## BELGIUM — DETAILED ASSESSMENT OF OBSERVANCE: BASEL CORE PRINCIPLES FOR EFFECTIVE BANKING SUPERVISION (_cr13133)

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### Summary findings and systemic context
- High level of compliance with the Basel Core Principles (BCPs) achieved despite continuing stress and vulnerabilities in the banking sector.
- Key contextual pressures:
  - Continued elevated stress within the banking system and persistent vulnerabilities following the financial crisis.
  - Industry pressure to meet forthcoming higher regulatory standards in capital and liquidity (Basel III/CRD IV).
  - Re-design of regulatory architecture and transfer of prudential supervision to the National Bank of Belgium (NBB) under the “Twin Peaks” model (effective April 2011).
- System structure and crisis impact:
  - Banking system assets: grew from 384 percent of GDP in 2000 to 470 percent of GDP in 2007; reduced to 310 percent of GDP in 2011 after post-2008 deleveraging.
  - Four dominant banking groups represent almost ¾ of consolidated system assets.
  - Cross-border claims fell from 300 percent of GDP in 2008 to 58 percent of GDP in mid-2012.
  - Contingent fiscal liabilities from state aid to three banks amount to 16 percent of GDP.
  - Total exposure of banking sector to the federal government increased to 10 percent of banking sector assets in mid-2012.
- Capital and liquidity indicators:
  - Tier 1 capital rose from 11.6 percent of risk-weighted assets in 2008 to 14.8 percent in mid 2012.
  - Major bank Tier 1 capital ratios range between 11.5 percent and 20.6 percent as at March 2012.
  - Deposit guarantee scheme reserves: €2 billion at end-2012; estimated coverage ratio around 0.6 percent of eligible deposits.

### Institutional, legal and governance observations
- Twin Peaks implementation:
  - Prudential supervision allocated to the NBB; market conduct and consumer protection assigned to the FSMA. All bank and insurance supervision staff moved to the NBB.
  - A formalized framework for financial stability coordination reflecting the Twin Peaks transition had yet to be fully implemented; MoUs between NBB and the Ministry of Finance still relied on 2005 and 2008 instruments; MoU with FSMA under active discussion (agreement on financial market infrastructure surveillance signed October 2012).
- NBB mandate, independence and resources:
  - Legal mandate includes obligations to detect threats to financial stability, submit recommendations to government, and coordinate crisis management (NBB Organic Law, Article 12; Article 36/3).
  - Independence and accountability: clear lines of accountability and separate funding for supervisory activities (fees levied on supervised institutions per Royal Decree of 17 July 2012).
  - Staffing: around 200 FTE at transfer in April 2011; NBB Board decided to increase resources by 40 FTE; staff dedicated to prudential regulation and supervision about 230 FTE in September 2012; at least 70 percent professional executives.
  - Recommendation: review project plans to ensure robustly adequate resources and build contingency demands into planning for major EU developments (e.g., Banking Union).

### Macroprudential links, crisis management and safety nets
- Deposit guarantee and resolution:
  - Deposit guarantee limit: €100,000 per depositor per credit institution (Directive 94/19/EC).
  - Deposit guarantee scheme reserves: €2 billion at end-2012; PF resources €241 million at June 30, 2012.
  - Resolution Fund (RF) established by law of 28 December 2011, implemented by Royal Decree of 23 February 2012; funded ex ante by contributions amounting to 0.035 percent of a credit institution's total liabilities net of eligible deposits and regulatory capital; Financial Stability Contributions of €238 million paid in 2012.
  - No target level of reserves for the RF had been set.
- Emergency Liquidity Assistance (ELA):
  - NBB is the provider of ELA under Article 14.4 of the Statutes of the ESCB; extension of ELA subject to ECB Governing Council consultation; ELA granted by the NBB is automatically guaranteed by the State (Article 9 of the NBB Organic Law).
- Fiscal exposure and risks:
  - Limited fiscal headroom; contingent fiscal liabilities from state aid to three banks amount to 16 percent of GDP; exposures to Belgian government constitute roughly more than half of sovereign debt holdings of the sector.
  - Recommendation: fiscal consolidation critical to avoid renewed strains, weaken market confidence, and increase funding costs.

### Major supervisory strengths and planned enhancements
- Supervisory practice and tools:
  - NBB deploys high-quality supervisory practices with a risk-based orientation: SREP (scorecarding), ICAAP scrutiny, Pillar 2 application, on- and off-site programs, supervisory colleges for cross-border groups.
  - PRIME program underway to upgrade scorecarding, reporting IT, clustering and proportionality projects to ensure consistent supervisory intensity across institutions.
- Supervisory findings and areas for improvement:
  - Supervisory resources stretched; need to refine risk‑based supervisory processes to identify minimum adequate supervisory attention per institution risk profile and manage resource reallocation under crisis conditions.
  - Recommendation: put in place systematic supervisory process to assure appropriate intensity of supervisory attention proportionate to each institution’s profile; formalize minimum set of supervisory activities (including annual Board meetings for all banks).
  - Recommendation: finalize MoU between NBB and FSMA to underpin domestic cooperation and remedy drafting oversight in Twin Peaks law to permit exchange of confidential information.

### Key regulatory and prudential issues (selected)
- Large exposures (Principle 10)
  - Legal limit: exposure to a client or group of connected clients shall not exceed 25 percent of own funds.
  - Concession per Directive transposition: where the client is an institution, the value shall not exceed 25 percent of own funds or EUR 150 million, whichever is higher, provided sum of exposures to connected non-institutions does not exceed 25 percent.
  - Where EUR 150 million is higher than 25 percent of own funds, exposure after CRM may not exceed a reasonable limit determined by the institution and not higher than 100 percent of own funds.
  - Concretely: smaller banks (own funds below EUR 600 million) may be accepted to exceed 25 percent up to 100 percent of own funds; CRM can reduce exposure even at the 100 percent threshold so gross exposure to a single counterparty can exceed 100 percent of own funds.
  - Assessment: concession significantly weakens regime for smaller banks and exposes them to concentration risk; recommendation for NBB to examine national discretion to set stricter limits when transposing CRD IV.
  - Sample large exposure data sighted: Bank 1 individual exposure after CRM 71 percent; Bank 2 Group 155 percent; Bank 3 300 percent sovereign; Bank 6 aggregate LE to 6 corporates approx 70 percent Total Capital.
- Capital adequacy (Principle 6)
  - Basel 2/CRD framework transposed; minimum Tier 1 and total capital rules in place; own funds regulation transposes Basel II/II.5 and prepares for Basel III.
  - Treatment anomaly at assessment time: investments in insurance subsidiaries deducted 100 percent from Total Capital (to be modified to 50:50 from T1 and T2 as of end 2012 and aligned with Basel II/III thereafter).
  - Pre-crisis practice concern: banks granting credit to shareholders to subscribe capital where repayment depended on proceeds from capital instruments; transition rules for deduction commencing 1 January 2014 with phased adjustments; published ratios still included these amounts at mission time, weakening transparency.
  - Assessment: Principle 6 graded Largely Compliant.
- Liquidity risk (Principle 14)
  - Regulatory stress test and reporting framework in place since 2009/2011: 1 week and 1 month horizons, daily reporting for systemic banks; NBB’s stress test parameters differ from Basel LCR in some definitions (eligible liquid assets broader, run-off assumptions more stringent).
  - Regulatory stress test allows unlimited intra-group support in meeting the test.
  - Assessment: Principle 14 graded Compliant; recommendation: consider limits on timing or extent of intra-group support in regulatory stress test.
- Risk management, governance and Board engagement (Principles 7, 17, 16)
  - ICAAP required and central to SREP; NBB uses scorecard and Pillar 2 add‑ons.
  - Weakness: supervisory framework did not mandate regular direct engagement with full Boards across all banks; recommendation: mandatory annual meetings with full Board and formalize minimum supervisory activities.
  - Interest rate risk in the banking book well covered by regulations and stress-test ratios; assessment: Principle 16 graded Compliant with recommendations to consolidate rule texts and strengthen separation of markets and treasury functions.
  - Internal control and audit: external auditors accredited by NBB and considered collaborators; external audit does not provide positive assurance on design and effectiveness of controls—supervisory testing frequency and comprehensiveness could be enhanced; assessment: Principle 17 graded Largely Compliant.

### Supervisory approach, on-site/off-site mix and reporting (Principles 19–21)
- Supervisory approach:
  - SREP supported by structured scorecarding (impact, risk, shareholder quality) and BPR (Bank Performance Report) IT tools; PRIME program to upgrade analytics and reporting.
  - Aggregate compliance summary: Compliant (C) – 21; Largely compliant (LC) – 9; Materially noncompliant (MNC) – zero; Noncompliant (NC) – None.
- On-site and off-site supervision:
  - On-site inspection types: deep dive inspections, thematic inspections, targeted/reactive inspections, information visits.
  - Frequency: systemic firms receive more intensive and regular on-site coverage; non-systemic firms lack mandated minimum supervisory intensity and may have multi-year inspection cycles.
  - Assessment: Principle 20 graded Largely Compliant; recommendation: implement baseline supervision and clustering/proportionality projects to ensure comparable institutions receive consistent supervisory attention.
- Supervisory reporting:
  - Prudential reporting: quarterly COREP/FINREP; liquidity reported monthly; concentration risk reported annually; IRRBB and FINREP/COREP sometimes submitted with up to 2.5 months lag.
  - Recommendation: align reporting dates and improve timeliness/consistency of key data elements; PRIME project to address remittance dates (EBA ITS/CRD IV expected to shorten remittance dates).

### Consolidated supervision, cross-border cooperation and colleges (Principles 24–25)
- Consolidated supervision powers and practice:
  - NBB exercises consolidated supervision under Banking Law Article 49 and Royal Decree of 12 August 1994; group memoranda and conglomerate supervisory powers in place; powers to request information from non-regulated entities in scope.
  - NBB participates in 12 supervisory colleges: 5 as home authority and 7 as host authority; NBB has signed 26 MoUs overall, of which 18 are intra-EU.
  - Assessors: consolidated supervision framework and college participation functioning effectively; recommendation to enhance expectations of parent company governance for holistic group coordination.
- Home-host relationships:
  - Information exchange practices and use of colleges well developed; secured college webtool used to structure exchanges.
  - Assessment: Principle 25 graded Compliant.

### Enforcement, remedial powers and sanctions (Principles 1(4), 23)
- Range of powers:
  - Articles 57 and 57bis grant extensive remedial powers: appoint special commissioner, require replacement of managers, impose restrictions, suspend activities, transfer or dispose assets/liabilities via Royal Decree in resolution circumstances.
  - Administrative fines up to EUR 2,500,000 per infringement or up to EUR 50,000 per day of delay (Article 103); fines payable to the Ministry of Finance.
  - Sanctions Committee required to impose fines; at the mission time the Sanctions Committee had not yet been convened (appointments pending Royal Decree).
  - Legal protection: liability protection for NBB staff except in fraud or gross negligence; insurance arrangements for defence costs in place.
- Assessment: Principle 23 graded Compliant; NBB often uses suasion but has demonstrated readiness to use legal remedies; consideration to make disciplinary powers more graduated and proportionate.

### AML/CFT, abuse of financial services (Principle 18)
- NBB assumed AML/CFT supervisory responsibilities for credit institutions from 1 April 2011.
- Legal framework: Law of 11 January 1993 and subsequent amendments and Royal Decrees; regulation of 23 February 2010.
- Findings:
  - No evidence of a fully systematic, risk‑based supervisory program covering all credit institutions for AML/CFT; a further review planned for December 2012.
  - Financial institutions not required to transmit copies of all STRs to the NBB; NBB can require relevant information but relies on CTIF/CFI notifications.
  - Assessment: Principle 18 graded Largely Compliant; recommendation to strengthen systematic supervisory coverage and reporting channels for STRs.

### Selected recommended action plan (selected items extracted)
- CP 1.2 Independence, accountability and transparency:
  - Publicly disclose reasons for dismissal of the Governor; review adequacy of staff resources.
- CP 4 Transfer of significant ownership:
  - Remedy lack of legal obligation for a credit institution to notify supervisory authority of material adverse developments affecting suitability of a major shareholder.
- CP 5 Major acquisitions:
  - Amend laws/regulations to ensure NBB has right of pre-approval for major acquisitions by a credit institution in the non-financial sector (planned Banking Law modification).
- CP 7 Risk Management:
  - Update Internal Governance Circular; require annual Board meetings with supervisor; develop standard supervision program linked to risk scorecard; formalize cycle for accredited internal models.
- CP 10 Large exposures:
  - Examine use of national discretion to set stricter limit on large exposures for smaller institutions in CRD IV transposition.
- CP 14 Liquidity risk:
  - Consider limitations on intra-group support assumptions in the regulatory liquidity stress test.
- CP 17 Internal control and audit:
  - Consider obtaining positive assurance from external auditor on design and effectiveness of controls.
- CP 20 Supervisory techniques:
  - Implement systematic supervisory process to ensure supervisory intensity proportionate to institution profile; baseline supervision and clustering projects to be coupled with contingency planning.
- CP 21 Supervisory reporting:
  - Align reporting dates so prudential returns submitted more timely and consistently; reduce lags for concentration and interest rate risk reporting.

*Source: International Monetary Fund staff report — Detailed Assessment of Observance: Basel Core Principles for Effective Banking Supervision (May 16, 2013) — content unit _cr13133.*

### 2013. The views expressed in this document are those of the staff team and do not necessarily reflect

### BELGIUM — DETAILED ASSESSMENT OF OBSERVANCE: BASEL CORE PRINCIPLES FOR EFFECTIVE BANKING SUPERVISION

### Summary, key findings, and recommendations
- High level of compliance with the Basel Core Principles (BCPs) achieved despite challenging environment and ongoing vulnerabilities.
- Key contextual pressures:
  - Continued elevated stress within the banking system and persistent vulnerabilities following the financial crisis.
  - Industry pressure to meet forthcoming higher regulatory standards in capital and liquidity.
  - Re-design of regulatory architecture and move of prudential supervision to the central bank.
- National Bank of Belgium (NBB) supervisory observations:
  - NBB deploys high-quality supervisory practices and is implementing well conceived initiatives and reforms.
  - Weaknesses exist in the supervisory process; NBB has instituted enhancements including an annual risk review.
  - Planned projects aim to streamline and integrate processes, create greater flexibility in data handling, and strengthen firm-specific and horizontal analysis.
  - Need to refine risk-based supervisory processes to identify minimum adequate supervisory attention per institution risk profile and to manage resource reallocation under crisis conditions.
- Large-exposure regime weakness:
  - Concession permits exposures to exceed the 25 percent of own funds limit where an amount of €150 million is higher than 25 percent of own funds.
  - Exposure, after credit risk mitigation, can exceed 25 percent up to 100 percent of own funds under this concession.
  - Concession derived from Directive 2009/111/EC (modifying Directive 2006/48/EC) and national discretion can set a stricter limit; four banks within the EC have done so.
  - Concession significantly weakens the regime and exposes smaller banks to concentration risk; smaller banks lack access to deep capital markets to quickly raise capital if an exposure defaults or is impaired.

### Assessment scope, methodology, and process
- Assessment conducted as part of IMF Financial Sector Assessment Program (FSAP) during 2012; reflects framework in place as of completion of the assessment.
- Belgian authorities agreed to be assessed according to the Core Principles (CP) Methodology issued by the Basel Committee in October 2006.
- Assessment features:
  - Use of essential (EC) and additional (AC) assessment criteria for each principle; EC are the only elements for full compliance; AC are best practices and commented on but not graded.
  - Qualitative assessment using a four-part grading system: compliant; largely compliant; materially noncompliant; noncompliant.
  - Five-category observation scale used in determination: compliant; largely compliant; materially noncompliant; noncompliant; non-applicable.
  - Judgment required; assessments not directly comparable to pre-2006 BCP assessments due to methodological changes and heightened focus on risk management.
- Information and engagement:
  - Review of laws, rules, guidance and extensive meetings with NBB officials and banking sector participants, including industry association and domestic and non-domestic institutions.
  - Assessment team: Katharine Seal and Christopher Wilson (both Senior Financial Sector Experts, IMF).
  - Team appreciated high-quality cooperation and extensive documentation provided by authorities.

### Institutional, macroeconomic, and market-structure overview
- Size and concentration:
  - Belgian banking system assets: grew from 384 percent of GDP in 2000 to 470 percent of GDP in 2007.
  - Post-2008 deleveraging reduced size to 310 percent of GDP in 2011; a second wave of deleveraging underway at a slower pace.
  - System concentrated: four dominant banking groups represent almost ¾ of consolidated system assets.
  - Assets of foreign-owned banks account for more than half of the sector.
  - Insurance sector embedded in bancassurance model dominated by a few conglomerates.
- Crisis impact and adjustments:
  - 2008 crisis led to deterioration of market funding and capital positions; banks raised capital, shed assets, and received state capital infusions.
  - Belgian state provided extensive funding and asset relief guarantees to the three largest banks.
  - Since 2008, major banks have shifted away from investment banking and asset management toward traditional domestic banking.
  - Cross-border claims fell from 300 percent of GDP in 2008 to 58 percent of GDP in mid-2012.
  - Largest remaining foreign exposures: Czech Republic, France, the United Kingdom, and Ireland.
- Macroeconomic outlook and risks:
  - Export-oriented growth slowed significantly since start of 2012; expected to stagnate in 2012–13.
  - General government deficit expected to fall below 3 percent of GDP in 2012; debt-to-GDP dynamics remain uncertain.
  - Labor market and pension reforms initiated; implementation challenging and competitiveness continues to fall.
  - Unemployment rate has begun to rise.
- Sovereign–bank links and fiscal contingent liabilities:
  - Total exposure of banking sector to the federal government increased to 10 percent of banking sector assets in mid-2012.
  - Contingent fiscal liabilities from state aid to three banks amount to 16 percent of GDP.
  - Exposures to the Belgian government are roughly more than half of all sovereign debt holdings of the sector.
  - Limited fiscal headroom makes fiscal consolidation critical to avoid renewed strains, weaken market confidence, and increase funding costs.
- Profitability, capital, and liquidity:
  - Banks have struggled with profitability since the crisis; structural costs remain high.
  - Wide and stable deposit base limited rollover risks; re-orientation to domestic markets prevented disproportionate decline in credit supply.
  - Downside risks to asset quality remain, especially in foreign subsidiaries; overall impairments have remained relatively benign so far.
  - Tier 1 capital rose from 11.6 percent of risk-weighted assets in 2008 to 14.8 percent in mid 2012.
  - Progress made to reduce structural liquidity dependence on wholesale funding.
  - Stricter NBB liquidity regulation (spearheading future Basel III liquidity framework) improved liquidity risk management focus; Eurosystem measures supported liquidity positions of Euro area banks.

### Regulatory and supervisory architecture and crisis management
- Re-organization post-crisis:
  - Regulatory and supervisory architecture re-organized into a “twin peaks” model effective April 2011, replacing the integrated regulator (Commission Bancaire, Financiers et Assurances).
  - Prudential supervision allocated to the NBB; market conduct and consumer protection assigned to the Financial Services and Markets Authority (FSMA).
  - All bank and insurance supervision staff moved to the NBB.
- Crisis management and financial stability coordination:
  - NBB has formal legal responsibility for coordinating financial crisis management (NBB Organic Law, Article 36/3, section 1).
  - NBB powers include advising Federal Government and Federal Parliament on measures necessary or useful for financial stability.
  - Actions proposed by NBB under Article 57bis of the Banking Law require a Royal Decree, deliberated by the Council of Ministers; the Minister of Finance role is not explicitly articulated in legislation.
  - NBB legal mandate for financial stability (Article 12 of the NBB Organic Law of 22 February 1998) includes obligations to detect threats to financial stability, submit recommendations to government as necessary, and collaborate with the European Systemic Risk Board (ESRB).
  - NBB powers regarding systemic financial institutions include the ability to oppose strategic decisions or impose specific measures (Article 36/3 section 2 of the Organic Law).

*Source: International Monetary Fund staff report — Detailed Assessment of Observance: Basel Core Principles for Effective Banking Supervision (May 16, 2013).*

### 21.      A formalized framework for financial stability coordination reflecting the transition

### 21.      A formalized framework for financial stability coordination reflecting the transition

### Coordination and Twin Peaks implementation
- A formalized framework for financial stability coordination reflecting the transition to the Twin Peaks model has yet to be put in place.
- Following the implementation of the Twin Peaks model in Belgium, new arrangements between the NBB and the Ministry of Finance are yet to be agreed.
- The NBB and the Ministry remain bound by MoUs agreed in 2005 and 2008.
- Progress is being made on MoUs between the NBB and the FSMA to formalize modalities of effective exchange of information and cooperation.
- An agreement on surveillance of financial market infrastructure was signed (October 2012) and a more general agreement of cooperation is under active discussion.

