effectively bar individuals from positions. - Restricting powers of managers/board and providing interim management possible via 'special administrator' (art. 1:76 AFS). - Restricting powers of controlling owners: a declaration of no objection can be modified or withdrawn (art. 95 and 1:104 AFS). - Facilitating takeover or merger by a healthier institution: no explicit powers, but occasional behind-the-scenes facilitation by DNB. - Penalties and sanctions: - Supervisor applies penalties and sanctions to the bank and, when necessary, to management or the Board or individuals (new AWB Chapter 5; Article 5:1). - Additional notes: - No specific laws guard against undue supervisor delay other than general liability of DNB. - DNB lacks specific ring-fencing powers but can use instruments to impose solvency and liquidity (e.g., power to give directions AFS Article 1:75). - DNB coordinates actions with regulators of non-bank financial entities nationally (AFM, AFS Article 1:47), within the EU (AFS Article 1:51) and outside the EU (AFS 1:65) on the basis of MoUs to settle confidentiality issues. - Assessment: Largely compliant. - Comments summarizing assessment rationale: - DNB has comprehensive intervention powers but historically showed reticence to use some powers, favoring moral suasion; project VITA aims to make supervision more intrusive and conclusive. - DNB does not yet have the full range of instruments necessary for orderly resolution without shareholder approval; MoF and DNB are working on legislation to introduce additional crisis management tools, including the option to transfer deposits of a failing bank to another bank. ### Consolidated supervision (Principle 24) - DNB supervises on a consolidated and solo basis in accordance with the CRD; requirements incorporated in AFS Section 3.6.2. - Measures ensuring DNB insight into banking group structure: - Information on group structure included in mandatory returns, discussed in policy meetings and on-site inspections. - Prior permission from DNB required for acquisition of (foreign) participating interests and establishment of (foreign) subsidiaries or third country branches; notification required for establishment of EU branches. - Powers to obtain information and perform SREP: - AFS Section 3:72 in conjunction with Section 3:276 authorizes DNB to require any relevant prudential information from a bank and any enterprise within its consolidation scope. - AFS Section 3:17 in conjunction with Section 3:276 enables DNB to require information from any individual business vehicle within the banking organization on financial condition and adequacy of risk management and controls. - Section 3:18a requires DNB to perform the SREP for the banking group worldwide on at least a yearly basis. - Limits on participations: - AFS Section 3.3.11 requires DNB declaration of no-objection before acquiring qualifying holdings; as a condition DNB may require frequent financial and non-financial information from subsidiaries. - Quantitative limitations: Section 120 of the CRD implemented in Section 140 of the Decree on Prudential Rules—maximum qualifying holding (participation) is 15 percent of a bank’s own funds and the total of all qualifying holdings may not exceed 60 percent. - Consolidated prudential standards and measures: - DNB can impose prudential standards on a consolidated basis (AFS Section 3:276). - Supervisory activities are performed on both consolidated and solo bases, including quarterly returns, capital adequacy calculations, large exposures, related-party exposures, and the Supervisory Review Process. - Under Basel II, Pillar 2 and AFS Section 3:111(a), DNB can require own funds in excess of minimum Pillar 1, strengthen governance and ICAAP, require specific provisioning policies, restrict or limit business/operations/network, and require risk reduction measures. - Cross-border cooperation and powers over foreign establishments: - Legal foundation for cooperation with other supervisors in AFS Chapter 1.3; MoUs or colleges facilitate information exchange. - DNB has power to limit or close foreign offices, impose limitations if oversight is inadequate or supervisory information flow is insufficient; can refuse or withdraw declaration of no objection or prohibit continuation (AFS Section 1:77). - Governance of foreign establishments: - An important element is governance by the Netherlands head office, whether or not through regional offices (AFS). *Source: _cr11206 - Section 3:17).