### A. Preconditions for Effective Banking Supervision
- Legal and institutional framework
  - Belgium has a complete system of business laws, consistently enforced; the legal system is based on civil law.
  - Legislative branch: a parliament with two chambers (Chamber and Senate); constitutional monarchy with the King as head of state and of the executive branch.
  - Judicial branch: independent, hierarchy of courts; Court of Cassation is the supreme judicial court.
  - Two kinds of ordinary appeal: application to set aside or appeal the decision (Article 21(1) of the Judicial Code) and “special appeals”; ordinary appeals are dealt with by Court of Appeal (five courts whose territorial jurisdiction set out in the Constitution).
  - Constitutional court established in 1980.
  - As an EU member, much domestic legislation, including banking regulation, derives from EU regulations, directives and decisions.
- Accounting and auditing framework
  - Belgian accounting framework is established in law and implemented through Royal Decree.
  - Belgium has adopted the IFRS accounting standards for listed companies and other consolidated accounts.
  - Unconsolidated accounts must be prepared in accordance with Belgium Generally Accepted Accounting principles (BGAAP) as set out in the Royal Decree of 23 September 1992.
  - Legal basis: Company law code and specific supervisory laws for insurance and banking.
  - Commission for Accounting Principles articulates Belgian General Accounting Principles; the NBB takes the Commission’s role for accounting in insurance and banking.
  - Belgian Institute of Accountants (Institut des Experts-Comptables—IEC) regulates the profession.
  - Belgian auditing framework established in law and implemented by the Belgian Auditing Institute (Institut des Réviseurs d'Entreprises - IBR/IRE).
  - IBR/IRE inspects audit firms, handles training and continuous professional education; external auditors are licensed by IBR/IRE; external auditors auditing a bank must also be accredited by the NBB (Article 50 of the Banking Act).
  - Domestic auditing standards prepared by the profession, reviewed by the High Council of the Institute, approved by the competent Minister; rotation standards require rotation after six years.
  - From 2012 onwards audits of PIE’s have to be performed according to International Standards on Auditing as issued by the IAASB.
  - The Institute is member of FEE and IFAC.
- Disclosure and market infrastructure
  - IFRS disclosures apply to all listed companies and all banks are subject to a range of disclosure requirements.
  - Required reports include annual financial statements, management reports, or annual Risk Report as issued by banks.
  - The NBB is planning to assess the consistency of Pillar 3 disclosures; no assessment has been completed beyond the EBA assessment to which the NBB contributed.
  - Belgium has a regulated stock exchange (Euronext) and a secondary market subject to investor protection and governance rules; most investor protection and disclosure requirements stem from European directives.

### Safety nets
- Deposit guarantee arrangements
  - All credit institutions established in Belgium must take part in a collective deposit guarantee scheme financed by them.
  - Consistent with EU Directive 94/19/EC depositors are guaranteed up to a limit of €100,000 per depositor per credit institution.
  - Legislation on the deposit guarantee system entered into force in 1994 and was successively modified in 1999, 2008, 2009 and 2011.
  - Law provides gateways for cooperation agreements with foreign bodies and creates a legal obligation for the NBB to inform the bodies that manage the deposit guarantee scheme when it detects problems likely to give rise to intervention (Article 110 bis2 of the Banking Law).
- Structure of the deposit guarantee scheme
  - The deposit guarantee scheme is jointly organized by:
    - the Protection Fund for Deposits and Financial Instruments ("PF"); and
    - the Special Protection Fund for Deposits, Life Insurance and capital of cooperative companies ("SPF").
  - SPF created in 2008 to give certainty to depositors; contributions to the SPF are risk based (solvency, liquidity and asset quality).
  - Prior to 2009 contributions were paid to the PF; contributions to the PF are currently suspended in light of contributions paid to the SPF since 2009.
- Governance and resources
  - The SPF is an administrative entity under the Ministry of Finance; the PF is an autonomous public institution (law of 17 December 1998).
  - PF administered by a management committee with equal numbers of representatives of the financial sector and the government; Chairman and five Committee members appointed by the Minister of Finance, two drawn from the NBB; remaining members proposed by the banking and stockbroking industry.
  - In case of conflict of interest a Board member must recuse (Royal Decree of February 15, 1999).
- Payout rules and reserves
  - DGS pay-out is triggered when a financial institution has been declared bankrupt by the Court or when the NBB has notified the DGS that a financial institution has failed to reimburse deposits to its clients.
  - The reimbursement period is 20 working days.
  - In the event of a failure, funds are to be drawn first from the PF, then from the SPF and, should these funds be insufficient, a supplementary advance will be made by the Ministry of Finance and recouped afterwards from contributing members.
  - After an advance from the Ministry, future contributions to the SPF will be evenly distributed between direct repayment to the Ministry and replenishment of the SPF’s reserves.
  - The reserves of the deposit guarantee scheme amounted to €2 billion at end-2012, with an estimated coverage ratio of around 0.6 percent of eligible deposits.
- Preventive measures and Resolution Fund
  - The PF may take preventive action within the limits of its financial resources (€241 million at June 30, 2012), assisting in liquidation, financial reorganization or resumption of business of a member institution if cost does not exceed the total payout or if operation is in the public interest; current legislation does not provide scope for preventive action by the SPF.
  - A Resolution Fund (RF) was established through the law of 28 December 2011 and implemented by Royal Decree of 23 February 2012.
  - RF is managed by the Caisse des dépôts et Consignations / Deposito en Consignatiekas, a special administration within the Ministry of Finance.
  - RF can finance preventative action, bridge bank, total or partial transfer of assets and liabilities, a good/bad bank split.
  - RF is funded ex ante by annual financial stability contributions amounting to 0.035 percent of the credit institution's total liabilities net of deposits eligible for deposit guarantee and of regulatory capital.
  - Contributions are paid directly to the Ministry of Finance where they go to general revenue although a resolution reserve has been created using the contributions from credit institution members of the Fund.
  - Financial Stability Contributions of €238 million were paid in 2012 for the first time.
  - No target level of reserves for the resolution fund has been set.
- Intervention and ELA
  - The NBB enjoys extensive early intervention and resolution powers defined in articles 57 and 57 bis of the law of 22 March 1993.
  - NBB may appoint a special inspector, suspend or prohibit activities, require replacement of managers or directors, and revoke authorization.
  - In a resolution phase and when financial stability is threatened, the government, through a Royal Decree, may adopt measures providing for transfer, sale or other disposition of assets, liabilities or rights and obligations of a credit institution.
  - The NBB is the provider of Emergency Liquidity Assistance ("ELA") to credit institutions under Article 14.4 of the Statutes of the ESCB.
  - Extension of ELA is subject to consultation with the ECB Governing Council, which can prohibit ELA or subject ELA to conditions.
  - ELA granted by the NBB is automatically guaranteed by the State (Article 9 of the NBB Organic Law).

### B. Main Findings
- Objectives, independence, powers, transparency, and cooperation (CP1)
  - The NBB has a clear legal power to conduct prudential supervision and a legal mandate to detect threats to financial stability.
  - The legal mandate does not clarify the relationship between the NBB’s supervisory function and its financial stability function or how to balance priorities if a conflict emerges.
  - Recommendation: greater legal clarity should be provided if a revision to the NBB Organic Law is undertaken; the NBB should develop and publish a mission statement of its objectives irrespective of legal changes.
  - The NBB has clear lines of accountability, transparency and separate funding when acting in its supervisory capacity; no indication of interference with operational independence.
  - Supervisory resources at the NBB are stretched; concern given continued stress within the financial system and importance of enhancements to supervisory practices and processes.
  - Recommendation: NBB should review project plans carefully to ensure robustly adequate resources for delivery of multiple supervisory projects and day-to-day supervision; build contingency demands into planning for major EU developments (such as the Banking Union) and potential crisis issues arising in supervised institutions.
  - The NBB operates within a clear and balanced legal framework; NBB Organic Law and Banking Law provide for authorization and ongoing supervision standards and remedial measures with proportionality.
  - Article 57 of the Banking Law acknowledges necessity for swift action in urgent situations; extensive powers balanced by need for ratification by Royal Decree; appropriate legal protections in place.
  - General framework for exchange of information well articulated but domestic coordination not fully put in place.
  - Recommendation: domestic working level cooperation should be underpinned by an MoU between NBB and FSMA; amend Twin Peaks Law to rectify drafting oversights in gateway for exchange of information between FSMA and NBB (planned for end of 2012) and conclude amendments.
- Licensing and structure (CPs 2–5)
  - Legal framework for authorization, ongoing supervision standards and permissible activities is clearly stated.
  - Law provides that NBB and FSMA should prevent the public being misled into placing deposits with unauthorized institutions.
  - NBB has conducted a thorough review of fit and proper policies and practices; fit and proper standards must be met on a continuous basis and NBB can initiate an assessment at any moment.
  - Widening of fit and proper assessments to include heads of compliance, internal audit and risk management (where not part of senior management) is good practice.
  - Change of control and major acquisitions are broadly well governed by laws, though some gaps merit attention.
  - NBB is increasing focus on shareholding and ownership structure above the institution.
  - Recommendation: remedy lack of legal obligation for a credit institution to notify supervisory authority of a material adverse development that may affect suitability of a major shareholder.
  - Recommendation: for non-systemic firms, NBB should establish either pre-notification or pre-approval thresholds for acquisitions in non-financial entities.
- Prudential regulation and requirements (CPs 6–18)
  - Belgium banks have undergone considerable stress and have increased capital and quality of capital (CET1).
  - Major bank Tier 1 capital ratios range between 11.5 percent and 20.6 percent for the larger systemically important banks as at March 2012.
  - Capital ratios demonstrate a high composition of CET1, which has been gradually increasing despite episodes of severe stress requiring state intervention and support.
  - Quality of the capital base has been improving with a run off of Tier 2 instruments in anticipation of Basel III implementation.
  - Increased minimum capital adequacy requirements under BIII will continue to be challenging for some banks in the context of lower internal profit generation.
  - NBB’s approach to Pillar 2 is well developed using a scorecard as primary tool for risk analysis, taking into account qualitative and quantitative measures.
  - At least on an annual basis the NBB determines minimum capital adequacy requirements for all banks on a forward looking basis; SREP and ICAAP analyses and outputs from banks’ economic capital models and stress testing are important inputs.
  - Senior management must submit an annual self assessment of the control environment to the NBB.
  - External auditor provides a factual evaluation of management’s self assessment but does not provide positive assurance regarding design and effectiveness of controls; external auditor’s report should not be overly relied upon in absence of on-site review.
  - NBB uses external auditor input in combination with ICAAP, on-site reviews and discussions with the Board.
  - Recommendation: annual meetings with the full Board of Directors should be mandatory for all banks as part of the NBB’s standard supervision practice to assess the Board’s role in overseeing management; formalize minimum set of supervisory activities to be performed periodically, including meetings with full Board (including non-executive independent directors).

*Source: _cr13133 - 21.      A formalized framework for financial stability coordination reflecting the transition*

### 43.      The limits regarding large exposures have been strengthened recently. An institution

### _cr13133 - 43.      The limits regarding large exposures have been strengthened recently. An institution

### Large exposure limits
- An institution shall not incur an exposure, after taking into account the effect of the eligible credit risk mitigation techniques, to a client (counterparty) or a group of connected clients (counterparties) the value of which exceeds 25 percent of its own funds.
- Following the European Directive text (as modified by Directive 2009/111/EC), where the client is an institution, the value shall not exceed 25 percent of the credit institution's own funds or EUR 150 million, whichever is the higher, provided that the sum of exposure values after taking into account eligible credit risk mitigation techniques to all connected clients that are not institutions does not exceed 25 percent of the credit institution's own funds.
- Where the amount of EUR 150 million is higher than 25 percent of the own funds, the value of the exposure, after credit risk mitigation, shall not exceed a reasonable limit in terms of the credit institution's own fund.
- That limit shall be determined by credit institutions, consistently with the policies and procedures to address and control concentration risk and shall not be higher than 100 percent of the credit institution's own funds.
- Concretely, a more lenient large exposure limit may be accepted by authorities for smaller credit institutions (i.e., having own funds below EUR 600 million).
- Assessment note: The LE regime provides for concessions for smaller banks to exceed the 25 percent limit up to 100 percent own funds if the exposure is less than 150mn euro; CRM can reduce the exposure even at the 100 percent threshold which means in practice, the gross exposure to a single counterparty can exceed 100 percent own funds.

### Liquidity regime and stress testing
- Systemic banks need to report liquidity on a daily basis in addition to meeting a one week and one month liquidity stress test.
- Objective: ensure the bank is able to meet predefined liquidity buffers o survive a short-dated stress.
- Definition of eligible liquids is broader than the Basel LCR definition, while the run-off assumptions for liabilities are more stringent.
- The stress test was introduced at the start of 2009 as an observation ratio with full implementation from 2011.
- The introduction of a liquidity stress test will help smooth the transition to comply with the LCR for banks when implemented in 2015.
- Regulatory assessment: The regulatory requirements for liquidity risk are relatively well advanced with a quantitative test similar to the Basel LCR in place since 2011. Daily reporting for larger systemic banks is robust. Follow-up of the self assessment process has not been conduced across all banks in the sector.

### Operational resilience, outsourcing, and ICT supervision
- Specific guidance has been issued regarding sound management of outsourcing, business continuity management and financial services provided by the internet.
- The NBB has a dedicated team of eight IT specialists.
- Credit institutions are required to perform regular business continuity practices and disaster recovery testing, but the NBB will not necessarily receive the detailed results of that testing.
- Recommendation: The NBB should strengthen the framework for operational risk monitoring by requiring all credit institutions to certify a certain level of resilience on an annual basis, and require immediate reporting of a breach of that level, particularly if bank is systemic.

### Interest rate risk in the banking book
- The requirements for managing interest rate risk in the banking book are well established in the regulatory framework.
- Interest rate risk stress test ratios require banks to hold sufficient capital to cover economic value losses related to adverse structural interest rate changes prescribed by the NBB.
- While the ratios provide a consistent measure across banks, the ratios do not always fully capture bank specific risks.
- When evaluating minimum capital ratios, interest rate risk is taken into account as a Pillar 2 risk.
- Regulatory assessment: The prudential requirements for managing interest rate risk in the banking book are well established; the NBB has embedded interest rate risk in its core work.

### Supervisory approach and ongoing supervision (CPs 19–21)
- The supervisory staff of the NBB are conducting excellent quality risk based supervision both on and off-site; a sound analytical process is in place and is being refreshed and deepened.
- The NBB shares detailed risk assessment with institutions concerned; this has a constructive effect.
- NBB has restructured its resources and put in place effective coordination between on-site and off-site teams.
- Recommendation: Ensure “globally balanced supervisory planning” so each institution receives supervisory attention proportionate to its profile; implement a risk based approach to supervisory intensity and clarify minimum frequency of reporting to the NBB Board.
- NBB has initiated analytical and IT projects to support these objectives; successful completion and robust project management are important in the current environment of elevated systemic risks and likely structural changes such as the Banking Union.

### Accounting, disclosure, and prudential reporting (CP 22)
- External auditors of banks are accredited by the NBB and are seen as ‘collaborator’ of banking supervision; auditors provide audit opinions on financial accounts (six monthly and annually) and on management’s annual self assessment of internal control and prudential returns reliability.
- Under NBB rules, banks report on a solo and, if part of a group, consolidated basis: Belgium GAAP on a solo basis and IFRS for consolidated basis if consolidated accounts are required by EU directives.
- Banks submit quarterly prudential returns for key data; liquidity is reported monthly.
- Concentration risk is only reported annually and interest rate risk data is submitted with a lag of two and half month after the reporting date, making integrated and comprehensive offsite analysis more challenging.
- Recommendation: Align reporting requirements for all key data elements; NBB has a project in place to consider prudential reporting.

### Corrective and remedial powers (CP 23)
- The NBB enjoys a broad range of powers for corrective and remedial measures and has demonstrated ability and readiness to use such remedies.
- Evidence exists that suasion has been used in preference to legal remedies in some cases.
- The NBB is examining the possibility of making its disciplinary powers more graduated and proportionate to the severity of the offence.

### Consolidated and cross-border supervision (CPs 24–25)
- The NBB has the necessary legal powers and implemented regulatory structure for consolidated supervision.
- Given significant cross-border activities of systemic groups, the NBB focuses on EU supervisory colleges to ensure effective group oversight.
- NBB uses the college environment to test group risk-focused management and to ensure adequate capital distribution within groups.
- Recommendation: Enhance governance requirements for groups by stating more explicitly expectations of the parent company regarding coordinating and controlling the group holistically, and ensure non-banking and non-financial risks are fully understood.
- Recommendation: NBB and the FSMA should finalize the MoU setting out the modalities of cooperation as foreseen in the Twin Peaks legislation.

### Selected Core Principle compliance highlights (Table summary)
- CP 1.2 Independence, accountability and transparency: graded LC; not mandatory to disclose reasons for dismissal of the Governor; staff resources are over-stretched; limited rule making powers subject to potential government veto.
- CP 6 Capital adequacy: graded LC; current approach deducts 100 percent from Total Capital for investment in insurance subsidiaries (to be modified to align with Basel II as of 1 January 2013); concerns over banks granting credit to shareholders to subscribe to capital, with transition commencing 1 January 2014.
- CP 7 Risk management process: graded LC; supervisory assessment may not directly engage full Boards regularly to verify oversight of risk management.
- CP 8 Credit risk: graded LC; no regulatory requirement for major credit exposures over a certain amount or percentage of the bank’s own funds to be decided by senior management or Board.
- CP 10 Large exposure limits: graded LC; concessions allow smaller banks to exceed 25 percent limit up to 100 percent own funds if exposure is <150mn euro; potential for gross exposure to exceed 100 percent own funds.
- CP 14 Liquidity risk: graded C; quantitative test similar to Basel LCR in place since 2011; daily reporting robust for systemic banks.
- CP 17 Internal control and audit: graded LC; supervisory testing frequency, depth and comprehensiveness can be enhanced.
- CP 18 Abuse of financial services: graded LC; last FATF Mutual Evaluation Report in June 2005 with another scheduled for 2014; supervisor’s systematic verification of controls across banks was not evidenced.

*Source: _cr13133.*

### 19. Supervisory approach

### 19. Supervisory approach

### Supervisory approach — findings
- The NBB has put in place a sound analytical process that it is in the process of refreshing and deepening both in terms of analytical insight as well as enhancing the underpinning IT capabilities. The new supervisory tools ought to support a more forward looking analysis and also integrate analysis of insurance risk into the global risk assessment of groups. (Rating: C)

### Supervisory techniques — findings and gap
- The NBB applies a comprehensive supervisory program to systemic firms.
- There is no process to identify the level of supervisory intensity that is proportionate for the non-systemic firms. Within the group of non-systemic firms, risk profiles vary and the minimum levels of adequate supervisory attention will also vary. The NBB needs to be certain that it has correctly identified these minimum levels of supervisory activity and is capable of monitoring and updating its plans as circumstances change. (Rating: LC)
- The NBB is aware of this dimension and has already embarked on multiple projects that will support a successful outcome.

### Supervisory reporting — findings
- Belgium has a well developed system for assessing prudential returns as part of its offsite analysis.
- Financial analysts within the integrated supervisory teams assess prudential returns, mainly on a quarterly basis, the results of which feed into the team meetings, which discuss peer comparisons and suggested outcomes for future action. (Rating: C)

### Accounting and disclosure — findings
- BGAAP applies at a solo level and IFRS for consolidated accounts.
- There is no concrete plan to harmonize accounting methodologies. The different treatment for valuations might create some lack of consistency in comparing risk profiles. (Rating: C)

### Corrective and remedial powers — findings
- The NBB has wide powers of remedial and corrective action and there is evidence that it is prepared to use such powers, even if moral suasion has been effective upon occasion.
- Planned legal changes to permit the NBB Board to apply periodic penalty payments will be a potentially useful additional power. (Rating: C)

### Consolidated supervision — findings
- The NBB has the necessary legal powers and has implemented the necessary regulatory structure to facilitate the practice of consolidated supervision.
- The NBB has continued to develop its working relationships with key supervisory authorities to ensure the quality of group oversight of the systemic firms in particular. (Rating: C)

### Home‑host relationships — findings
- The NBB places great value on home-host relationships. Cooperation agreements and MoUs have been put in place with all relevant authorities and an increasingly mature dialogue of exchange of information and joint activities is being undertaken. (Rating: C)

### Aggregate compliance summary
- Compliant (C) – 21 3
- Largely compliant (LC) – 9
- Materially noncompliant (MNC) – zero
- Noncompliant (NC) – None
- (note: CP 1 is divided into six component for this analysis.)

### Recommended action plan — selected recommendations
- 1.2 Independence, accountability and transparency
  - The reasons for the dismissal of the Governor of the NBB must be publicly disclosed. Adequacy of staff resources need to be reviewed.
- 4. Transfer of significant ownership
  - Remedy the lack of legal obligation for a credit institution to notify its supervisory authority of a material adverse development that may negatively affect the suitability of a major shareholder.
- 5. Major acquisitions
  - Amend laws or regulations to ensure that the NBB has the right of pre-approval of a major acquisition by a credit institution in the non-financial sector.
- 7. Risk Management
  - Continue with the update of the Circular on Internal Governance. Emphasis on role of Board.
  - Develop a comprehensive risk management standard articulating the NBB’s minimum expectations for risk management for banks and across a group.
  - Develop a standard supervision program for all banks according to risk profile; link minimum supervision program to the risk scorecard.
  - Consider requiring Internal Audit to formally report to the Audit Committee; require major policies approved by the board to be submitted to the NBB.
  - Establish a formal cycle for all accredited internal models (Pillar 1) to be assessed on a regular basis.
- 16. Interest rate risk in the banking book
  - Write a single regulation to replace multiple rule texts; include requirements for stress testing and a limit framework reflecting risk appetite.
  - Strengthen requirement for functional and operational separation of markets and treasury function.
  - Consider an Asset Liability Committee for all credit institutions.
  - Extend cross‑sectoral analysis to more banks; improve identification of outliers and transfer of skills to supervisors.
- 17. Internal control and audit
  - Consider obtaining positive assurance from the external auditor as to the design and effectiveness of controls, extending beyond current audit scope.
- 20. Supervisory techniques
  - Put in place a systematic supervisory process to ensure each institution systematically receives the appropriate intensity of supervisory attention proportionate to its profile.
- 21. Supervisory reporting
  - Align reporting dates so prudential returns are submitted more timely and more consistently; some returns are currently lagging public reporting and some are submitted only annually (e.g., concentration risk).

### Authorities’ response — summary of positions and planned actions (paragraphs 54–76)
- The NBB can subscribe to the general conclusions and main findings and is satisfied with the overall high level of compliance. Challenges noted stem from crisis conditions and the recent integration of prudential supervision into the NBB.
- BCP 1: The NBB will reconsider the adequacy of supervisory resources in order to achieve appropriate supervisory intensity and effectiveness in the course of 2013.
- BCP 4: The obligation for a credit institution to inform the supervisory authority of any material adverse development affecting suitability of a major shareholder will be provided soon in the next Banking Law modification.
- BCP 5: The right of pre-approval by the NBB of a major acquisition by a credit institution in the nonfinancial sector will be provided soon in the next Banking Law modification.
- BCP 6: Regulation will be adapted as from 1 January 2013 regarding deduction of insurance company participations. The NBB notes alignment with Basel 3 criterion 11 and transitional measures for deduction of existing credits at end December 2010; all new credits since end 2010 have been deducted from common equity tier 1.
- BCP 7: The NBB plans to review its internal governance framework, including risk management, starting in the autumn of 2013 and will consider IMF recommendations on Board oversight and integration of risk management and capital setting.
- BCP 8: The NBB largely agrees but notes company law and NBB internal governance guidelines address conflicts of interest; NBB clarified own funds regulation to deduct some transactions between banks and shareholders.
- BCP 10: The NBB will examine whether to use national discretion to set a stricter limit on large exposures within smaller institutions when transposing CRD IV.
- BCP 12: The NBB largely agrees and notes existing guidelines on credit and concentration risk already address country risk principles.
- BCP 16: Interest rate risk is a priority in the NBB's Risk Review 2013; an extensive program since 2012 will be rolled out.
- BCP 17: The NBB considers comfort on design and effectiveness of internal controls should be obtained via a combination of senior management self-assessment, ICAAP reporting, internal auditor input, external auditor input, and NBB on-site inspections; will enhance integration and quality assurance.
- BCP 20: The NBB agrees generally, will better document supervisory choices, introduce standard presentations and peer comparisons, develop an enhanced scorecard system to drive decision making and periodic Board reporting, and implement baseline supervision with clustering and defined baseline for low risk institutions.
- BCP 21: The European Implementing Technical Standards (ITSs) on reporting prepared by the EBA in the context of CRD IV will shorten remittance dates for prudential returns and will become directly applicable in Belgium.

*Source: _cr13133 - 19. Supervisory approach*

### 77.      Table 3 below offers the detailed Principle-by-Principle assessment. It provides a

### Table 3. Detailed Assessment of Compliance with the Basel Core Principles

### Principle 1 — Objectives, autonomy, powers, and resources (overview)
- Principle summary: Clear responsibilities and objectives for each supervisory authority; operational independence, transparent processes, sound governance, adequate resources, accountability; suitable legal framework for authorization, ongoing supervision, powers to address compliance and safety/soundness, legal protection for supervisors; arrangements for information sharing and confidentiality.

### Principle 1(1) — Responsibilities and objectives
- Essential criteria EC1: Laws in place and responsibilities publicly defined
  - Legal framework:
    - Law of 22 March 1993 (the “Banking Law”).
    - Law of 22 February 1998 (the "NBB Organic Law").
    - Articles 12bis, 36/2 and 36/3 of the NBB Organic Law: NBB responsible for banking supervision.
    - Banking Law (Article 1): establishes legal status and supervision of credit institutions.
    - Banking Law (Article 46): NBB responsible for ensuring banks operate according to the Banking Law and implementing decrees/regulations.
  - Findings:
    - Legal framework clarifies banks are subject to supervision and NBB is supervisory authority.
    - Neither the Banking Law nor the NBB Organic Law clearly creates publicly stated objectives for the NBB in respect of supervision (e.g., explicit statement that supervision aims to achieve or support safety and soundness of supervised institutions).
  - Structural changes:
    - Law of 2 July 2010 introduced the “twin peaks” model from April 2011.
    - Amendments transferred banking supervisory responsibility to the NBB, succeeding the CBFA.
    - Following Twin-Peaks, NBB responsible for micro- and macro-prudential supervision of banks, insurance and stockbroking investment firms ("sociétés de bourse" - "beursvennootschappen"), and clearing and settlement institutions.
    - FSMA responsible for market supervision, conduct of business and supervision of certain institutions (UCITS management companies, asset management companies and investment advisors).
    - Cooperation governed by Chapter IV/I of the NBB Organic Law and Section 6 of Chapter III of the Law of 2 August 2002.
  - NBB objectives in Organic Law:
    - Article 12: contributing to financial stability.
    - Art 12bis section 3: NBB shall exercise banking supervision and carry out its supervisory tasks exclusively in the general interest.
    - Art 36/2 and 36/3: NBB mission to undertake prudential supervision and must take due account of impact on stability of financial system in other EU Member States concerned.
    - NBB role in financial stability: detection of threats, recommending measures to government and parliament, coordinate financial crisis management, determine systemically relevant institutions and impose measures as necessary.
  - Observations:
    - No direct/explicit legislative reference to NBB role in promoting safety and soundness of individual institutions; Banking Law Article 1 implicitly recognizes role in protecting savings and smooth operation of credit system.
    - Practical indicators (powers over systemically relevant institutions; NBB communications such as the Financial Stability Review) suggest safety and stability of individual firms is a core component of securing financial stability.
- Additional criteria AC1:
  - NBB applying and refining risk-based supervision; supervisory planning accounts for systemically important institution concept.
- Assessment: Compliant
- Comments:
  - Overarching legal framework applied to banks and updated timely for national and EU developments.
  - Legal mandate exists for supervision and detecting threats to financial stability but lacks explicit expression of the purpose of prudential supervision (e.g., safety and soundness of individual institutions) and how to balance prudential supervision with protecting financial stability.
  - Recommended: clarify relationship between the two functions (prudential supervision and financial stability) — could be achieved via redrafting of the NBB Organic Law (intended during 2013) or a focused mission statement published on the NBB website.

### Principle 1(2) — Independence, accountability and transparency
- Essential criteria EC1: Independence, governance, removal protections, no evidence of interference
  - Legal and governance structure:
    - Twin Peaks Law (Law of 2 July 2010); Royal Decree of 3 March 2011 implemented Twin Peaks from 1 April 2011.
    - NBB decision-making bodies: Governor, Board of Directors, Council of Regency, Board of Censors, Sanctions Committee.
    - Governor:
      - Appointed by the King for a renewable term of five years.
      - No limit on number of renewals.
      - Age limit of 67.
      - Dismissal only for reasons specified by Article 23 of the Organic Law (serious misconduct or no longer fulfils conditions required).
      - Not mandatory that reasons for dismissal be publicly disclosed.
      - Dismissal motivation must be provided to the incumbent under Belgian administrative rules; Governor can challenge dismissal (Article 14.2 of ESCB statutes), possibly resulting in published judgment.
    - Board of Directors:
      - Responsible for administration and management; decides on policy direction.
      - Composed of the Governor plus at least five and at most seven Directors (currently eight members plus two special representatives advising on prudential supervision).
      - Directors appointed for six years; dismissible only for reasons in Article 23.
      - Equal division between Dutch and French speaking members (except Governor).
      - Conflict of interest restrictions and recusal/minuting obligations.
    - Council of Regency:
      - Discusses monetary policy, economic state, supervisory policy; approves budget, annual accounts and Annual Report; determines rules of procedure and wages/pensions of Board members.
      - Composed of Governor, Directors and ten Regents; Regents elected by general meeting for renewable term of three years; selection process to represent socioeconomic interests.
      - Regents prohibited from administrative/management roles in supervised institutions; conflict of interest rules in Organic Law.
    - Board of Censors:
      - Supervises budget preparation and implementation; audit committee; ten members; elected for renewable three-year terms.
    - Sanctions Committee:
      - Pronounces on administrative fines and penalties; six members; appointment by the King; members serve six-year renewable terms.
      - At time of assessment, Sanctions Committee did not exist as no appointments confirmed by Royal Decree.
    - Restrictions on eligibility: age limit of sixty-seven for Board of Directors, Council of Regency and Board of Censors; no office-holder may remain beyond age seventy except completion of term may be granted by Royal Decree for Governor.
  - NBB legal status and oversight:
    - NBB is an "société anonyme de droit public / naamloze vennootschap van publiek recht" — public institution in form of public limited liability company created for public service tasks.
    - Operational and financial autonomy for supervisory function.
    - NBB administrative decisions subject to appeal at Council of State (scrutiny limited to legality, not substance).
    - Decisions to impose administrative fines/penalties subject to appeal at Brussels Court of Appeal.
    - Regulations issued by NBB require enforcement via Royal Decree ("tutelle d'approbation" / "goedkeuringsvoogdij").
    - NBB consults firms and associations when preparing regulations and Circulars.
    - NBB finances prudential supervision from fees paid by financial institutions; detailed in Royal Decree of 17 July 2012.
  - Findings on transparency and dismissal:
    - Grounds for dismissal limited but reasons for dismissal are not publicly disclosed as required by criterion (transparency limited).
    - Dismissal decision may become public via legal challenge and published judgment, but public cannot routinely know reasons for dismissal.
- Essential criteria EC2: Publication of objectives and accountability framework
  - NBB communicates via website, annual report, and annual Financial Stability Review.
- Essential criteria EC3: Credibility of authority and staff
  - Prudential staff composition: mix of CBFA staff and NBB staff.
  - Code of ethics (Article 26, section 3) includes prohibition on trading financial instruments of supervised companies.
  - Industry view: NBB seen as accessible, professional and technically expert.
- Essential criteria EC4: Financing not undermining autonomy; sufficient budget/staff/salary/training/IT/travel
  - Funding:
    - Prudential activities funded through fees levied on supervised financial institutions (Article 12bis, section 4 NBB Organic Law).
    - Royal Decree of 17 July 2012 on covering operating expenses of the NBB in connection with supervision.
    - Royal Decree establishes:
      - fees should cover effective cost of supervision;
      - stability and predictability in financing burden on supervised institutions;
      - system is pre-financed with year-end adjustments (repayment or additional levies).
    - Global amount of resources increases each year as follows:
      - a) for personnel costs, increase linked to increases applied to NBB staff.
      - b) all other expenses adjusted in line with consumer prices.
    - Additional amounts account for real costs driven by coordination/cooperation with other supervisory authorities.
    - Two supervised sectors levied: insurance sector; banking and securities sector (investment firms and clearing and settlement institutions). Each sector subject to main levy; SIFIs pay supplementary amount.
  - Staffing and resources:
    - No ceiling on the number of staff.
    - When taking over micro-prudential supervision from CBFA in April 2011, staff dedicated to prudential regulation and supervision numbered around 200 full time employees (FTE).
    - NBB Board decided to increase resources by 40 FTE.
    - In September 2012, staff dedicated to prudential regulation and supervision amounted to around 230 FTE.
    - This includes staff for prudential regulation, financial stability, supervision of banking and insurance sector, market infrastructure, specific operational support and prudential law. Other support functions (secretariat to Board, IT support) available but not included in these figures.
    - At least 70 percent of the NBB staff dedicated to prudential regulation and supervision are professional executives.
    - Compensation at NBB shown to be in the top quartile for commensurate roles (e.g., Hudson Banking Salary Survey).
    - Identified general need for IT personnel; no dedicated IT or HR for supervision; major IT budget to renew entire IT architecture has absorbed up to 50 percent of IT staff.
- Additional criteria AC1:
  - Head(s) appointment: Governor appointed for a minimum, renewable term of five years.
- Assessment: Largely Compliant
- Comments:
  - Clear lines of accountability, transparency, separate funding and no indication of interference with operational independence in practice.
  - Non-compliance point: reasons for removal of head of supervisory body are not publicly disclosed as required by CP1(2).
  - Resource concern: at time of mission it was unclear that supervisory functions had adequate resources to deliver systematic risk-based supervision for all institutions. Mitigating factors:
    - NBB increased resources compared with former headcount; no formal ceiling on headcount.
    - Funding mechanism supports ability to meet needs (industry levy).
    - Challenge lies in identifying scale of future resource needs amid structural uncertainties (e.g., discussions around Single Supervisory Mechanism) and integrating staff increases effectively.
  - Rulemaking:
    - NBB has limited rulemaking powers; regulations require Royal Decree and possible ministerial scrutiny/veto. Practical effect limited, but preferable for NBB to have power to issue binding regulations without that formal constraint.
  - Minister of Finance right to suspend NBB decisions noted; no legal carve-out clarifying Minister has no vires over prudential supervision (unlike ESCB functions). Intention to address in redrafting of NBB Organic Law planned for 2013 recommended.

### Principle 1(3) — Legal framework (authorization and ongoing supervision)
- Essential criteria EC1: Law identifies authority responsible for granting/withdrawing licenses
  - The Banking Law (Section I, Article 7): exclusive competence of the NBB to authorize a bank.
  - Banking Law (Article 57): NBB exclusively authorized to revoke such authorization.
- Essential criteria EC2: Law empowers supervisor to set prudential rules and requires public consultation
  - In Belgium, many prudential standards prescribed in EU legislation and transposed into Belgian law.
  - NBB cannot change laws but may issue prudential regulations under Organic Law Article 12bis.
  - (Further details on EC2 continuation not included in the supplied excerpt.)
- Assessment: (Assessment text for CP1(3) not included in excerpt.)

*Source: IMF staff assessment excerpt (Table 3 — Detailed Assessment of Compliance with the Basel Core Principles) contained in the provided content unit.*

### section 2 NBB) , which provides that “within the areas of its competence, the NBB may lay

### section 2 NBB) , which provides that “within the areas of its competence, the NBB may lay

### NBB regulatory and rulemaking powers
- The NBB Organic Law and the Banking Law authorize the NBB to issue regulations:
  - NBB may “lay down regulations to supplement the relative legal or regulatory provisions in respect of technical aspects.” Such regulations only take legal effect following enforcement by Royal Decree.
  - Specific competence under Article 43 of the Banking Law to issue regulations on requirements relating to, inter alia, solvency, liquidity and concentration risk (e.g., the NBB Own Fund Regulation and the Liquidity Regulation).
  - Banking Law (Articles 20, section 4 and 20bis, section 8) allows the NBB to set prudential rules on specific topics such as risk management; the NBB has exercised this power.
- The NBB may conduct open consultation on proposed regulations (has the option of open consultation).

### EC3 — Powers to obtain information from banks and banking groups
- Legal basis:
  - NBB Organic Law (Article 36/19) provides that the NBB can obtain all necessary information from institutions under its supervision.
  - Banking Law (Article 44) requires credit institutions to submit financial reports to the NBB in the manner and frequency prescribed by the NBB.
  - Article 46 permits the NBB to request information on financial position, transactions, organization and operation; parent of consolidated group must submit financial statement in form and frequency specified by NBB.
  - Article 49 allows obtaining necessary information from entities controlling a credit institution or non-consolidated subsidiaries not part of the consolidation/financial group subject to supplementary supervision.
- Verification and enforcement:
  - Right to conduct on-site verification of information received, or to require verification by accredited auditors or foreign experts.
  - Criminal offence under Banking Law (Article 104, section 1, point 12) to refuse to give required information, give wrongful or incomplete information, or prevent NBB from inspection and verification procedures.
- Assessment of Principle 1(3): Compliant.

### Principle 1(4) — Legal powers to address non-compliance and unsafe/unsound practices
- EC1–EC2 (description):
  - Article 46 requires NBB to ensure credit institutions operate in conformity with Banking Law and implementing decrees and regulations; law requires attention to qualitative aspects (suitability of risk management, administrative and accounting organization, internal control systems) in addition to quantitative capital adequacy.
  - NBB has full access to banks’ board, management, staff and records; Article 46 grants broad on-site inspection powers including reading and copying information related to compliance, accuracy of information, adequacy of management, administration, internal controls, governance and accounting.
- EC3 — Range of powers:
  - Banking Law (Article 57) grants remedial measures including:
    - appointment of a special commissioner whose approval is required for all or part of acts and decisions;
    - requirements regarding solvency, liquidity, and risk concentration;
    - imposition of restrictions on variable elements of remuneration;
    - suspension for a certain period of all or part of the credit institution’s activities;
    - requirement to transfer shares held in accordance with Articles 32, §§ 4 and 5 Banking Law;
    - order directors to be replaced or appoint temporary directors if necessary;
    - revocation of the credit institution’s authorization.
  - Remedial measures must respect the principle of proportionality: measures cannot exceed what is necessary to remedy the situation.
  - For systemic institutions, disposal of assets or liabilities can be required under Article 57bis through the application of a Royal Decree; competence is shared with government, which must consult NBB. Powers under Article 57bis not yet exercised though NBB has reached the stage of initiating disposal process.
- Administrative sanctions:
  - Two types: fines and publication of failure to comply with orders (Article 102 and 103).
  - Fines under Article 103:
    - up to EUR 2,500,000 per infringement or a maximum of EUR 50,000 euros per each day’s delay.
  - Administrative fine range for infringement of regulations: between €2,500 and 2,500,000.
  - Fine is payable to the Ministry of Finance.
  - Publication may occur without names if publication might inflict significant damage.
  - Sanctions Committee must decide administrative sanctions; at time of mission a Sanctions Committee had not yet been convened and appointments must be ratified by government.
- Criminal sanctions:
  - Article 104 imposes criminal sanctions for specific breaches; criminal sanctions are the prerogative of criminal courts and outside NBB’s imposition power.
  - Any criminal investigation relating to breaches must be notified to the NBB under the Banking Law.
- Potential amendments:
  - Authorities discussing legal changes to allow a more administratively efficient approach to imposing periodic penalty payments upon firms as a corrective measure.
  - Under Twin Peaks Royal Decree, Sanctions Committee competent to impose fines ("geldboete"/"amende") and periodic penalty payments ("dwangsom"/"astreinte"); these measures are legally distinct.
  - In FSMA framework, fines were competence of Sanctions Committee while periodic penalty payments were sole competence of Board of Directors; NBB intends to adopt new law removing the qualification of “administrative sanction” from periodic penalty payments so Board of Directors can adopt them without elaborate procedures (Articles 36/9 and seq. of Organic Law of NBB).
- Assessment of Principle 1(4): Compliant.
- Comments: NBB has range of remedial measures allowing proportionality and Article 57 contemplates necessity for swift action in urgent situations.

### Principle 1(5) — Legal protection for supervisors
- EC1:
  - Liability protection under Organic Law (Article 12bis, section 3): “the NBB, the members of its bodies and the members of its staff shall not bear civil liability for their decisions, acts and conduct in the exercise of the legal tasks of the NBB, save in the event of fraud or gross negligence.”
  - Civil liability limited to fraud or gross negligence for persons carrying out remedial measures outlined in Article 57bis.
- EC2:
  - Insurance arrangement: In 2008 an insurance agreement covering costs of defending actions was concluded for NBB staff; amended in 2011 to also cover staff working on prudential supervision tasks.
- Assessment of Principle 1(5): Compliant.
- Comments: Appropriate legal protections are in place.