* ### Section 3:17) [EC 7]. DNB regularly monitors whether an institution’s top level management ### _cr11206 - Section 3:17) [EC 7]. DNB regularly monitors whether an institution’s top level management ### Supervision of foreign establishments and consolidated supervision - DNB regularly monitors whether an institution’s top level management is informed adequately about the state of affairs within the foreign establishments, and whether decision-making and governance have been adequately implemented in the foreign network (AFS Section 3:). - When the risk profile of the foreign operations is higher or when the operations are conducted in supervisory regimes differing fundamentally from those of the Netherlands, DNB pays extra attention to the bank’s internal governance [EC 10]. - DNB identifies high risk areas through risk based supervision by means of FIRM. - Corporate ownership and shareholder assessment: - Corporate ownership of banking entities is allowed in the Netherlands. - Shareholders of banks, including parent companies and their activities, are reviewed and tested against criteria regarding fit and proper standards, integrity, safety and financial soundness (AFS Section 3.3.11). - If a prospective or existing shareholder fails to meet these criteria, DNB may refuse to grant, or withdraw, its declaration of no-objection; the participating interest may not be acquired or may have to be sold. - Remedial actions: under AFS Section 1.4.2, DNB can take special measures, such as notification to a bank that certain bodies may only exercise powers after approval by one or more persons appointed by DNB and with due observance of instructions given by these persons. - Use of host supervisor work: - DNB will always have an independent responsibility as regards the supervision of foreign establishments but may use results of examinations by the “host supervisor” (AFS Section 1.3.2 and 1.3.3). - DNB’s assessment of the supervision exercised by the “host supervisor” is of importance, particularly for non-EU establishments where DNB assesses the quality of the respective “host supervisor”, especially in cases where a MoU is (to be) concluded. - Consolidated supervision approach: - Consolidated supervision of internationally active banks is based on a top down approach of the group. - Risk areas are identified, examined and dealt with on the basis of risk based supervision regardless of where the risks are located (domestic or non-domestic). - Supervisors use the group’s internal staff departments such as corporate risk or group-audit, supported by decentralised staff functions in business units. - In case of exceptional developments special inspections will be carried out. - DNB receives reports on foreign establishments by internal and external auditors as well as making local inspections. - Assessment: Largely Compliant. - Comments (key points preserved verbatim): - Although DNB has the necessary legal and regulatory powers to apply effective consolidated supervision of cross-border banking groups, there have been examples where DNB appears to have relied to large extent on the supervision exercised by the host supervisor. - This reliance is a cornerstone of the Basel Accord and the CRD, in which both EEA supervisors and equivalent supervisors from third countries are considered exercising supervision in compliance with the CRD and or Basel II. - Nonetheless, it remains the responsibility of the consolidated supervisor to assess the financial soundness of the overall group and this responsibility requires it to form its own independent judgement of the risks to the group posed by the activities of group subsidiaries. - DNB’s ability to form such an independent judgement appears to have been constrained by the failure of supervisory resources to match the demands of regulating large, complex and internationally active firms. - In consequence, DNB may wish to consider strengthening the resources it devotes to its oversight of subsidiaries located outside the Netherlands and its practices and procedures for obtaining relevant information concerning their operations and the risks that they pose to the group. ### Home-host relationships and information exchange - Legal framework and confidentiality: - The AFS provides that confidential information obtained under this Act is secret and that this information shall remain within DNB; in certain exhaustively listed cases DNB is permitted to supply confidential information to specific persons or bodies (AFS Chapter 1.5). - Chapter 1.3 of the AFS contains specific instructions for the exchange of information with other supervisory authorities, distinguishing supervisory authorities of other EU Member States and those of non-member states. - Memoranda of Understanding and colleges: - DNB has concluded 37 MoUs with relevant EEA and non-EEA supervisors. The MoUs contain agreements about: (i) the exchange of information, the rights and obligations with regard to requests for and the provision of information; (ii) cooperation in the field of supervision, for example in relation to on-site examinations (announcement, host supervisor involvement, exchange of research results); and (iii) confidentiality with regard to the information provided and received. - For banks and banking groups of material interest to the home or the host supervisor, colleges of supervisors have been established. There are currently 14 colleges in place for banks, banking groups or financial conglomerates, which have regular exchange of information and conference calls and meet at least once a year. - For 8 of the (largest) banks, operating