### Principle 1(6) — Cooperation and information sharing
- EC1 — Domestic cooperation:
  - EU legislation provides overarching legal gateways for exchange of confidential information between domestic authorities.
  - Twin Peaks law introduced deficiency: omission of specific exemption allowing FSMA to exchange confidential information with the NBB when NBB acts as supervisor; an amending instrument was needed and hoped to be achieved possibly by the end of 2012.
  - In practice, exchange of information and cooperation continue at working level; a protocol (MoU) was being drafted to formalize arrangements with discussions ongoing.
- EC2 — Cross-border cooperation:
  - Organic Law (Article 36/16) allows NBB to conclude cooperation agreements with competent foreign authorities defining terms, distribution of supervisory tasks, designation of supervision coordinator and methods of supervision; collection and exchange of information covered.
  - Ten bilateral cooperation agreements concluded since 2005 (some by CBFA predecessor) with authorities of: Hong Kong (2005), Poland (2005), Malta (2006), Switzerland (2006), Canada (2007), Serbia (2008), Dubai (2008), China (2008), U.S. (2011) and Turkey (2011).
  - MoUs generally not drawn up with EU authorities as EU directives (notably 2006/48/EC and amending directives) cover cooperation.
  - Five multilateral cooperation agreements for supervision of specific cross-border financial groups; non-institution related MoUs also exist (e.g., MoU between financial supervisory authorities, central banks and finance ministries of the EU, 2008).
  - Files reviewed by assessors demonstrated high quality and frequently extensive information sharing in practice.
- EC3 — Confidentiality safeguards:
  - Section 4 of Organic Law and Article 44(2) of Directive 2006/48/EC provide gateways for exchange of confidential information with non-domestic supervisors; recipients must be subject to equivalent obligation of professional secrecy.
- EC4 — Discretion to deny requests:
  - NBB Organic Law stipulates NBB "may" share confidential information; there is no legal obligation to do so. Communication of confidential information is an exception to professional secrecy and is a possibility, never an obligation.
- Assessment of Principle 1(6): Compliant.
- Comments:
  - General framework for exchange of information is well articulated and operational in practice.
  - Important to remedy the drafting oversight in Twin Peaks law to provide formal exemption for FSMA to exchange confidential information with NBB in supervisory capacity; authorities aim to amend before end of 2012.
  - NBB and FSMA should conclude protocol governing working arrangements and exchanges to ensure access to full, relevant information; de facto working relationships exist but prolonged lack of MoU could degrade supervisory relationships and effectiveness.

### Principle 2 — Permissible activities and use of the word “bank”
- EC1 — Definition:
  - Term “credit institution” defined in Article 1 of the Banking Act; deposit taking prohibited for any institution not authorized as a credit institution under Article 4 of the Banking Law.
  - Article 1 defines credit institutions as Belgian or foreign companies whose activities consist in: 1) receiving deposits or other repayable funds from the general public and offering credit for their own account; 2) issue payment instruments under the form of electronic money.
  - Electronic Money Law expected to be amended to exclude electronic money issuance from Banking Law and include it in payment institutions legislation.
- EC2 — Permissible activities:
  - Banking license required for taking deposits from the general public and offering credit for own account.
  - Application must include a business plan; new activities post-licensing that change basis for license must notify NBB (typically via Article 20).
  - Main potential banking activities listed (non-exhaustive), facilitating EU passport:
    - Acceptance of deposits and other repayable funds
    - Lending including, inter alia: consumer credit, mortgage credit, factoring, with or without recourse, financing of commercial transactions
    - Financial leasing
    - Money transmission services
    - Issuing and administering means of payment (e.g., credit cards, travellers' cheques and bankers' drafts)
    - Guarantees and commitments
    - Trading for own account or for account of customers in:
      (a) money market instruments (cheques, bills, certificates of deposit, etc.);
      (b) foreign exchange;
      (c) financial futures and options;
      (d) exchange and interest rate instruments; or
      (e) transferable securities.
    - Participation in securities issues and provision of services related to such issues
    - Advice to undertakings on capital structure, industrial strategy and related questions and advice as well as services relating to mergers and the purchase of undertakings
    - Money broking
    - Portfolio management and advice
    - Safekeeping and administration of securities
    - Credit reference services
    - Safe custody services
- EC3 — Use of the word “bank”:
  - Only licensed entities may use the word “bank” (Article 6 of the Banking Law).
  - Terms "credit institution,” "bank," and derivations may only be used by:
    - Belgian credit institutions;
    - foreign credit institutions performing tasks under free provision of services or via branch office;
    - representative offices.
  - Exceptions: NBB, ECB, other international public banking organizations, and financial holding companies.
  - If NBB becomes aware of wrongful use of "bank" it will inform Office of the Public Prosecutor and FSMA; NBB can formally require necessary information from institutions executing the activity or third parties (Article 36/19 of Organic Law) subject to penalties for non-compliance.
  - FSMA mandated (Law of 2 August 2002, Article 45, section 1) “to contribute towards compliance with the rules aimed at protecting savers and investors against the illegal offer or supply of financial products or services” and conducts market surveillance to detect illegal deposit taking; FSMA issues warnings and closes unlicensed activities where identified.
- EC4 — Reservation of deposit taking:
  - Banking Law requires credit institutions that take deposits from the public to be licensed and subject to supervision.
- EC5 — Published list of licensed banks:
  - Article 13 requires NBB to establish list of all licensed credit institutions; updated list published on NBB website and notified to the European Commission, subdivided into sections (banks, saving banks, public banks, investment banks) with annex covering Belgian financial holding companies.
- Assessment of Principle 2: Compliant.
- Comments: Legal framework provides clear definitions; both NBB and FSMA take measures to ensure public not misled into placing deposits with unauthorized institutions.

### Principle 3 — Licensing criteria and process
- EC1: Supervisory and licensing authority are the same in Belgium (NBB).
- EC2: Licensing criteria set in Banking Law (Articles 15–22) include:
  - Legal form: Article 15 requires credit institutions be established as commercial companies.
  - Minimum initial capital: Article 16 requires fully deposited minimum capital of 6.2 million euro.
  - Shareholders: NBB must be informed of identities of shareholders with qualifying holdings and amounts (Article 17).
  - Leaders: Effective management must consist of at least two natural persons with necessary professional reliability and suitable experience; may not have prior convictions as set out in Article 19.
  - Organizational requirements: suitable management structure, adequate administrative and accounting structure, control and IT-security measures, suitable internal control; Article 20bis applies if investment services conducted.
  - Head office location: head office should be located in Belgium.
  - Membership of deposit guarantee system: required for Belgian credit institution obtaining license.
  - King, on recommendation from NBB and FSMA, can further specify rules via Royal Decree.
  - NBB can further specify requirements under Articles 20, 20bis, 20ter for internal organization and functions (internal control, risk management, compliance, internal audit, audit committee).
- EC3: Licensing criteria are consistent with ongoing supervision; conditions must be met on a continuing basis.
- EC4: NBB discretionary power to refuse license if criteria not fulfilled or information inadequate; must demonstrate grounds for refusal.
  - Licensing Memorandum: proposed two-phase procedure for authorization:
    - Phase one: screening of conceptual proposal; encourages prior discussion.
    - Phase two: detailed formal application; end of phase two requires accredited auditor report (selected by applicants in consultation with NBB, paid by candidate) confirming conditions satisfied and appropriate organization developed; NBB may perform on-site visits before final decision.
  - When granting authorization, NBB may impose conditions/limits on exercise of activities (Article 11).
  - False declaration or concealment may give rise to administrative sanctions.
- EC5: Licensing authority assesses structures to ensure they will not hinder effective supervision on solo and consolidated basis:
  - Article 20 and Section 7 require governance appropriate to activities and not impede prudential supervision; governance tailored to nature, size, complexity and risk profile.
  - Governance memorandum must be submitted; NBB does not formally approve but gives "nihil obstat" with recommendations; supervisory assessment includes cross-sectoral "Internal Governance Circular" (PPB-2007-6-CPB-CPA).
- EC6: NBB identifies and determines suitability of major shareholders and ultimate beneficial owners; checks sources of initial capital (Article 17).
- EC7: Minimum initial capital stipulated:
  - Articles 16 and 23 specify minimum level of capital of EUR6.2mn; grandfathering permitted but none remain in Belgium.
- EC8: Fit and proper assessments for directors and senior management:
  - Banking Law requires NBB to verify persons in charge of senior management are fit and proper with adequate experience (Article 18); Article 19 prohibits persons with convictions or prohibitions.
  - Banks must notify NBB in advance of appointment, renewal or dismissal of directors and senior managers and provide information for assessment (Article 26bis).
  - Circular PPB-2006-13-CPB-CPA defines senior management and "Key staff"; currently key staff not formally subject to fit and proper but often informally screened; CFO/CRO may be assessed if not within senior management definition.
  - Fit and proper forms collect details on experience/competence and integrity/reputation.
  - Interviews may be requested; future interviews likely to become standard for limited group (members of management committee, chairperson, committee chairs) to be held by Governor or another Board member.
  - Fit and proper regime under review; proposed changes include:
    - widening scope to include persons responsible for independent control functions (risk management, internal control, compliance);
    - confirming institution obligation to inform NBB of any material issue affecting suitability;
    - more consistent use of interviews with senior NBB staff.
  - NBB preparing new Circular with stock-taking of significant fit & proper cases over last five years and international practices.
  - NBB created centralized function to systematise fit and proper assessments; Board of Directors makes final decision receiving advice from central unit and supervisory team ("four eyes" principle); forms being revised.
- EC9: Licensing authority reviews proposed strategic and operating plans via business plan requirement (Article 8) including pro forma financial statements and projections; governance arrangements scrutinized with principle of proportionality per Article 20.

*Source: IMF staff assessment text provided in content unit*

### section 1, second paragraph).

### _cr13133 - section 1, second paragraph)

### Governance, internal control and licensing (EC10–EC13)
- Internal control functions (audit, risk management, compliance) must be part of the governance arrangements a bank must set up; the bank must describe them in its governance memorandum. (See also CP 17).
- Outsourcing arrangements must be in line with the guidelines set out in the "Outsourcing Circular" (PPB 2004/5).
- EC10 — Licensing authority reviews pro forma financial statements and projections for the proposed bank, including:
  - assessment of adequacy of the financial strength to support the proposed strategic plan;
  - financial information on the principal shareholder of the bank.
- Findings re EC10:
  - Article 8 of the Banking Law requires authorization to be contingent upon a suitable business plan including pro forma financial statements and projections.
  - The NBB requires pro forma data including projections and sensitivity analysis (covering 2-3 years) to assess viability and sufficient capital on a stand-alone basis; if not met, the license will not be granted.
  - Fit and proper character of main shareholders is evaluated during licensing and on an ongoing basis, including ability to support the bank if needed (see Article 24 of the Banking Law).
  - Assessors discussed a refusal of authorization due to funding arrangements and financial strength of a proposed shareholder.
- EC11 — For foreign banks (branch or subsidiary), before issuing a license the host supervisor establishes that no objection (or statement of no objection) from the home supervisor has been received and assesses whether the home supervisor practices global consolidated supervision.
  - NBB assesses whether home country supervisor practices consolidated global supervision and requires adequate information exchange.
  - Relevant legal provisions cited for EU/EEA and non-EU branches/subsidiaries and application of CEBS/EBA Guidelines for Passport Notifications (17 December 2010).
- EC12 — If license was based on false information, license can be revoked.
  - False declaration or concealment can give rise to administrative and penal sanctions.
  - NBB considers whether revocation or other remedial powers (e.g., Article 25 divestment) are appropriate.
- EC13 — Board collectively must have sound knowledge of intended activities and associated risks.
  - NBB assesses collective "fitness" of the board and applies criteria collectively and individually (Internal Governance Circular, paragraph 52).
  - Continuous assessment of board composition expected; NBB will review appointments and follow up if key skills are missing.
- Additional criteria:
  - AC1 — Assessment includes ability of shareholder to supply additional financial support; if institution not viable on stand-alone basis license will not be granted.
  - AC2 — No specific policies for supervisory practice relating to new credit institutions; supervisory intensity assessed via normal risk-based planning. Example: quarterly updates required to monitor conditions placed on authorization.

### Transfer of significant ownership (Principle 4, EC1–EC5; AC1)
- EC1 — Definitions:
  - Banking Law refers to instruments (Royal Decree of 23 September 1993 and Company Law Code) for definitions of "control", "participation", "parent company", "subsidiary" (Article 3, section 1, point 2 and Article 44).
  - Company Law Code articles 5 to 12 define control.
  - For prudential purposes participation presumed at direct or indirect holding of 20 percent.
  - "Qualifying holding" defined in Banking Law (Article 3, section 1, point 3) as direct or indirect holding representing 10 percent or more of capital or voting rights or enabling significant influence.
- EC2 — Notification and approval requirements:
  - Any acquisition/disposal crossing notification thresholds per Article 24 must notify NBB in advance; notification triggers timetable maximum of sixty days (suspension up to thirty days permitted).
  - Notification thresholds: 20, 30 or 50 percent of voting rights or share capital.
  - Article 24, section 7: acquisition above 5 percent of voting rights must notify NBB within 10 days; same for falling below 5 percent.
- EC3 — Supervisor powers:
  - Banking Law (Article 24, section 3) grants NBB powers to assess candidates proposing to acquire a qualifying holding and to object; if NBB does not decide within assessment period deemed not to have objected; NBB can object on grounds of incomplete information; refusal may be publicly explained at purchaser's request.
- EC4 — Reporting on shareholders and beneficial owners:
  - Legal notification threshold is 5 percent (Article 24, section 8) with 10-day notification; annual notification required of shareholders with qualifying holding and related acquisitions/disposals not previously notified.
  - Standard reporting format issued by NBB; chairman must countersign submission; false/incomplete information can result in penalty sanction.
  - NBB adopting a more vigorous “look through” approach to corporate and trust structures.
  - FSMA applies transparency requirements under Law of 2 May 2007 (Title II) for listed issuers.
- EC5 — Remedies for unnotified change of control:
  - Article 24, section 6: President of the Commercial Court can annul shareholder assembly decisions on submission of NBB notification (per Article 516, section 3 Companies Code).
  - Article 25 gives NBB powers to divest shareholder or suspend voting rights if qualified holding hampers sound management.
  - Article 104, section 1: deliberate omission to notify or ignoring NBB objection may incur criminal sanctions (NBB not the criminal enforcement authority).
- AC1 — No primary legislation requires banks to inform NBB when becoming aware of material information negatively affecting suitability of a major shareholder (reputation, financial soundness, ability to meet prudential requirements, suspicion of ML/TF).
- Assessment: Compliant, with recommendation to remedy lack of legal obligation for bank to notify supervisor of material adverse developments affecting major shareholder.

### Major acquisitions (Principle 5, EC1–EC6; AC1)
- EC1 — Definition of cases requiring prior supervisory approval:
  - NBB Organic Law (Article 36/3, section 2) obliges NBB to determine systemically relevant institutions; such institutions must submit strategic decisions for approval.
  - Strategic decisions example wording: “notably decisions to acquire or establish another institutions, to set up a joint venture established in another state, to conclude cooperation agreements or agreements on capital investment or acquisition of a branch of activity, merger or demerger”.
  - Circular CREFS_2010_01: decisions deemed systemic if impact exceeds thresholds: investment of at least 10 percent of total consolidated balance sheet or income and revenue or 5 percent of capital and reserves.
  - For non-systemic institutions: Article 33bis requires advance notification for acquiring/creating a non-domestic subsidiary (period not specified). Article 30: mergers or transfers of assets between domestic credit institutions or between credit institutions and financial institutions require prior approval; supervisory failure to act within 3 month period deemed approval.
  - Constraints on shareholdings/participations (Article 32): no single shareholding may exceed 10 percent and total amount of all shareholdings may not exceed 35 percent of own funds; qualifying holdings not exceed 15 percent of own funds and total amount of all shareholdings may never exceed 60 percent of own funds.
- EC2 — Criteria to judge proposals:
  - Article 30 permits refusal of mergers/transfers on grounds of concerns relating to sound and prudent management.
  - For systemically relevant institutions, Article 36/3, section 2 criteria: proposals that “go against sound and prudent management of the system-relevant financial institution or are liable to have a significant effect on the stability of the financial system.”
  - Mergers/acquisitions involving credit institutions and non-financial institutions do not require pre-approval unless systemic; ex post NBB assessment possible under Article 20.
- EC3 — Preventing undue risks and hindrance to supervision:
  - NBB can object to establishment of non-domestic branch (Article 34) on grounds including adverse impact on organization, financial position or supervision.
  - Pre-notification required for foreign subsidiary (Article 33bis); NBB considers compatibility with Article 20 organizational requirements and may invoke powers to prevent activities.
  - “Close links” requirement (Article 20, section 7) permits objection where links hinder individual or consolidated supervision.
- EC4 — Determination of adequate financial and organizational resources:
  - Article 30 and Article 20 permit objection on grounds related to sound and prudent management and organizational requirements.
  - NBB Board scrutinizes financial and organizational arrangements and undertakes global assessments.
- EC5 — Cases where ex-post notification sufficient:
  - No formal ex-post notification requirements. Governance memorandum submitted annually provides relevant information.
  - Range of permitted acquisitions without pre-notification is limited due to: all acquisitions by systemically relevant institutions subject to pre-approval; all mergers/transfers between credit institutions/financial institutions subject to pre-approval; any acquisition/establishment of a non-domestic subsidiary subject to pre-notification; shareholdings outside Article 32 not permitted.
  - Aggregation rules: shares issued by companies regarded as single risk are aggregated; affiliated enterprises regarded as single risk unless evidence to contrary provided.
- EC6 — Risks from non-banking activities and mitigation:
  - Acquisition of non-banking institution does not require prior approval, though Banking Law sets limits on holdings and participations.
  - Organic Law (Article 36/3, section 2) obliges SIFIs to notify NBB of strategic decisions and empowers objection if inconsistent with sound and prudent policies or jeopardizing financial stability.
  - Article 20 grounds permit objection if acquisition/investment in non-banking activities would jeopardize organizational soundness (e.g., risk management).
- AC1 — For cross-border significant holdings, NBB would consider quality of supervision in host jurisdiction and establish MoUs as necessary; no explicit law requiring this.
- Assessment: Largely Compliant. Comments recommend at minimum pre-notification procedures for acquisitions in non-financial sectors and consideration of granting NBB pre-approval powers for acquisitions or investments that exceed a defined benchmark (suggested 5 percent threshold as a commonly used standard).

### Capital adequacy (Principle 6, EC1–EC2)
- EC1 — Legal and regulatory framework:
  - Capital regulations follow European CRD; NBB regulation and Royal Decree dated November 2011 (issued by force of Article 43 of the Banking Law) set own funds requirement.
  - Credit institutions must calculate minimum capital ratios using Basel measurements and definitions with minimum capital set at 4 percent Tier 1 and TC 8 percent.
  - NBB Regulation transposes Basel 2 and Basel 2.5 framework and specific EU rules (e.g., securitization retention).
- Current capital positions and instruments:
  - Major bank Tier 1 capital ratios range between 11.5 percent and 20.6 percent for larger systemically important banks as at March 2012.
  - Composition: high CET1 composition gradually increasing; run off of Tier 2 instruments in anticipation of Basel III.
  - Capital floors for banks using internal models: 80 percent of B1.
  - Definitions distinguish Tier 1 and Tier 2 and deductions; hybrid instruments within Tier 1 authorized up to 25  percent of Tier 1 with possibility to exceed to 33  percent for mandatory convertible instruments. Tier 2 may not exceed the amount of Tier 1.
  - All Tier 1 instruments included in regulatory capital require prior approval by the NBB. Capital redemptions (other than redemption at maturity date of Tier 2 dated instrument) subject to prior approval.
- Own funds rules and additional ratios:
  - Own funds regulation applicable on solo and consolidated basis.
  - Three minimum capital rules: minimum TC requirement of 8 percent of risk weighted assets; a gearing ratio; a coverage ratio measured against fixed assets.
  - Gearing ratio minimum own funds (Tier 1 + Tier 2 minus regulatory deductions) must exceed the following percentages of liabilities:
    - first slice; between 0 and 25.000.000 € of liabilities 6  percent
    - second slice; between 25.000.000 € and 125.000.000 € of liabilities; 4  percent
    - third slice; between 125.000.000 € and 250.000.000 € of liabilities; 3  percent
    - fourth slice; between 250.000.000 € and 1.250.000.000 € of liabilities; 2.5  percent
    - fifth slice; more than 1.250.000.000 of liabilities; 2  percent
  - Coverage ratio: own funds (Tier 1 + Tier 2 - deductions) must be higher than fixed assets not already deduced from own funds.
- Reporting and supervisory review:
  - NBB receives quarterly reports on capital adequacy and six monthly and annual audited accounts; annual accounts include bank’s analysis of specific risk profile.
  - Results feed into RAS (Scorecarding tool) and are used to set additional capital requirements (Pillar 2).
  - Prudential filters: unrealized gains/losses on AFS bonds portfolio are neutralized; unrealized gains on AFS equity portfolio recognized in Tier 2 (unrealized losses deduced from Tier 1); Deferred tax assets deduced when they exceed 10 percent of tier 1 (exception for DTA relating to unrealized losses on AFS bond portfolio that are neutralized).
  - NBB preparing revision of CAD-requirements in view of transposition of Basel III.
- Specific capital transparency issue:
  - Problematic crisis practice: banks granting credit to shareholders to subscribe to bank capital where loan repayment depended on proceeds from capital instrument, affecting effective loss absorbency.
  - Article II.1 of own funds regulation amended in 2010: funding provided by institution to shareholder to subscribe capital instrument not recognized in equity; capital deducted for instances after 31 December 2010; capital instruments issued before that commence deduction from 1 January 2014 at 20 percent per year until fully deducted by 1 January 2018.
  - At time of review these amounts still included in published capital ratios for systemically important banks, weakening transparency of true loss absorbency; while deducted in Pillar 2 assessments, published ratios are artificially inflated.
- EC2 — Alignment with Basel for internationally active banks:
  - Definition of capital, method of calculation and required minimum ratios are based on CRD; Basel II.5 requirements implemented in CRD3 are in effect.
  - Basel III transition plans in place to comply with definitions and higher ratios.
  - Risk weighted assets calculation: standardized or internal model (IRB) with NBB prior approval; market risk via standardized or internal (VaR) model with prior authorization; operational risk via basic indicator, standardized or AMA with prior authorization for AMA.
  - Revaluation gains when related to equities or real estates may be accounted as part of Tier (text truncated in source).
- Assessment and supervisory stance:
  - NBB aware of emphasis on equity capital and adjusted risk assessment when setting minimum capital adequacy ratios.
  - Own funds reporting requires detailed and comprehensive calculation in respect of specific risk profile and is used in supervisory SREP/ICAAP processes.

*Source: _cr13133 - section 1, second paragraph).*

### 2. Tier 2 may not represent more than 100 percent of Tier 1.In terms of prudential filters,

### _cr13133 - 2. Tier 2 may not represent more than 100 percent of Tier 1.In terms of prudential filters,

### Prudential filters and capital deductions (Belgium)
- Main deductions from own funds:
  - own shares
  - intangible and goodwill
  - significant participation in financial and insurance companies
  - non signification participations in financial and insurance companies if the aggregate amount exceed 10  percent of own funds before deductions. Only the excess amount is deduced
  - significant participations in non financial companies exceeding 15  percent of own funds before deduction or, on aggregate basis, 60  percent of own funds before deductions. Only the excess amount is deduced.
- CRD allows national discretion versus Basel II; some CRD risk-weighting is lower than Basel for certain real estate and equity investments.
- Treatment of investments in insurance subsidiaries:
  - Basel II: flexible; if deduction used, indicated preference that half should be from T1 and half from T2.
  - As applied for major Belgian banking groups (at time of review): investments in insurance subsidiaries are deducted 100 percent from Total Capital rather than 50:50 from T1 and T2, causing T1 ratios to appear larger than under Basel II.
  - NBB own funds regulation (Art II.6): at the end of 2012, the deduction of investments in insurance subsidiaries will be 50:50 from T1 and T2 in line with Basel II. Intention to apply deduction pursuant to the Basel III framework in the future.
- Solo solvency test: participations in consolidated subsidiaries are not deduced but subject to a risk weight of 400 percent.

### EC3 — Supervisor powers to impose capital charges and limits
- Legal basis:
  - Article 43 and 57 of the Banking Law.
  - Organic law of the National Bank (article 2-36/3, § 3) allows NBB to impose additional capital, liquidity or concentration requirements on Domestic SIFIs.
- Allocation and decision-making:
  - Allocation of capital assessed under Pillar 2.
  - Conclusions shared within the college of supervisors of each banking group.
  - Joint college of supervisors decides minimum capital at level of each bank in group.
  - Joint college process described as mature and effective.
- Solo own funds regulation requires each bank to have own funds covering its own risk weighted assets.

### EC4 — Capital ratio reflects risk profile
- Minimum capital ratios calculated based on Basel II methodology for Pillar 1 covering credit, market and operational risks.
- All exposures (on and off balance, derivatives) included in minimum capital requirements.
- NBB sets capital add-ons above minimum (Pillar 2) based on bank-specific risk profile assessment; assessment is forward looking.
- Main objective of NBB capital assessment: determine whether “an institution has sufficient capital/own funds, as well as an adequate policy/process on the matter, to face its current and future risks.”

### EC5 — Capital adequacy considers jurisdictional conditions
- NBB may set higher capital requirements based on its Pillar 2 assessment.
- Risk scorecarding tool central to risk assessment: captures quantitative and qualitative metrics, bank-specific and environmental factors.
- ICAAP assessment: may involve offsite or onsite review, assessment of Pillar 1 estimates, evaluation of Pillar 1 calculation approaches, consideration of stress testing and SREP capital needs. Interest rate risk in the banking book is a Pillar 2 risk.
- Capital add-on selection: generally the worse result of the three tests (scorecard/ICAAP/stress tests) is used.

### EC6 — Supervisor authority when banks fall below minimum capital
- Legal provisions:
  - Article 43 s3: NBB may lay down requirements on solvency, liquidity, concentration risks and risk positions in addition to s1.
  - Art 57: if NBB finds a credit institution not operating according to law or without sufficient solvency guarantees, it shall determine the deadline to rectify the situation.
- The law gives NBB broad remedial powers if a bank falls below minimum capital ratios.

### EC7 — Use of internal models and qualifying standards
- Use of internal models subject to prior approval by NBB; qualifying standards are defined in own funds regulations and align with Basel II and II.5.
- Approval criteria include: use test, governance and risk management framework, independence of risk management and model development, adequacy of rating system, internal validation, documentation, data collection, conservatism of estimates.
- Approvals for internationally active groups made after consultation with relevant supervisors via college of supervisors.
- Conditional approvals: NBB attaches conditions for periodic monitoring and assessment.
- Numbers of approvals (as reported):
  - 8 banks approved to use internal models for credit risk
  - 3 for operational risk
  - 4 banks approved for market risk

### Additional criteria (AC) — non-internationally active banks
- AC1 / AC2:
  - No difference between minimum capital requirement rules for internationally or non-internationally active banks.
  - Own funds regulation differences relating to insurance subsidiary deduction are being aligned with BII and BIII.
- AC3:
  - Banking Law of 22 March 1993 (article 43) requires forward-looking capital assessment expressed in the ICAAP.
- AC4:
  - Minimum capital ratios applied at solo and consolidated basis and assessed by SREP.
- AC5:
  - Supervisor can set minimum capital ratios at both solo and consolidated levels.

### Assessment and comments on Principle 6 (Capital adequacy)
- Assessment re principle 6: Largely Compliant
- Comments:
  - At assessment time, capital rules did not align with Basel II regarding treatment of investments in insurance subsidiaries; expected remedy by 31 December 2012.
  - Problematic pre-crisis practice: banks granting credit to shareholders to subscribe to capital where repayment depended on proceeds of capital instrument, meaning capital could not absorb losses and could not be classified as ‘paid up’.
  - Own funds regulation amended to address this issue with a transition period commencing 1 January 2014; at mission time the capital base included these amounts.

### Principle 7 — Risk management process (overview and findings)
- EC1 (comprehensive risk management processes):
  - Legal basis: Art. 20 § 3 and Art. 43 of the Banking Law; Regulation dated 5 June 2007 (organizational requirements).
  - No comprehensive Circular dedicated solely to risk management; principles are contained within Circulars for specific risk types and referencing Basel documents.
  - NBB uses EBA Internal governance guidelines (GL 44 dated September 2011) and BCBS “Principles for enhancing corporate governance,” October 2010 as references.
  - ICAAP is required: drafted by senior management and approved by whole board.
  - NBB plans to revise Internal Governance Circular to enhance expectations.
  - Supervisory testing of risk management via onsite reviews is not mandated annually across all banks; reliance on external auditors’ report of Internal Controls where onsite reviews absent.
  - External auditor’s report does not give positive assurance of design and effectiveness of controls; may not identify hidden build-up of risks.
  - Supervisory structure: four layers — internal control, internal audit, external accredited auditor, NBB; weakness if NBB does not perform onsite reviews to test control effectiveness.
  - Recommendation-like observations: supervisors should conduct meetings with bank Boards at least annually to assess understanding of risks and oversight.
- EC2 (board-approved strategies and board oversight):
  - Internal Governance Circular requires Board to assess and approve general policy and strategy guidelines including risk management.
  - Circular does not require updated policies to be resubmitted to NBB; policy framework reviewed on exception basis.
  - No mandated regular engagement with Board to determine appropriateness of risk management strategies across all banks.
  - Suggested improvement: require credit institutions to forward salient Board-approved policies to supervisor on an annual basis.
- EC3 (documentation, review, communication, exceptions):
  - Governance memorandum documents, reviewed and updated; must be approved by Board and senior management; process required at least annually.
  - Regulations do not require policies be submitted to NBB when reviewed or updated.
  - Exception reporting not mandated to be reported to senior management or Board in all instances.
  - Self assessment and external auditor’s report submitted to supervisor annually for all banks; in absence of other triggers, this serves as confirmation of control environment integrity.
- EC4 (senior management and board understanding of risk and capital):
  - ICAAP central to supervisory assessment but Board involvement not necessarily assessed across all banks.
  - ICAAP regulations do not appear to require submission to NBB, though supervisors expect it.
  - Engagement with senior management more frequent for larger banks; engagement with Board less frequent, especially for independent non-executive directors.
- EC5 (banks’ internal capital adequacy processes and supervisor review):
  - Legal basis: Banking Law Article 43 and several Circulars and regulations (NBB Regulation 15/11/2011; Circular CBFA_2011_03; Circular PPB-2007-15-CPB-CPA; CEBS guidelines).
  - Banks required to submit ICAAP at least annually; NBB assesses ICAAP as part of SREP annually.
  - Supervisor may need to perform activities testing integration of ICAAP into bank’s risk management and capital planning.
- EC6 (model validation and testing):
  - No minimum mandated cycle for periodic and independent validation submission to NBB for accredited internal models.
  - NBB typically attaches terms and conditions requiring performance and monitoring submissions for a defined period, but ongoing submissions are not mandated for model lifecycle.
  - No requirement to notify NBB if model validation not completed as per plan or if performance degrades below certain level.
  - Quantitative models team engages regularly with industry; comprehensive reviews typically triggered by events such as requests for new models.
- EC7 (organization, internal control and ICAAP requirements):
  - Legal and regulatory references: Banking Law of 22 March 1993 Article 20; NBB Regulation 15/11/2011 article XII.3; Circular PPB-2007-1-CPB; Circular NBB_2011_09 dated 20 December 2011.
  - ICAAP is important supervisory tool; NBB assesses ICAAP to assess risks.
- EC8 (new products and major risk initiatives approval):
  - Internal Governance Circular requires internal approval processes for launching activities in foreign jurisdictions and/or new complex structures, involving compliance and/or actuarial functions.
  - Independent control functions and statutory auditor should have unlimited access to information and be kept informed of significant developments.
- EC9 (segregation of duties and reporting lines):
  - Internal Controls Circular sets minimum expectations for independent risk control function (RCF).
  - RCF must be independent of business units and have sufficient knowledge; interaction with operational functions should ensure all staff bear responsibility for managing risk.
  - Regulation does not explicitly require reporting of risk exposures directly to senior management and Board or require Board approval for exposures over a certain percentage of own funds.
- EC10 (standards for major risk types):
  - Supervisor has issued guidance related to credit risk, market risk, liquidity risk, interest rate risk and operational risk, referencing relevant Basel documents.
- AC1 (dedicated units for larger banks):
  - Proportionality rules set higher standards for complex banks; dedicated risk management units expected for systemic and larger banks.
- AC2 (stress testing requirements):
  - NBB expects rigorous forward-looking stress testing as part of ICAAP, using building block approach and CEBS's 17 principles on stress testing.
- AC3 (other material risks):
  - NBB expects institutions to account for business, strategic and reputational risks in ICAAP; NBB empowered to define additional capital requirements if scope inadequate.

### Assessment and comments on Principle 7 (Risk management)
- Assessment of Principle 7: Largely Compliant
- Comments:
  - Many CP7 criteria require supervisor assessment of Board involvement; supervisory framework does not mandate regular direct engagement with Board (including independent non-executive directors) even for larger systemic banks on at least an annual frequency.
  - Suggested improvements:
    - Annual meetings with the Board to enhance supervisor’s assessment of Board oversight and risk understanding.
    - Make documentation requirements for internal governance memorandum, ICAAP reporting and internal control statement more explicit and better aligned to ensure Board-approved policies are submitted to NBB at least annually.
    - Internal Governance Circular should require notification to NBB if an accredited model fails annual validation with a remediation plan.

*Italic: Source: _cr13133 - 2. Tier 2 may not represent more than 100 percent of Tier 1.In terms of prudential filters,*

### 1. On site examinations. Onsite inspections will assess all aspects of the credit

### _cr13133 - 1. On site examinations. Onsite inspections will assess all aspects of the credit

### Onsite examinations
- Onsite inspections will assess all aspects of the credit risk process, as set out in the inspection manual.
- For banks accredited to use internal models, a separate Circular applies and a more extensive onsite assessment will be involved.
- The assessment of an appropriate credit risk management policy framework for all significant areas will be a component of an onsite credit risk visit and will also test whether the bank effectively implements these policies.
- If an onsite review is not performed within an annual period of updating the risk scorecard, the supervisor will rely upon other sources of information such as engagement with internal and external audit, and the internal control report.

### Reporting and internal control requirements
- The Circular letter NBB_2011_09 of 20 December 2011 on internal control requires the bank management to assess the internal control, including with regard to the credit activities, and report the conclusions to the NBB.
- Accredited auditors are required to maintain a permanent information file with the NBB giving a description and a critical assessment of the organization and internal control of banks with which they have mandate. Credit risk is a key focus of these files. The supervisors regularly assess the quality of these files.
- The result of the assessment is summarized in the scorecard relating to credit risk.

### Offsite analysis, scorecards, and thematic work
- The offsite analysis based on quarterly data submitted by all banks on a solo and consolidated basis forms the foundation for credit risk assessment by the supervisor.
- There was evidence of detailed horizontal analysis, which had been performed on specific thematic issues such as mortgage portfolios, sovereign credit risk etc. The analysis was of high quality.
- Scorecards are updated on an annual cycle.
- For the larger systemic banks it was evidenced that annual reviews are performed that comprehensively cover this criterion. However, for the broader population of banks, the frequency of supervisory activities to assess whether credit practices aligned with policies was not mandated.

### EC2 — Policies and confirmation of appropriate credit risk environment
- The supervisor requires, and periodically confirms, that such policies and processes establish an appropriate and properly controlled credit risk environment, including:
  - a well documented strategy and sound policies and processes for assuming credit risk;
  - well defined criteria and policies and processes for approving new exposures as well as renewing and refinancing existing exposures, identifying the appropriate approval authority for the size and complexity of the exposures;
  - effective credit administration policies and processes, including continued analysis of a borrower’s ability and willingness to repay under the terms of the debt, monitoring of documentation, legal covenants, contractual requirements and collateral, and a classification system that is consistent with the nature, size and complexity of the bank’s activities or, at the least, with the asset grading system prescribed by the supervisor;
  - comprehensive policies and processes for reporting exposures on an ongoing basis;
  - comprehensive policies and processes for identifying problem assets; and
  - prudent lending controls and limits, including policies and processes for monitoring exposures in relation to limits, approvals and exceptions to limits.
- Description and findings re EC2:
  - The regulations, which are based on the Basel principles, do not require banks to submit policies on a minimum cycle i.e., annually. Policies will be reviewed as part of an onsite review or if triggered by an exception. Policies will also be reviewed by Internal Audit.
  - Policies might also be reviewed through other supervisory activities such as horizontal analysis, however it is not mandated that the supervisor would review and assess credit risk policies and strategies prior to updating the scorecard.
  - For the larger systemic banks, the NBB will be in constant contact with many sources of qualitative and quantitative information pertaining to credit risk.
  - The second aspect of this criterion is for the supervisor to confirm that practices align with policy and are prudent. In practice, the minimum supervision cycle for onsite reviews will depend upon the result of the risk scorecard.
  - While the criterion does not prescribe a specific timeframe, scorecards are updated on an annual cycle.

### EC3 — Conflicts of interest and arm’s length credit decisions
- The supervisor requires, and periodically confirms, that banks make credit decisions free of conflicts of interest and on an arm's length basis.
- Description and findings re EC3:
  - Article 28 of the Banking Law states that credit to a member of the Board or senior management shall be granted at arm's length (under the same considerations as credit to other customers).
  - The NBB will obtain confirmation of compliance with the various regulations from a variety of sources: internal control report, external auditor, internal audit.
  - Article 523 of the Company Law prohibits a member of the Board from participating in a decision when that member has a potential conflict of interest. This applies for credit applications from a shareholder or a Board member.
  - Under the own funds regulation (see title II of own funds regulations), even if the credit is granted on arm's length basis, the credit amount will be deduced from own funds if the credit has been use to increase the own funds of the institution or if there's some doubt about the ability of the shareholder to redeem the credit.
  - Pursuant to Article 28 of the Banking Law of 22 March 1993, a credit extended to a member of the board or senior management shall be granted at arm's length condition (same condition as credit granted to the customers).
  - Identified weakness: granting of credit to major shareholders to purchase own shares that would increase the own funds of the bank is not subject to any particular oversight framework and only guidance exists that they should be made under similar conditions to other customers.
  - Consequences noted:
    - It would be difficult for the bank, or an officer of the bank, to refuse credit especially in an instance where the bank needed to raise capital.
    - There is no requirement in the regulations for major credit risk exposures over a certain amount (or percentage of the bank’s own funds), to be decided by the bank’s senior management or Board.
    - Critical credit decisions could potentially be made by officers of the bank that are under the direction of senior management.
  - The NBB has taken measures to account for situations where the bank grants credit to a major shareholder (or to the member of the Board) to increase own funds by deducting the amount from own funds calculation in Pillar 2.
  - It was not evident whether the degree of encumbrance of the share registries across the entire sector had been performed to identify pockets of potential risk.

### EC4 — Access to credit information and personnel
- The supervisor has full access to information in the credit and investment portfolios and to the bank officers involved in assuming, managing, controlling and reporting on credit risk.
- Description and findings re EC4:
  - NBB has full access to all information of a credit nature as per Article 46 of the Banking Law that states “NBB may, for the purpose of the prudential supervision do the following:
    1. Require all information relating to the organization, the function, the situation and the operations of a credit institution;
    2. Carry out onsite examination;”

* _cr13133 - 1. On site examinations._

### 3. Have access to all documents and information.

### 3. Have access to all documents and information.

### Additional criteria — AC1: senior management approval for major credit exposures
- Requirement described: the supervisor requires that the credit policy prescribes that major credit risk exposures exceeding a certain amount or percentage of the bank’s capital are to be decided by the bank’s senior management; same for especially risky exposures.
- Findings:
  - "There is no specific provision in the law/regulation , which requires a bank to have an approval by the senior management if a credit exposure exceeds a certain amount or risk."
  - Each bank is required to define the credit policy including the delegation of powers with regard to credit granting, which should take into account the size and the risk of credit exposures.
  - "So while credit institutions are required to define their credit risk policy, there is no mandatory delegation hierarchy where loans over a certain amount or percentage of own funds would only be approved by senior management or the Board."

### Additional criteria — AC2: counterparty credit risk policies and processes
- Requirement described: supervisor determines banks have policies/processes to identify, measure, monitor and control counterparty credit risk exposure, including potential future exposure, commensurate with size/complexity.
- Findings:
  - These requirements are part of the Basel principles, which is the standard used by the NBB.
  - Compliance assessments performed through on-site inspections, report of the bank management on internal control and reports of the accredited auditors.

### Additional criteria — AC3: monitoring total indebtedness of counterparties
- Requirement described: supervisor determines banks have policies/processes to monitor total indebtedness of entities to which they extend credit.
- Findings:
  - Requirement covered adequately by the NBB’s existing regulations, which rely upon the Basel principles.
  - Compliance assessed through on-site inspections, management internal control reports and accredited auditors’ reports.
  - Assessment results summarized in the scorecard relating to credit risk.
  - NBB sets minimum requirements obliging banks to monitor credit quality of counterparties and to review internal ratings as a minimum requirement for authorization to use an internal model for credit risk (IRB). Compliance assessed during IRB validation.