on a cross-border basis, a multilateral written agreement is signed between members of the respective colleges. These agreements provide for further formal arrangements for home and host supervisors with respect to (i) objectives of cooperation; (ii) identification of relevant supervisory authorities of subsidiaries and significant branches; (iii) confidentiality of information exchange; (iv) responsibilities of supervisory authorities; and (v) cooperation in on-going and in crisis situations. - Cooperation obligations: - AFS Section 1:51-1:51a provides that DNB shall cooperate closely with other supervisory authorities and provide them with any information which is essential or relevant for the exercise of the other authorities' supervisory tasks. - DNB communicates on request all relevant information and communicates on its own initiative all essential information such as adverse developments or major sanctions and exceptional measures. - Host access and collaboration: - Home country supervisors have on-site access to establishments in the Netherlands after prior consultation with DNB (and vice-versa) in conformity with AFS Section 1.3.2.2 and the MoU between DNB and other supervisory authorities. - DNB discusses the findings of their on-site examinations with them. - Assessment: Compliant. - Comments: - DNB has developed a communication strategy with the relevant host supervisors primarily in the form of the colleges of supervisors for large international banking groups headquartered in the Netherlands. - DNB has established a secure website in which information on banking groups can be exchanged among members of the college. - Additional supervisory rules and cross-border treatment: - Pursuant to AFS chapter 2.2 local branches and subsidiaries of foreign banks are subject to the same legal and supervisory regime as domestic banks. - Under mutual recognition agreements, branches of EEA licensed banks carrying out their business in the Netherlands from a branch situated in the Netherlands or by providing services to the Netherlands are exempted from capital adequacy supervision on a solo basis by DNB (home country control principle). DNB’s liquidity requirements, however, have to be met by EU branches in the Netherlands. - Banks established in a state not being a member state of the EEA are not allowed to invite, or to receive redeemable funds in the operation of a business outside of a restricted circle from parties not being professional market parties (AFS Section 3:5), unless DNB has granted authorization as meant in AFS Section 2:20. - On the grounds of AFS Section 3:31, a bank established in the Netherlands which is a subsidiary of a bank established in a non-Member State shall be under sufficient consolidated supervision in the state in which the latter bank is established. ### Summary Table and Recommended Action Plan (selected items) - Compliance grading highlights: - Compliant: Principles 1-10; 12 - 22; 25 - Largely compliant: 1(2);11; 21, 23; 24 - Recommended Action Plan (selected entries verbatim): - CP 1 (2). Independence, accountability and transparency. - To spell out more precisely under which circumstances the MoF would use its legal powers to object DNB rule making decisions to make the process more transparent. - CP 9. Problem assets, provisions and reserves. - DNB may want to consider to providing guidance on the definition of default and outline its expectations concerning the level of provisions that would be appropriate when assets are impaired. - CP 11. Exposures to related parties. - DNB to implement specific rules detailing the limits and prohibitions on related party lending. - CP 14. Liquidity risk. - DNB to standardize liquidity report to permit analysis according to major currencies. - CP 21. Supervisory reporting. - The authorities need to introduce more standardized and more granular reporting forms to facilitate comparative or aggregate macro and micro analysis (stress tests). Solo reporting also needs to be enhanced. - CP 23. Corrective and remedial powers of supervisors. - To make necessary legal changes to provide DNB with a full range of bank resolution tools. - CP 24. Consolidated supervision. - The authorities to strengthen the resources it devotes to its oversight of subsidiaries located outside the Netherlands and its practices and procedures for obtaining relevant information concerning their operations and the risks that they pose to the financial group. ### Authorities’ response (selected paragraphs preserved verbatim) - Paragraph 72–77 (key points): - The Dutch authorities express appreciation to the IMF and the assessment team; the FSAP has been a useful exercise delivering useful insight. - The authorities welcome the overall assessment indicating a high level of observance of banking supervision with the well respected Basel Core Principles. - Since the conclusion of the FSAP-mission, several initiatives have already been taken up: creation of a new supervisory division within DNB since January 2011 that comprises several expertise