### Assessment of Principle 8
- Overall assessment: Largely Compliant
- Comment:
  - "There is no requirement in the regulations for major credit risk exposures over a certain amount or percentage of the bank’s own funds, to be decided by the bank’s senior management or board."
  - Risk noted: without this requirement, critical credit decisions can be made by officers who might not be suitably informed of all risks.
  - Recommendation implied: an effective delegation structure will strengthen risk management and help avoid conflicts of interest; conflicts of interest policy required by regulations may be inadequate alone.

### Principle 9: managing problem assets, provisions and reserves — EC1: policies and periodic review
- Requirement described: laws/regulations/supervisor require banks to formulate specific policies/processes for identifying and managing problem assets, periodic review, asset classification, provisioning and write-offs.
- Findings — regulatory and accounting framework:
  - Two-layer framework: accounting framework for valuation/presentation; prudential regulation for credit risk management and solvency treatment.
  - Accounting regimes: BGAAP for solo accounts; IFRS for consolidated accounts.
  - RD of 23 September 1992 (BGAAP) defines impaired loans: "loans with uncertain outcome" and "doubtful loans" (article 35 of the RD). Distinctions by nature of problems (commercial credit risk and country-related risk).
  - Under BGAAP:
    - "A loan classified as doubtful will require an individual (specific) provision..."
    - "A loan classified as uncertain will be assigned a general provision..."
    - Within "uncertain outcome" banks use subcategories (e.g., uncertain still performing; uncertain but 90 days past due; doubtful but recourse guaranteed; or incurred but not reported).
  - Prudential definition: per art. VI.87 of the NBB regulation on own fund of 15/11/2011, an exposure is “defaulted” when past-due for more than 90 days and/or it is probable that the debtor will not meet all its commitment.
  - "An exposure that is classified as 'uncertain' or 'doubtful' in the BGAAP financial statements shall be considered as 'defaulted' for prudential purposes."
  - IFRS (consolidated): apply IAS39 and IAS36 for impairment; IFRS applied mandatory since 2006 for banks and investment firms.
  - External auditors review loan classification as central task in semi-annual and annual audits.
  - All banks must report provisioning data quarterly in prudential returns (Schema A, tables 50.10 to 50.15) with detail on gross outstanding amounts, available credit lines and guarantees and collateral.
  - NBB empowered to require institutions to:
    - Strengthen credit policies and procedures;
    - Provide for additional provisioning if level deemed unsatisfactory; failure may lead to a capital add on under Pillar 2 or a deduction from regulatory own funds.
  - Governance regulations require policies to be reviewed on an annual basis.

### Principle 9 — EC2: supervisor confirmation of adequacy (external experts)
- Findings:
  - External auditor confirms adequacy of classification and provisioning policies/processes unless onsite review or exceptional circumstances.
  - Auditor tests provisioning alignment with accounting standards; annual positive assurance and limited semi-annual review.
  - External auditors are specially accredited by the NBB.
  - BGAAP reference: article 27bis RD of 23 November 1992 on recognizing interest; article 35ter, §4 on effective interest rate methodology.
  - Prudential treatment: defaulted loans receive specific treatment (higher risk weight in standardized approach; probability of default of 100 percent in IRB approach).
  - Both BGAAP and IFRS are principle-based and do not require recognition of minimum amounts of provisions.
  - Extent of NBB analysis of classification and valuation not established within a minimum supervision cycle; onsite review includes loan classification but cycle not explicitly tied to risk score or minimum cycle.
  - Larger systemic banks receive greater scrutiny via onsite visits, interaction with external auditors, and meetings with compliance and risk management.
  - Example: in 2011, Bank reviewed most exposed banks and issued recommendations on minimum provisioning for certain debt instruments.

### Principle 9 — EC3: off-balance sheet exposures
- Findings:
  - BGAAP (solo): Article 35, §1 of RD of 23 September 1992 requires banks to monitor and when necessary provision off-balance sheet exposures; account for counterparty risk of not meeting contractual commitments.
  - Article 35 allows impairment item-by-item or at portfolio level using statistical information and economic conditions.
  - Consolidated (IFRS): most exposures reflected on balance sheet as financial instrument or as provision under IAS37; IAS37 requires recognition when present obligation meets IAS37.14 conditions; contingent liabilities/assets disclosed in notes per IAS37.27.

### Principle 9 — EC4: realistic repayment and recovery expectations
- Findings:
  - Compliance with BGAAP or IFRS requires banks to have policies/processes ensuring provisions and write-offs reflect realistic repayment and recovery expectations.
  - BGAAP (solo): valuations, depreciations, write-offs and provisions must meet prudence, sincerity and good faith; accounted systematically based on bank methodologies; exposures must account for all foreseeable risks and losses arising from past events.
  - Article 35 of RD of September 1992 requires a forward looking approach.
  - Impact of collateral not defined under BGAAP (solo); generally collateral considered when determining level of provision.
  - Prudential framework quantitative requirements on collateral per Chapter V of NBB Regulation of 15/11/2011 on "own funds" (article V18, V21, V55, V58 referenced for methodologies).

### Principle 9 — EC5: early identification, oversight and collections
- Findings:
  - Accounting standards implicitly require banks to have appropriate policies/processes and organizational resources for early identification of deteriorating assets, ongoing oversight of problem assets and collecting on past due obligations.
  - Credit portfolio tested by external auditors for loan classification and provisioning adequacy; larger loans receive more intense and frequent oversight.
  - Supervisory process well-defined for larger systemic banks but not explicitly defined for all banks.

### Principle 9 — EC6: supervisor access to classification and provisioning information
- Findings:
  - Regular prudential reporting: all banks file separate, detailed and comprehensive quarterly reports on doubtful and impaired loans to the NBB.
  - Banks approved for internal models: NBB receives information when requested and provides detailed analysis of loan classifications and provisioning.
  - Annual accounts submitted to NBB provide required detail.
  - Article 44 and 46 of the Banking Law give NBB power to request all information necessary to fulfill supervisory duties; this power has been exercised.

### Principle 9 — EC7: power to require higher provisions or financial strength
- Findings:
  - NBB is not empowered to modify provisions reported in banks’ general purpose financial statements.
  - For prudential purposes, NBB can require corrections pursuant to article II.1, §1.b.v of NBB Regulation of 15/11/2011 on own funds — deductions from accounting own funds for possible/predictable losses not accounted for.
  - Tools in practice: adjustments to regulatory own funds; Pillar 2 process capital add-on (Art 46 & 57) to account for potential underestimation of provisions.

### Principle 9 — EC8: assessment and remedial powers for prudential adequacy
- Findings:
  - NBB has capacity and power to review loan classification; assessment depends on bank risk profile and impact.
  - Minimum expectation: NBB receives a self-assessment from management including frequency of loan classification review; reliance on external auditor for review.
  - Adequacy of loan classification is standard feature of onsite reviews where banks are subject to regular onsite review.
  - NBB can adjust level of own funds if provisions assessed as inadequate.

### Principle 9 — EC9: valuation of risk mitigants (guarantees and collateral)
- (Content for EC9 heading is present in the source but truncated at the end of the provided excerpt and no description/findings text for EC9 is included in the supplied content.) 

*Source: _cr13133 - 3. Have access to all documents and information.*

### Chapter V of the NBB Regulation of 15/11/2011 on own funds sets out qualitative

### _cr13133 - Chapter V of the NBB Regulation of 15/11/2011 on own funds sets out qualitative

### Qualitative and quantitative requirements for guarantees and collateral
- Chapter V (including article V.28.§1) sets periodic assessment requirements and quantitative requirements that apply to guarantees and collateral.
- Specific valuation methods apply depending on the type of collateral (section IV of Chapter V) to obtain a reliable net realizable value or market value.
- Management must establish a process to determine and continuously monitor the bank’s counterparties’ risk profile to:
  - determine potential losses and the impairments or provisions needed to cover these losses; and
  - determine the risk weighted value of the credit for capital adequacy purposes.
- Processes must include sufficient consideration of benchmark or, where available, market information on the client.

### Impairment criteria (EC10) — laws, regulations, and supervisor expectations
- Laws, regulations or the supervisor establish criteria for assets to be identified as impaired (e.g., loans identified as impaired when there is reason to believe that all amounts due will not be collected in accordance with contractual terms).
- Description and findings:
  - At solo level, loans, receivables and debt securities are identified as impaired under different categories:
    - for debt securities and receivable held as financial fixed assets, when repayment at maturity is partly or fully uncertain or compromised (article 29, §2.2 of the RD);
    - for all other assets held within the banking book, account must be taken of the risk that the counterparty does not meet its contractual commitments (see article 35 of the RD);
    - assets held within the trading book are valued at their market price which normally reflects all expectations regarding credit risk.
  - Under BGAAP, assets are basically identified as impaired when there is a reason to believe that all amounts due will not be collected in accordance with contractual terms of the loan agreement.
  - Prudential reports require banks to report problem assets by type of assets, by nature of the problem and by valuation approach (portfolio or individual asset approach).
  - At consolidated level (IFRS), a financial asset or group of financial assets is impaired when there is objective evidence of impairment with a loss event impacting estimated future cash flows (the “incurred loss” model). Expected losses from future events are not recognized under IFRS; expected losses on loans, receivables and debt securities do not lead to impairment testing under IFRS.

### Board reporting and governance on asset quality (EC11)
- The supervisor determines that the Board receives timely and appropriate information on asset portfolio condition, including classification of credits, provisioning level and major problem assets.
- Description and findings:
  - The NBB Regulation of 15/11/2011 on own funds contains governance requirements on monitoring and internal reporting (up to the Board) on risks including asset classification and provisioning.
  - The Board and senior management are responsible for preparation of BGAAP financial accounts every six months.
  - Senior management must confirm twice a year that information reported to the NBB is compliant with reporting standards (article 44 of the Law of 22 March 1993).
  - Pillar III reports are published pursuant to Chapter XIV of the NBB Regulation of 15/11/2011 and contain a level of detail regarding credit quality.

### Individual valuation requirement for large exposures (EC12)
- The supervisor requires valuation, classification and provisioning for large exposures to be conducted on an individual item basis.
- Description and findings:
  - The accounting law requires impaired exposures to be treated on an individual basis for valuation and provisions.
  - No expressed requirement within the regulations specifically mandated valuation, classification and provisioning for large exposures to be conducted on an individual item basis.

### Additional criterion — arrears-based classification (AC1)
- Criterion: Loans are required to be classified when payments are contractually a minimum number of days in arrears; refinancing that prevents arrears does not improve classification.
- Description and findings:
  - No specific days-in-arrears threshold exists under BGAAP (RD of 23 September 1992), except that doubtful loans must be treated separately and reported to the supervisor (article 35, §2.d of the RD).
  - At consolidated level under IFRS, IFRS7 requires disclosure on financial assets that are past due or impaired (IFRS7, paragraph 37); FINREP requires reporting of past due assets (template 10 of FINREP).

### Assessment and supervisory recommendation for Principle 9
- Assessment of Principle 9: Compliant
- Comment: The NBB should mandate a minimum supervisory cycle with an appropriate mix of offsite and onsite reviews of the adequacy of classification and provisioning policies and processes and their implementation; the cycle would ideally be risk-based.

### Large exposure regime (Principle 10) — scope, limits, and findings
- Legal framework:
  - The LE regime transposes Directive 2006/48/EC into NBB Regulation 15/11/2011, Article X.5.
  - "Same counterparty" is defined consistent with the CRD (Article 4).
  - Circular (CBFA_2011_03 dated 27 January 2011) clarifies concept of control in relation to own funds regulation.
- Limits and definitions:
  - An LE is defined where exposure value is equal to or exceeds 10 percent of own funds (Article X.5. of Royal Decree 15/11/2011).
  - 10 percent or more of a bank’s capital is defined as a large exposure.
  - 25 percent of a bank’s capital is the limit for an individual large exposure to a counterparty or group of connected counterparties.
- Exclusions and measurement:
  - Certain exposures excluded consistent with EU Directive (e.g., specified short settlement windows).
  - Off-balance sheet exposure value is calculated as its balance-sheet value (no risk weight or conversion factor).
  - Exposure value for derivatives and similar transactions determined according to Credit Counterparty Risk provisions (MtM Method, Original Exposure Method, Standardized Method, Internal Model Method).
- Special treatment for smaller banks:
  - LE regime permits smaller banks to exceed the 25 percent limit when the client is an institution: value shall not exceed 25 percent of own funds or EUR 150 million, whichever is higher, provided sum of exposures to non-institutions does not exceed 25 percent after CRM.
  - Where EUR 150 million is higher than 25 percent of own funds, the exposure after CRM shall not exceed “a reasonable limit in terms of the credit institution's own funds” determined by the institution and not higher than 100 percent of own funds.
  - Consequently, smaller banks may extend exposures of up to 100 percent of capital after credit risk mitigation.
  - The concession weakens the regime and exposes smaller banks to considerable risk given limited access to deep capital markets and less sophisticated risk management systems.

- Sample large exposure data (small sample sighted):
  - Bank 1: individual exposure to other credit institution after CRM 71 percent; sovereigns over 10 percent approx 150 percent.
  - Bank 2: Group 155 percent
  - Bank 3: 300 percent sovereign.
  - Bank 4: Unable to report March 2012
  - Bank 6: Aggregate LE to 6 corporates above 10 percent in total approx 70 percent Total Capital.

### LE governance, monitoring and supervisory reporting (EC3–EC5, AC1)
- EC3: Article X13 requires credit institutions to have organizational and internal control systems to identify, record, monitor and manage all large exposures per internal policies.
- EC4: Circulars (PPB-2006-17-CPB of 20 December 2006 and CBFA_2010_27 of 16 December 2010) describe best practices and require banks to have arrangements to control, monitor and mitigate concentration risk, including use of internal limits or thresholds.
- EC5: Reporting requirements:
  - COREP Pillar 1 table 90.18: quarterly reporting of all large exposures (top 20 for IRB banks) including category of exposure, amount of credit risk mitigation, indirect exposures, total exposures before and after weightings, distinction banking and trading book.
  - Example LE reporting submitted did not provide sectoral, geographical or currency detail.
  - Financial holding companies report LE data on a six monthly basis; quarterly reporting for material financial holding companies has been initiated.
  - NBB receives geographical concentration data from regulated banks on an annual basis; majority of prudential reporting is quarterly.
  - The NBB’s reporting frequency for geographical and sectoral data could be increased to respond to risk signals in a timely fashion.
- AC1: Definitions reiterated:
  - 10 percent or more of a bank’s capital is a large exposure.
  - 25 percent of a bank’s capital is the limit for an individual large exposure.
  - Minor deviations may be acceptable, especially if temporary or related to very small or specialized banks.

### Assessment and supervisory comments for Principle 10
- Assessment of Principle 10: Largely compliant
- Comments:
  - The LE regime permits small banks to extend exposures of up to 100 percent of capital after CRM, significantly weakening the regime for this group and enabling build-up of excessive concentrations.
  - The credit risk management framework does not require large exposures to be approved/reviewed by senior management or the Board. Without this, excessively large exposures could be made by less experienced staff.
  - The supervisor should ensure prudential limits and governance oversight (including Board approval/review) to restrict exposures to single counterparties or groups of connected counterparties.

### Exposures to related parties (Principle 11) — definitions, restrictions and supervisory tools
- EC1: Definition and scope
  - Belgium’s framework for related party exposures comprises several separate documents; no single Circular explicitly defines related party exposure.
  - Article 28 of the Banking Law requires each credit institution to grant loans, credit facilities or guarantees to its officers or managers under the same conditions as those applicable to their clients and requires reporting to the NBB of related party transactions where officers/managers or spouses personally own a direct or indirect qualifying holding.
  - Article 28 lacks explicit reference to transactions with material shareholders.
  - Large exposure regime applies but does not define or explicitly reference related parties.
  - Accounting law and supplementary supervision rules (conglomerates) define groups and related companies and include shareholders.
  - NBB reporting defines “connected or related parties” regarding:
    - corporates upstream and downstream within the group and companies with significant influence;
    - individual shareholders and their direct kin;
    - directors and managers and their close relatives and corporates in which these hold significant stake or board/management responsibility.
  - The Governance Circular and Internal Governance Circular translate EBA guidelines into internal governance memos; Conflicts of interest policy applies at solo and consolidated level.
  - Regulations do not specifically require a board approved policy on related party exposures; Banking Law and Circular require risk management policies but not explicit board-approved related party policy.
  - Conclusion: The regulatory regime for exposures to related parties is likely not comprehensive as required by the EC and may not assist supervisors to take prompt corrective actions.

- EC2: Terms and arm’s length requirement
  - Banking Law requires integrity policy (article 20, §3) but does not require the policy to include specific measures for related party exposures or a comprehensive related party definition.
  - Article 20bis §2 references measures to prevent conflicts of interest for investment services.
  - Article 28 explicitly states credit institutions must grant credits to directors and managers on the same conditions as customers; breaches are criminally prosecutable.

- EC3: Board approval and conflicts of interest
  - Regulations do not refer to requirements for write-off or limits that require Board approval for related party exposures.
  - Strategic decision requirements in the Banking Law could capture significant related-party transactions (requiring Board decision and prior NBB approval) but application to related parties is unclear.
  - The Sound Governance Circular’s conflicts of interest provisions lack detailed guidance on prudential treatment of related party exposures (for example, no explicit need for Board approval), leaving potential supervisory gaps.

- EC4: Preventing conflicted persons from participating in exposure decisions
  - Internal Governance Circular (principle VIII) requires internal conduct rules and appropriate measures regarding conflicts of interest.

- EC5: Limits, capital treatment and deductibility
  - NBB regulation on capital adequacy reserves the right to deduct from own funds exposures granted under more favorable terms than “at arm’s length,” requiring full coverage by own funds.
  - Credits to shareholders to subscribe capital instruments, or where shareholders cannot redeem credit other than from their investment in the bank, shall also be deducted from own funds. This requirement was recently introduced.
  - Relevant texts include NBB Regulation 15/11/2011, article II.1; Circular PPB-2007-1-CPB comments to article II.1 §§ 1 and 5; and the Large Exposure regime.
  - The LE regime provides exemptions for intra-group transactions which can negate the limit framework.
  - In practice, the NBB uses Pillar 2 assessment and deducts from capital accordingly.
  - Transition: Belgian rules modified during transposition of Directive 2009/111/EC (CRD II); NBB commenced transition to a tougher requirement imposing a limit of 100 percent of own funds for intra-group transactions mainly where group counterparty is domiciled outside Belgium. A transitional period until 31 December 2012 was permitted.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13133.pdf*

### 1. For those exposures to group entities, which receive a 0 percent risk weight under

### _cr13133 - 1. For those exposures to group entities, which receive a 0 percent risk weight under

### Large Exposure Regime (LE Regime) — scope and limits
- For exposures to group entities which receive a 0 percent risk weight under the Standardised Approach, no limit is applicable.
- Subject to NBB's prior approval, exposures to a domestically regulated subsidiary, the parent company or a subsidiary of that parent company, are exempted from the LE Regime provided that:
  - (a) funding is mainly provided by professional counterparts; and
  - (b) non-professional deposits are limited in volume relative to the Belgian banking sector.
- Exposures to subsidiaries subject to a control on a consolidated basis are exempted from the LE Regime.
- Exposures to the parent company or other subsidiaries of that parent company, that are subject to a control on a consolidated basis or equivalent, are subject to the Large Exposure Regime up to 25 percent of own funds. In practice, the limit is thus set at 100 percent of the own funds.

### Related-party exposures — supervisory requirements and findings (EC6, EC7, Principle 11)
- Supervisor requirements described:
  - Banks must have policies and processes to identify individual exposures to related parties and the total amount of such exposures.
  - Banks must monitor and report related-party exposures through an independent credit review process.
  - Exceptions to policies, processes and limits are reported to the appropriate level of senior management and, if necessary, to the Board, for timely action.
  - Senior management monitors related party transactions on an ongoing basis, and the Board provides oversight.
- Description and findings re EC6:
  - The Belgium rules text for exposures to related parties does not specifically address the requirements in this criterion.
  - The Banking Law and regulations do not include a limit framework that would apply specifically to this criterion.
  - The Circular for Internal Governance is not referred to in the Banking Law for exposures to material shareholders; it is not apparent how a bank would design its policy framework to ensure an independent credit approval process is established.
  - Board approval and oversight is not explicit within the regulations; governance (principle VIII) does not align with the requirements of this EC.
  - An integrated process for identification, monitoring and reporting approved by the board is not explicitly provided for in the regulations.
  - Reliance on various regulations not designed specifically to mitigate related-party risk is an inherent weakness.
- Description and findings re EC7:
  - In reporting to the NBB by credit institutions on a solo basis, information on related companies, their balance sheet, their profit and loss account and the off-balance sheet commitments is submitted.
  - In the public annual accounts on a solo basis, banks must disclose any transactions with related companies or individuals.
  - On a consolidated basis, disclosures are based on IAS 24 "Related party disclosures" and are made public.
  - In reporting transmitted to the NBB on consolidated basis, information on balance sheet, profit and loss account and off-balance sheet items is included.
- Assessment of Principle 11: Compliant
- Comment: An integrated process for identification, monitoring and reporting of exposures to related parties approved by the board is not explicitly provided for in the regulations.

### Country and transfer risk — supervisory framework and findings (Principle 12, EC1–EC4)
- Overall assessment of Principle 12: Largely compliant
- EC1 — policies and processes:
  - NBB has not issued specific guidance on country and transfer risk (other than guidance relating to credit risk and concentration risk in general).
  - Country and transfer risk is treated as a subset of credit risk; regulatory framework consists of the credit risk Circular (Circular letter NBB_2011_09 of 20 December 2011) which uses the Basel Document “Principles of Credit Risk Management” of 2000 as its base.
  - When banks extend credit internationally, assessment is made against general credit risk principles rather than explicit country and transfer risk requirements.
  - Credit risk scorecards are updated at least annually.
  - NBB assesses compliance through onsite examinations; report to management on credit risks; and reports of an accredited auditor.
  - Lack of specific requirements creates uncertainty about consistent risk management approaches and minimum standards.
  - Lack of explicit guidance weakens the quality of control reports used by NBB (self assessment of internal controls and external auditors’ reports).
  - For internal model users, there is consideration of country risks in PD and LGD estimates; NBB recently assessed exposures to sovereign assets within the eurozone and the PD/LGD assigned.
  - Internal model accreditation covers a small percentage of banks; the NBB assessment was initiated after issues where transfer risk had crystallized.
  - Circular letter CBFA_2010-27 of 13 December 2010 relates to management and monitoring of risk concentration and includes reference to sectoral and geographical concentrations.
- EC2 — information systems and reporting:
  - Pursuant to rules referenced in EC1, banks are required to identify, control and report country risk exposures (general requirement).
  - Credit institutions report quarterly to the NBB (table 40.80) the amount of assets and debts by localization of counterparties.
  - Annually, institutions report (table 90.34 of prudential reporting), on consolidated basis, risk exposures per country when these exposures exceed 3 pc of their own funds.
  - These reports enable the NBB to monitor evolution of country risk.
  - NBB carries out periodic assessments of some countries where Belgian banks have material exposures (examples: Greece, Spain, Italy, Hungary, Ireland, The Netherlands, France and Germany — specific attention on the real estate market for The Netherlands, France and Germany). These are exceptional analyses rather than part of quarterly supervisory monitoring.
- EC3 — provisions against country and transfer risk:
  - NBB has not issued specific guidance on appropriate provisions against country and transfer risk.
  - NBB has required value adjustments in specific cases (e.g., haircut to Greek sovereign bonds in trading books).
  - No consistent framework using minimum provisions or fixed percentages on a country-by-country basis was evident.
  - Since IFRS on consolidated basis, NBB has no power to impose additional value adjustments specifically for country and transfer risk at an early stage, but may require additional value adjustments for own funds purposes on a case by case basis.
  - NBB has issued some recommendations for additional value adjustments to some institutions based on assessments.
  - For banks using IRB Models, NBB will assess whether models account for country risks in PD and LGD calibration.
  - Reported divergence in LGD estimates for sovereign bonds: Greek Sovereign bonds ranged from 20 percent to 70 percent; Portugal from 10 percent to 40 percent; Ireland 10 percent to 40percent.
  - The divergence could be material for sizable portfolios and affect RWA.
  - The annual ICAAP assessment (including stress testing) provides NBB opportunity to assess these risks and adequacy of policies and procedures.
  - Monitoring by NBB is not yet systematic and ongoing.
- EC4 — timeliness and sufficiency of information:
  - Credit institutions report quarterly to the NBB (table 41.80) the amount of assets and debts by localization of counterparties.
  - Annually, institutions report (table 90.34 of prudential reporting), consolidated risk exposures per country when exposures exceed 3 pc of their own funds.
  - Consolidated reporting requirements are clear; solo requirements are not.
  - Annual reporting is lodged no later than six months after the end of financial year; lags in supervisors reviewing data mean annual reporting is not sufficiently timely to react to a build-up in risks.

### Market risk — supervisory framework and findings (Principle 13, EC1)
- Regulatory basis:
  - Core framework: Article 20 of the Banking Law regarding a sound and safe banking organization.
  - Specific market risk requirements align with the European Directive (revised most recently 2010/76/EU of 24 November 2010).
  - Relevant instruments listed:
    - NBB Regulation 15/11/2011, articles I.6 and IX.84.
    - Circular NBB_2012_03, 10 May 2012, transposing the CEBS/EBA guidelines related to the management of operational risks in market-related activities.
    - Circular D1/2002/4, 2 August 2002 related to market risk models.
    - Circular D1/2001/10, 7 December 2001 related to the organization of market activities.
    - Circular B 90/1, 17 April 1990 related to the organization of market activities.
- Findings:
  - Regulations require banks to have policies and processes that adequately identify, measure, monitor and control market risk.
  - Policies must be regularly approved by the Board at least annually.
  - Supervision plan for each bank is determined by risk assessment (scorecard); supervisory activities include off-site and on-site work.
  - Offsite analysis relies on external auditor control report to confirm compliance with market risk policies.
  - Onsite inspections are not typically annual for all banks—reserved for higher risk banks or larger systemic banks.
  - Credit institutions are subject to quarterly reporting on market risk; quarterly reports are analyzed by financial analysts within banking supervision teams.
  - At least annually the supervisor performs a SREP analysis involving a meeting with senior management and the external auditor.
  - Regulatory regime does not require policies to be submitted to the NBB; policy updates are not communicated to the NBB, so supervisors may be unaware of changes in risk appetite or expanded trading activities.

*Source: _cr13133*

### introduction of new products based on reporting requirements.

### _cr13133 - introduction of new products based on reporting requirements.

### Market risk governance and limits (EC2)
- Supervisor determines banks have market risk limits commensurate with size and complexity; limits should be approved by the Board or senior management and adhered to.
- Description and findings:
  - Suite of market risk Circulars require imposing market risk limits on trading book activity; Value-at-Risk (VaR) is the most common measurement tool.
  - No specified minimum period to calculate VaR; banks use a range of minimum periods. The lack of consistent rule weakens offsite peer comparisons and outlier identification.
  - Typical limits include sensitivities such as basis point values (BPV) - global and per time bucket - delta/vega's, liquidity limits, limits per counterparty, stop loss limits, stress tests.
  - Supervisory assessment mainly via onsite examinations; offsite periodic financial analysis based on quarterly and annual submissions.
  - Onsite review frequency: at least annually for banks with large or more complex portfolios and trading strategies; considerably less than annual for majority of banks where supervisory cycle exceeds one year.
  - Regulatory regime not precise on requirement for immediate reporting of limit breaches to the NBB; absence of immediate reporting is a weakness given potential fast market volatility.
  - Recommendation implied: enhanced reporting of limit compliance, possibly quarterly, could strengthen early warning indicators. Also consider implementing additional early warning indicators and notification of new product approvals.

### Valuation and capture of transactions (EC3)
- Supervisor requires systems/controls to ensure timely capture of transactions and frequent revaluation using reliable market data or, absent prices, internal/industry models; policies for valuation adjustments/reserves for illiquid/stale positions required.
- Description and findings:
  - NBB Regulation 15/11/2011, Articles I.6 & I.7 mandate rigorous and prudent valuation practices; supervisory and audit teams verify compliance, frequency depending on scorecard output.
  - Off-site controls based on quarterly prudential reports (COREP tables) and institutions' internal risk reports (submitted annually).
  - Quarterly reporting basis for interviews with market risk management (frequency quarterly for larger banks and annually for all others).
  - All credit institutions required to measure and report trading book positions per instrument categories in COREP tables 90.10 to 90.15.
  - Onsite examinations are primary tool to assess valuation adjustment policies/processes; NBB performs interviews but it is not clear what information NBB requires to assess valuation appropriateness unless receiving very detailed reports beyond existing reporting requirements.
  - Evidence exists of NBB addressing valuations for Greek sovereign bonds in trading portfolios, indicating capacity to examine emerging risks.
  - Scorecard uses indicator "notional amount of trading derivatives / balance sheet total" for materiality and capital requirements for market risk for riskiness; quantitative indicators do not indicate quality of risk management or risk appetite.
  - Horizontal analysis by market risk teams and liaison with external auditors are used to review valuation of mark to market positions.
  - Liquidity of market risk portfolios and valuation have been issues for Belgium banks.

### Scenario analysis, stress testing and model validation (EC4 & AC1)
- Supervisor expects banks to perform scenario analysis, stress testing, contingency planning, and periodic validation/testing of market risk measurement systems; approaches should be integrated into risk management.
- Description and findings:
  - Two Circulars set requirements for periodic scenario analysis: NBB Regulation 15/11/2011, articles IX.84 and IX.85; and Circular D1/2002/4, 2 August 2002 related to market risk models. Circulars align with EU Directive and BCBS recommendations including back testing, validation and stress testing for internal models; the use test is a criterion when validating internal models.
  - Supervisory activity for active testing of control effectiveness is less well defined; credit institutions with moderate risk score may not receive onsite examinations to test controls.
  - Unclear whether results of stress testing and scenario analysis must be submitted to the supervisor or whether stress test/scenario breaches must be reported to the supervisor.
- Additional criteria (AC1) findings:
  - NBB Regulation 15/11/2011, articles I.6 and I.7 require market data used to value trading book positions to be verified by a function independent of the dealing room; article I.7 § 4 specifies valuation model should be developed or approved by an independent unit.

### Assessment of Principle 13
- Compliance status: Compliant
- Comment:
  - Consider implementing additional early warning indicators for market risk to complement existing measurement tools, mainly VaR. Suggested measures: risk tolerances across multiple market risk metrics clearly linked to a risk appetite statement; other tools to identify changes in risk might include notification of new product approvals.

### Liquidity risk — supervisory framework (Principle 14, EC1)
- Supervisor sets liquidity guidelines considering undrawn commitments, off-balance sheet liabilities, and on-balance sheet liabilities.
- Description and findings:
  - NBB's liquidity regime is based on three key requirements.
    1. A regulatory stress test: objective for bank to survive a short-dated stress using NBB assumptions for run off of liabilities and a standard definition of liquid assets in four categories. Stress period is over one week and one month and is applicable to all credit institutions at a solo and consolidated basis and financial holding companies. The stress test was implemented over a two year period from 2009 to 2011. Committed lines and contingent facilities are included in the calculations.
    2. A mandatory liquidity reporting scheme that allows calculation of the regulatory stress test ratios and additional liquidity metrics such as level of liquid assets, maturity mismatches, support from related parties, contingent liquidity risks, funding concentration, level of wholesale funding.

*Source: _cr13133 - introduction of new products based on reporting requirements.*

### 3. Qualitative requirements for banks' liquidity management implementing the

### 3. Qualitative requirements for banks' liquidity management implementing the

### Overview and legal/regulatory basis
- The Belgium Liquidity regime draws from the Basel Committee’s Sound Principles paper on liquidity risk management published in 2008 and was implemented in 2009 as an observation ratio through Circular letter CBFA 2010-21.
- The qualitative guidelines and the quantitative ratios cover contingent liquidity risks related to off-balance sheet items as well as on-balance sheet risks.
- The Basel III liquidity standards and monitoring tools will be introduced also for Belgian banks.

### NBB organizational framework and tools
- The NBB scorecarding system incorporates a mix of quantitative (scores on prudential liquidity ratios) and qualitative (compliance with Basel core principles) elements to determine the level of risk embedded in the bank's liquidity position and its management.
- The NBB has established a "liquidity risk" team tasked to:
  - regularly inform and share information among NBB staff about banks' liquidity risk positions, management and regulation;
  - detect risks and outliers; and
  - oversee consistent application of the NBB's liquidity policy.
- The NBB monitors the liquidity position of major banks on a daily basis through management information and calls with banks' treasurers.
- Daily liquidity reporting is in place for the larger systemically important credit institutions; this is a mix of top down qualitative information from the markets area and bottom up bank specific information.
- Since 2006, the NBB has organized and conducted annual liquidity stress test exercises and high level meetings on liquidity risk with the major banks.

### Liquidity stress testing, reporting and ratio mechanics
- The 2011 liquidity (stress-test) exercise focused on three main areas:
  1) developments in the Belgian regulatory stress test ratio for liquidity risk and other indicators of liquidity risk calculated by the NBB based on prudential reporting;
  2) the results of the QIS on Basel III liquidity standards; and
  3) the internal liquidity stress tests of banks.
- At the end of the exercise, the NBB produces a feedback note analyzing each bank's results and comparing them with their peers.
- The regulatory stress test allows intra-group support to meet the test with no limit as to the extent of intra-group support.
  - The group providing the liquidity is not assumed to be under stress; contagion and fungible excess liquidity at the parent are not assumed.
  - The assumption of unlimited intra-group support means the stress is not a stand-alone test of a credit institution.
- Credit institutions only need to meet the test on an aggregate basis and not across individual currencies in the liabilities schedule.
- The NBB regulatory stress test ratios for liquidity risk:
  - compare potentially required liquidity (net stressed outflows calculated as the sum of the stressed mismatch and a percentage of the bank's contingent claims) with the liquidity available to the bank (calculated as the liquidity buffer composed of unencumbered liquid assets and the potential support from related parties);
  - are calculated for a one week and one month horizon, both on a consolidated and a legal entity basis;
  - use the same methodology as the forthcoming Basel III Liquidity Coverage Ratio but include different parameters and definitions.
- Ratios were used as internal measures until the financial crisis, introduced as non-binding observation ratios in 2009 and as binding regulatory standards since the beginning of 2011.
- A ratio higher than 100 percent implies a liquidity shortage if the stress scenario would materialize at the reporting date (potentially required liquidity > potentially available liquidity).
- Assumptions allow full convertibility between currencies (within a time frame of one week).
- The Belgian liquidity standard, compared to the LCR, is generally less severe with regard to the definition of the liquidity buffer, but compensated by stricter assumptions on the stress scenario and liquidity outflows.

### EC2 — Board-approved liquidity management strategy, policies, processes
- Minimum expectations of the NBB are described in the BCBS Sound Principles — specifically Principle 3.
- Requirements include:
  - banks to develop a strategy, policies and practices to manage liquidity risk;
  - the board of directors to review and approve these at least annually.
- Implementation verification:
  - initial self assessments were performed when BCBS document was introduced; outcomes entered into the scorecard.
  - ongoing evaluation focuses on specific requirements (stress tests, governance, monitoring systems, reporting, intra-group relations) rather than a full-spectrum BCBS reassessment for all banks.
  - more attention paid to banks with less robust liquidity positions.

### EC3 — Senior management implementation and understanding
- Regulatory regime requires senior management to develop policies and practices to manage liquidity risk (Principle 5 of BCBS document).
- Main means of confirming effective implementation:
  - annual internal control report;
  - external audit reports;
  - annual meeting with credit institutions;
  - on-site examinations where required.

### EC4 — Measurement and monitoring of net funding requirements
- BCBS Principles (Principle 5 and Principle 6) require sound processes for identifying, measuring, monitoring and controlling liquidity risk and monitoring across legal entities, business lines and currencies.
- Principle 6 requires a funding strategy providing for effective diversification; however:
  - the regulatory stress test’s allowance of unlimited intra-group support to meet outflows is contrary to the diversification principle.
- Belgian reporting and ratios:
  - standardized liquidity reporting scheme (tables 90.31-33) submitted monthly on entity and consolidated levels, including unencumbered liquid assets, projected in- and outflows, contingent liquidity risks.
  - Bank Performance Report (BPR) computes prudential liquidity metrics from this input and complements with funding concentration data and short term credit ratings.
  - horizontal analysis assesses potential outliers and feeds a quarterly liquidity and funding review presented to the NBB Board.
- Not all banks are required to test liquidity by currency nor to ensure sufficient diversification of funding sources by currency.

### EC5 — Foreign currency liquidity transformation and reporting
- Liquidity reporting is separate for:
  - position in EUR;
  - aggregate position in convertible currencies (G-10 + EU countries' official currencies);
  - individual positions in non-convertible currencies.
- Separate reporting of convertible currencies (mainly USD) is only delivered by major banks.
- For Basel III LCR monitoring the NBB requires banks to fill in LCR templates in USD if their positions are significant.
- Principle 5 requires banks to assess foreign currency needs, determine acceptable mismatches, manage risks from foreign currency deposits and assets funded in domestic currency, and develop contingency strategies.
- The NBB edits a standard liquidity dashboard for major banks from daily inputs.
- The new European Basel III LCR stress test reporting to be introduced from next year will require each bank to report in each currency in which the bank has a significant position.

### EC6 — Contingency funding plans and supervisory interaction
- Principle 11 requires banks to have a formal contingency funding plan setting out strategies for addressing liquidity shortfalls in emergency situations; such plans have been effectively activated by a number of institutions.
- At introduction of revised qualitative requirements in 2009:
  - compliance checked via self assessment and an implementation plan generated by banks;
  - on-site inspections conducted at a selected number of institutions, including all large banks.
- Contingency funding plans are not required to be submitted or vetted by the NBB on an ongoing basis.
- No systematic follow-up by the NBB to monitor banks' progress since the self assessment exercise; deep dive inspections are conducted for identified outliers.
- Foreign currency risk inclusion:
  - included in annual stress testing exercise, but NBB does not require individual currency stress tests.
  - forthcoming European LCR reporting will complement NBB scheme and require currency-level reporting for significant positions.

### Additional criteria (AC1, AC2)
- AC1: Where a bank conducts business in multiple currencies, foreign currency liquidity strategy should be separately stress-tested and used to determine appropriateness of mismatches.
  - Principle 5 and Principle 9 require assessment of FX convertibility and access to FX markets in stress tests when relevant.
- AC2: Supervisor confirms banks periodically review efforts to establish and maintain relationships with liability holders, maintain liability diversification, and ensure capacity to sell assets.
  - Principle 7 refers to funding diversification and maintaining market access; banks are requested to build investor relationships, develop markets for asset sales and strengthen borrowing arrangements.

### Assessment of Principle 14 (Liquidity) and recommendation
- Assessment: Compliant.
- Comments and recommendation:
  - Regulatory requirements for liquidity risk are well advanced with a quantitative test similar to the Basel LCR in place since 2011.
  - Daily reporting for larger systemic banks is robust.
  - Recommendation: Consider applying certain limitations to either the timing or the extent to which intra-group support can meet the regulatory stress test to strengthen the individual liquidity position of a bank.

---

### Principle 15 — Operational risk: framework and supervisory findings

EC1 — Operational risk policies and proportionality
- Articles 20, 46 and 43 of the Banking Law set the regulatory framework for operational risk.
- Article 43 supports the NBB Regulation of 15 November 2011 on the capital of credit institutions and investment firms, including Pillar 1 and Pillar 2 requirements for operational risk.
- Title VIII of the NBB Capital regulation: Pillar 1 capital requirements for operational risk.
- Title XII: Pillar 2 ICAAP and SREP regulation (including operational risk).
- NBB Communication NBB_2011_05 of 27 October 2011 advised banks that BCBS Principles for the Sound Management of Operational Risk of June 2011 set new prudential expectations and will be used in assessments.
- Additional qualitative criteria and Circulars:
  - Circulars on outsourcing, business continuity planning, financial services via the internet.
  - Committee for Financial Stability recommendations on business continuity management for systematically important institutions of October 20th, 2004.
- Supervision:
  - On- and off-site supervision; risk specialist teams cover IT aspects and model validations.
  - Dedicated "Operational Risk Team" under the Risk Committee for structured information sharing and level playing field considerations.
  - Operational risk is a dedicated risk category in the overall periodic scorecard.
- Limitations:
  - Quarterly reporting for operational risk under basic indicator and Standardized approach lacks granularity to identify changes in risk profile.
  - New product approval document is available but not mandatory to submit to the NBB.

EC2 — Board oversight and approval
- BCBS Principles (Principles 1, 3 & 4) explicitly refer to Board role in approving policies for operational risk.
- Operational risk assessed at least annually in SREP; higher risk banks may be assessed more frequently.
- Tools used by banks for identifying and assessing operational risks include:
  i) descriptions of business processes with key risks and key controls;
  ii) periodic self assessments (e.g., scenarios);
  iii) loss data registration (including "lessons learned");
  iv) testing/monitoring operational effectiveness of key controls;
  v) internal risk reporting.
- EC2 expectations:
  - Board review and approval of operational risk management policies at least annually.
  - Not required to submit policies to the NBB on an annual basis.