centers and a separate department with a focus on intervention policy; the Ministry of Finance published in March 2011 draft legislation for consultation to strengthen the formal powers of DNB. - In February 2011, DNB published its supervisory themes for 2011 and identified further strengthening of data collection as a specific theme requiring extra attention. - The Minister announced proposals with regard to institutional framework and division of responsibilities; the Ministry of Finance and the Ministry of Justice are exploring possibilities to limit the liability of the financial supervisors by explicitly laying down the limitation in legislation. - DNB will continue to strengthen its international cooperation and will increase its supervisory resources, although available resources will remain constrained compared to the size of the financial sector and it will continue to be necessary to set priorities on the basis of a risk-based approach. - Paragraph 78 (on CP 11 exposures to related parties): - DNB notes its current practice contains more than an informal approach based on moral suasion (paragraph 60). - As part of the FINREP reporting requirements, institutions are required to report a standardized table to DNB on a regular basis. - Institutions must assess and disclose exposures to related parties in their annual accounts; these exposures form an integral part of the annual discussion between DNB and the external auditor. - DNB assesses exposures against the background of controlled and sound business operations and has provided the IMF with evidence that this approach is actively enforced with use of its formal powers under the AFS. ### Appendix: Ladder of intervention (summary of phases and measures) - Normal: - Solvency and liquidity adequate. Operations adequate / management performing adequately. - Appraisal via FIRM of risks and appropriate control measures; FIRM score decides light or strict supervisory regime. - All institutions subject to ongoing supervision: financial reports and policy interviews. DNB Supervisory Strategy 2010-2014 special attention areas: ‘business model and strategy’ and “conduct and culture.” - Responsible: The supervisory officer, in dialogue with their manager and consultation with specialists. - Increased vigilance: - Triggered by issues/signals concerning solvency and/or liquidity (institution meets ratios but shows a (potential) declining trend), operations/management performance, doubts about business model/strategy or internal culture, start-up banks, market instability, internal fraud, or permanent concentration risk. - Measures: intensive monitoring (increased frequency of reports; requiring specific audits by Internal Audit; more frequent on-site inspections; additional stress tests); discussion with institution; focus on file building; request plan to address issue; increased capital requirement may be called for. - Responsible: Involvement of department head, alignment with division director, inform Governing Board; intensified contact with fellow supervisors; possible Direction (AFS Article 1:75); impose special measure (AFS Article 3:111a), replacement of director, attach additional conditions to authorisation or to VVGB, fine, cease and desist order under penalty. - Concern: - Serious concern regarding solvency and/or liquidity (bank risks noncompliance with solvency and/or liquidity ratios), operational/management performance, or doubts about business model/strategy or culture. - Measures: significant expansion of supervisory capacity, increased file building, drafting Plan of Action (PoA) which may include Direction (AFS Article 1:75), imposition of special measure (banks), recovery plan, restructuring plan (insurers), replacement of Director (AFS Articles 3:8, 3:9 and 1:75). Plan of Action submitted for approval to the Governing Board (Executive Director for small institutions). - Impending crisis: - Survival of the firm as an independent entity is in danger; market and public confidence may come under pressure with rapid evaporation of financing. - Measures: attach additional conditions to authorisation or to VVGB (AFS Articles 3:95 to 3:109); fine, cease and desist order under penalty (AFS Articles 1:80 and 1:79); appoint a special administrator (AFS Article 1:76); finance plan (insurers), Safety Net for Life Insurers (Opvangregeling leven), intrusive crisis management tools, ELA. Responsibility to use intrusive crisis management tools: to be determined; DNB as the central bank. - Crisis: - Firm cannot continue as an independent entity. Market confidence evaporated. - Measures: emergency regulations/bankruptcy; prospective addition: portfolio transfer under the DGS; revoking banking license (AFS Article 1:104); DNB applies to Court of Law for emergency regulations/bankruptcy; the Court decides. - Note: The phrase ‘improvement is not reasonably to be expected’ is being considered for more precise modification to avoid adverse court rulings. *Source: IMF Team* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11206.pdf_