EC3 — Implementation effectiveness
- NBB evaluates operational risk framework through offsite and onsite reviews.
- Annual internal controls report submitted by credit institutions is a key supervisory input.
- Onsite review frequency:
  - Larger systemically important credit institutions: general rule annual cycle (not mandated).
  - Rest of population: frequency varies between one and five years for IT depending on risk profile.
- Onsite inspection categories:
  a) general inspections including operational risk;
  b) inspections targeting operational risk management;
  c) inspections targeting specific elements (AMA, IT, Business Continuity, outsourcing).
- Information sources for supervisory assessment: regulatory reports, loss databases, spontaneous event-driven reports, annual internal controls reports.
- Limitations:
  - Independent testing of control effectiveness requires periodic onsite review; external auditors do not provide positive assurance on control effectiveness as part of the annual Internal Control Report.

EC4 — Business resumption and contingency plans
- NBB requirements for business continuity captured in BCBS principles (Principle 10) and Circular letter PPB 2005/2 of 10 March 2005.
- Assessment of adequacy of business resumption and contingency plans is included in standard onsite examinations.
- Limitations:
  - For wider bank population, processes are less established.
  - All credit institutions required to perform regular BCP and DR testing, but NBB will not necessarily receive the results.
  - No requirement to notify the NBB if a credit institution fails its own test or identifies weaknesses.

EC5 — Information technology policies and investments
- BCBS principles (principle 9, §§ 47 to 53) and Circular letter PPB 2005/2 provide ICT-related guidance.
- Circular letter CBFA_2009_17 of 9 April 2009 covers prudential expectations for Internet financial services, addressing legal, operational and reputational risks; includes "comply or explain" attachment on Internet security practices.
- NBB has a team of eight IT risk specialists covering approximately 170 firms regulated by the NBB.
  - Challenge: small team coverage; reliance on risk scorecard to identify higher risk banks and direct scarce resources.

EC6 — Reporting mechanisms for operational risk
- Key reporting inputs:
  - annual effective management reports on internal controls (Circular letter NBB_2011_09 of 20 December 2011);
  - quarterly table (90.16) on operational risk capital requirement calculations;
  - yearly table (90.17) for AMA banks reporting past year's operational risk losses;
  - spontaneous reporting requirements for major frauds or suspect operations (Circular letter NBB_2012_03 of 10 May 2012), security incidents for Internet services or IT infrastructure (Circular letter CBFA_2009_17 of 9 April 2009), and material outsourcing arrangements (Circular letter PPB 2004/5 of 22 June 2004).
- Circular letter CBFA_2009_19 of 8 May 2009 requests external auditors to communicate certain events spontaneously to the NBB.

EC7 — Legal risk inclusion
- EC7 requires explicit consideration of legal risk in operational risk management.
- Finding: There is no explicit reference to legal risk in the BCBS document; this is identified as a deficiency in the operational risk framework.

EC8 — Outsourcing risk management
- BCBS principles (principle 9, § 54) and Circular letter PPB 2004/5 of 22 June 2004 provide guidance on outsourcing risk management practices.
- Outsourcing programme expected to cover:
  - due diligence for selecting service providers;
  - structuring the outsourcing arrangement;
  - managing and monitoring outsourcing risks;
  - ensuring an effective control environment; and
  - establishing viable contingency planning.
- Circular addresses need for comprehensive contracts/service level agreements with clear allocation of responsibilities.

*Source: IMF Financial Sector Assessment — chapter: Qualitative requirements for banks' liquidity management implementing the Basel Committee 2008 principles and related NBB regulations and supervisory findings.*

### references.

### _cr13133 - references.

### Outsourcing arrangements and operational risk (AC1)
- The NBB uses the principles of Circular letter PPB 2004/5 of 22 June 2004 as the framework to assess outsourcing arrangements using a risk based approach, through off site analyses of service letter agreements and monitoring reports and through on site inspections.
- AC1: The supervisor determines that the risk management policies and processes address the major aspects of operational risk, including an appropriate operational risk framework that is applied on a group-wide basis. The policies and processes should include additional risks prevalent in certain operationally intensive businesses, such as custody and correspondent banking, and should cover periods when operational risk could increase.
- Description and findings re AC1:
  - The supervisor has a number of inputs into the assessment of external factors such as loss data collected from industry, major loss information reported and ad hoc information requests.

### Assessment of Principle 15
- Assessment of Principle 15: Compliant.
- Comments:
  - As a general rule, for the large banking groups, an onsite assessment is performed annually in includes a review of outsourcing arrangements.
  - For medium sized and small banks, the frequency of onsite inspections varies between one and five years for IT, following a risk based approach.
  - While all credit institutions are required to perform regular BCP and DR testing, the regulations do not require banks to submit results of testing should a bank fail its own test.

### Interest rate risk in the banking book (Principle 16) — overview and essentials
- Principle 16: Supervisors must be satisfied that banks have effective systems in place to identify, measure, monitor and control interest rate risk in the banking book, including a well defined strategy that has been approved by the Board and implemented by senior management; these should be appropriate to the size and complexity of such risk.

### Essential criteria EC1 — Board approval and oversight
- EC1: The supervisor determines that a bank’s Board approves, and periodically reviews, the interest rate risk strategy and policies and processes for the identification, measuring, monitoring and control of interest rate risk. The supervisor also determines that management ensures that the interest rate risk strategy, policies and processes are developed and implemented.
- Description and findings re EC1:
  - Chapter 1 of the annex to the NBB Circular PPB-2006-17-CPB lays out minimum requirements for the internal management of interest rate risk. Section §2.2 includes an explicit requirement for the installment of control and procedures approved by the Board for the identification, measurement, monitoring and control of interest rate risks.
  - The Circular also requires internal risk limits and an internal control system to be developed in accordance with the strength of the institution and that there should be sufficient flows of information with the supervisor.
  - The Circular requires the Board to be involved in determining strategies and approving all important policies, as well as the effective supervision of the implementation.
  - The regulatory framework requires involvement of the Board in setting policies and processes. The NBB guidelines are strongly aligned with the relevant international texts of BCBS and CEBS/EBA.
  - The Circular treats both qualitative aspects (adequacy of internal risk management and risk measurement systems) and quantitative aspects, in line with the international rules and guidance (BCBS & CEBS). The Circular explicitly references the two documents as the basis of the NBB’s expectations. These texts are quasi completely aligned with each other and at its turn. The circular incorporates them into the Belgian, which provides for a flexible way to pick up progress made at the EBA and the likely developments in the banking union.

### NBB IRRBB regime and supervisory tools
- The NBB's IRRBB regime has two main features:
  1. Regulatory IRRBB stress test ratios requiring banks to hold sufficient capital to cover economic value losses related to adverse structural interest rate changes in order not to be identified as an outlier bank.
  2. Qualitative requirements for banks' IRRBB management implementing the internationally agreed Basel Committee 2004 principles for the management and supervision of interest rate risk, and implementing the CEBS 2006 “Technical aspects of the management of interest rate risk arising from non-trading activities under the supervisory review process.”
- The NBB organizes annual IRRBB stress test exercises as part of the European solvency stress tests, which integrate both interest rate risk and spread scenarios.
- The NBB scorecarding system incorporates a mix of the quantitative (scores on IRRBB ratios) and qualitative (compliance with Basel core principles) criteria.
- To further strengthen the supervisory toolkit for IRRBB, the NBB is developing a tool to monitor the IRRBB position of major banks on a quarterly basis.
- The NBB has observed divergences in approaches used by banks to measure and calculate IRRBB, and take this into account in its supervisory appraisal of reported IRRBB indicators. Going forward, the NBB will further analyze both the qualitative and quantitative aspects of these divergences to ensure a full comprehension of interest rate risks.
- Concerning qualitative aspects, attention will be paid to factors such as i.e., combining views of ALM and treasury departments on IRRBB and ensuring the functional separation between Head of Treasury and Head of Markets at banks.

### Supervisory engagement with boards and supervisory assessment practices
- While the regulatory framework is clear and comprehensive regarding the Board’s involvement, the supervisory framework is less clear to determine how well the Board is meeting its obligations set out in this criterion.
- The frequency of engagement with the board by the supervisor is not mandated by the supervisory framework.
- In practice, the supervisor will meet frequently with the larger systemic banks, which would typically include the CFO, CEO and CRO. The engagement does not, however, extend systematically to the board of directors of all banks.
- The supervisor does perform assessments of board reports carried out at least annually when the scorecard is updated as part of the SREP. The board reporting and minutes cover a number of risk areas.

### Essential criteria EC2 — measurement systems and limits
- EC2: The supervisor determines that banks have in place comprehensive and appropriate interest rate risk measurement systems and that any models and assumptions are validated on a regular basis. It confirms that banks’ limits reflect the risk strategy of the institution and are understood by and regularly communicated to relevant staff. The supervisor also confirms that exceptions to established policies, processes and limits should receive the prompt attention of senior management, and the Board where necessary.
- Description and findings re EC2

*Source: _cr13133 - references.*

### Chapter 1 of the annex to the NBB Circular PPB-2006-17-CPB requires institutions to be

### Chapter 1 of the annex to the NBB Circular PPB-2006-17-CPB requires institutions to be able to calculate both the earnings and value sensitivity to interest rate risk in the banking book

### Interest rate risk in the banking book (IRRBB) — supervisory framework and practices
- Banks must calculate both the earnings and value sensitivity to interest rate risk in the banking book using internal measurement techniques adapted to the size and complexity of a bank’s activities and related risks.
- The Board must be engaged when setting strategies and approving all important policy decisions, including effective supervision of risk management.
- The NBB receives quarterly reporting based on common assumptions and common scenarios:
  - Scenarios limited to upward and downward parallel shifts in the yield curve shocks of 1percent, 2 percent and 3 percent on both the economic value of the banking book and on the net interest income for the coming three years (COREP table 90.30).
  - Banks may use internal measurement systems under common assumptions (treatment of equity, duration of deposits, time dynamics of interest rate shocks).
- Required reported ratios include:
  - the impact of interest rate shocks on the economic value of the banking book
  - impact of interest rate shocks on expected net interest income
- Prudential reporting does not capture all types of firm-specific interest rate risks; supervisors must follow up with bespoke information requests.
- IRRBB is a Pillar 2 risk and is monitored through internal and prudential reporting, focusing on economic value (VaR, BPV) and interest income perspectives (e.g., Earnings at Risk).

### Supervisory capital linkage and model governance
- To calculate the tier 1 capital requirement, the impact of a 200bps parallel shift in the yield curve is measured against the capital base using data from quarterly prudential returns; this amount is adjusted according to the supervisor’s assessment of the bank's interest rate risk management and entered into the scorecard.
- The supervisor has discretionary influence on this amount based on judgment of the bank’s interest rate risk profile (within limits).
- Internal models for IRRBB:
  - As IRRBB is a Pillar 2 risk, internal models are not required to be approved by the NBB.
  - Potential divergence in model quality, data inputs, assumptions and approaches may make peer comparisons and inherent risk appreciation difficult without detailed analysis.

### Stress testing requirements and supervisory findings (EC3, AC1–AC3, AC4)
- Regulatory requirement:
  - §2.2 of chapter 1 of the annex to the NBB Circular PPB-2006-17-CPB requires interest rate risk management to include possible stress scenarios such as considerable shocks, changes in correlations and changes in behavioral assumptions.
- Supervisory observations:
  - Many banks perform interest rate risk stress tests focused on a set of interest rate scenarios (general and institution-specific such as basis risk).
  - More attention needed on stress testing changes in behavioral assumptions (e.g., duration of deposits, convexity in prepayments).
  - Unclear to what extent top management is exposed to stress test results; non-systemic banks show less sophisticated stress testing practices.
- AC1: Supervisor power and practice
  - Supervisor can obtain results of internal interest rate risk measurement systems, expressed in terms of threat to economic value and net interest income; banks report these quarterly (COREP table 90.30).
  - The Banking Law provides powers for the NBB to obtain any reporting relevant to supervision.
- AC2: Assessment of internal capital measurement systems
  - Annual ICAAP analysis includes IRRBB as Pillar 2 risk.
  - For certain large complex banks, NBB bases prudential capital requirements on internal analysis; for other banks, NBB uses SREP analysis.
- AC3: Stress tests and senior management engagement
  - The requirement for stress tests to consider a worst case scenario is not explicitly mentioned.
  - Senior management is required to consider results when establishing and reviewing policies, processes and limits for interest rate risk.
- AC4: Functional separation
  - Interest rate risk management at large institutions is assigned to ALM departments reporting separately from risk-taking departments.
  - NBB regulations do not formally require separation of staff responsible for Treasury and markets activity; recent on-site examinations prompted NBB recommendations to separate treasury and markets functions.
  - This remains a specific area for attention.

### Assessment and supervisory recommendations for IRRBB (Principle 16)
- Assessment: Compliant
- Comments / suggested enhancements:
  - Write a single regulation to replace multiple rule texts; include requirements for stress testing and limits that reflect NBB risk appetite.
  - Strengthen framework with a requirement for functional and operational separation of markets and treasury functions.
  - Require an ALCO for all credit institutions to enhance quality, timeliness and management of IRRBB.
  - Extend cross-sectoral analysis to a greater number of banks, improve identification of outliers and strengthen transfer of skills to supervisors.

---

### Internal control and audit (Principle 17) — legal framework, supervisory practice, and findings

### Board and senior management responsibilities (EC1–EC3)
- Legal basis:
  - Banking Law Article 20 and Circular PPB-2007-6CPB-CPA establish Board and senior management responsibilities for corporate governance and effective control (including role of Audit Committee).
  - Article 20 §5 (sixth part) requires senior management to report at least once a year to the Board and the external auditor about internal control, internal audit, compliance, risk management, financial reporting, and follow-up of external auditor recommendations; senior management must send a copy of the report to the NBB.
  - Circular letter NBB_2011_09 dated 20.12.11 details content and timing of management’s self-assessment; NBB suggested COSO methodology (not mandated).
  - External auditor procedures are set out in Circular letter CBFA_2009_19 dated 20.12.2011.
- Audit Committee and governance:
  - When quantitative thresholds are passed, a credit institution must set up an Audit Committee (art. 20 §2bis); Audit Committee tasks are described in art. 20 §5.
  - At least one member of the Audit Committee must be a non-executive director meeting independence criteria in art. 526ter of the Company Law Code (art. 20 §2bis and §2ter).
  - NBB strongly recommends a majority of non-executive directors on the Board but this is not mandated.

### Internal controls, auditor roles and supervisory verification (EC2, EC7, EC8)
- Internal control requirements:
  - Article 20 §1 of the Banking Law requires organizational structure, administrative and accounting organization, control and security measures for electronic data processing, and an appropriate internal control.
  - Circular letter D1 97/4 dated 30.06.97 addresses internal controls and internal audit (under revision).
- External auditor and supervisory reliance:
  - External auditor receives management’s report, verifies documentation, performs procedures and sends observations to the NBB with a copy to the bank.
  - There is no positive assurance requirement for auditors concerning the control environment; Circular does not mandate extent of testing for audit opinion.
  - NBB does not systematically verify completeness or comprehensiveness of management’s self-assessment or the auditor’s testing; verification occurs via off-site examinations, on-site inspections, or meetings with auditors and internal audit head.
  - For larger systemic banks, assessment of controls and internal audit is regular and comprehensive; for smaller banks, frequency of supervisory on-site review is not mandated.
- Internal audit function requirements (EC7, EC8):
  - Article 20 §3 and Circular D1 97/4 require an independent and effective internal audit function with prescribed duties, independence, access rights, staffing and reporting (internal audit charter).
  - Internal audit methodology should include risk-based approach, work programs, working papers, written reports and follow-up procedures.
  - No systematic supervisory process exists to assess internal audit across all banks annually; NBB obtains internal audit plans and major adverse findings but systematic coverage for smaller banks is lacking.
  - NBB meets external auditors at least annually as part of supervisory program to gain insight on internal audit.

### Assessment and supervisory recommendations for internal control and audit (Principle 17)
- Assessment: Largely Compliant
- Comments / suggested enhancements:
  - Mandate a minimum annual frequency for on-site examinations to test effectiveness of the control environment across all banks.
  - Reduce reliance on external auditors by mandating more frequent supervisory testing of the control environment, including explicit guidance on audit testing scope.

---

### Abuse of financial services, AML/CFT (Principle 18) — legal framework, supervisory powers, and findings

### Legal and regulatory framework (EC1)
- AML/CFT framework:
  - Law of 11 January 1993 on the prevention of the use of the financial system for money laundering and terrorism financing, as modified by Laws of 18 January 2010 and 26 November 2011, Programme Law (I) of 29 March 2012, and Royal Decrees of 6 May 2010, 3 March 2011 and 2 June 2012.
  - Regulation of 23 February 2010 of the Banking, Finance and Insurance Commission on prevention of money laundering and terrorism financing approved by Royal Decree of 16 March 2010.
  - Provisions on coercive measures and sanctions described in § 512 of Belgium’s REM of June 2005.

### Supervisory responsibilities and practices (EC2–EC7)
- NBB responsibilities and tools:
  - Since 1 April 2011 the NBB is charged with regulation, monitoring and sanctioning regarding AML/CFT for credit institutions and other financial institutions.
  - NBB uses off-site analysis, on-site reviews, meetings with internal and external auditors, meetings with compliance officers/MROs, and ad-hoc off-site reporting.
  - No systematic supervision plan across all credit institutions was evidenced for deployment of tools in a risk-based approach; a further review of compliance was planned for December 2012.
  - NBB undertook special reviews based on information from the financial intelligence unit.
- Reporting of suspicious transactions (EC3):
  - Financial institutions are not required to transmit copies of all suspicious transaction reports (STRs) sent to CTIF/CFI to the NBB; minimum reporting requirement is the annual activity report of the AML officer.
  - Article 39 §2 of the AML/CFT Law and Article 46 paragraph 4 of the Banking Law permit the NBB to require relevant information, including STRs.
  - In practice, absence of immediate reporting requirements to NBB of STRs means NBB must rely on other sources and CTIF is obliged to inform NBB when a bank failed to comply with reporting obligations.
- Enhanced due diligence and KYC (EC4–EC5):
  - FATF 2005 mutual assessment found Belgian procedures largely compliant with Recommendation 5 (KYC) and Recommendation 6 (PEPs); Recommendation 11 (unusual transactions) and Recommendation 22 (group approach) were largely or fully compliant.
  - Article 16 §2 of the Law of 11 January 1993 requires coordinated AML/CFT programs across groups and subsidiaries.
  - 2010 regulation incorporates by reference BCBS "Consolidated Know Your Customer Risk Management" (October 2004) and requires group-level AML/CFT programs, coherent risk classification, transaction monitoring, and group information exchange; Belgian parent expected to verify implementation in branches and subsidiaries abroad.
- Periodic confirmation and supervisory coverage (EC6):
  - Compliance forms part of off-site monitoring and on-site inspection program; NBB undertakes detailed on-site examinations but monitoring for small banks not frequently inspected is unclear.
- Enforcement powers (EC7):
  - Article 40 of the Belgian AML/CFT Law allows NBB to:
    - publish decisions and measures it adopts (terms determined by NBB);
    - impose an administrative fine of not less than EUR 250 and not more than EUR 1 250 000.
  - These specific sanction powers are additional to measures under the Law of 22 March 1993.

### Internal arrangements at banks and supervisory access (EC8–EC11)
- Bank obligations and structures:
  - Internal controls and internal audit are expected to cover AML/CFT measures.
  - Article 18 of the AML/CFT Law requires organizations to appoint one or more persons responsible for implementation (AML/CFT officer) who examine internal reports and adopt measures as required under Articles 23 to 28.
  - Article 17 requires procedures for staff screening and ongoing training on AML/CFT and KYC.
  - Banks must implement first-line (ex ante/human) and second-line (ex post/automated) monitoring, internal written reports to AML/CFT officer, and enable AML/CFT officer to access needed information to analyze and decide on STR filings to FIU.
- Supervisor notification and cooperation:
  - Article 31 requires supervisory authorities to immediately notify the Belgian Financial Intelligence Processing Unit (CTIF/CFI) in writing or electronically of facts potentially related to money laundering or terrorism financing that they find in inspections.
  - Professional secrecy provisions do not prevent testimony in court.
  - Mechanisms for cooperation with foreign counterparts described in REM 2005 paragraphs 829-836.

### Assessment and supervisory recommendations for AML/CFT (Principle 18)
- Assessment: Largely Compliant
- Comments / supervisory gaps identified:
  - No evidence of a systematic assessment by NBB of transition plans for compliance with new AML/CFT rules across the banking population.
  - Absence of immediate STR reporting to NBB reduces ability for prompt supervisory action; reliance on CTIF notifications only when non-compliance detected.
  - No systematic supervisory process evidenced to review banks’ AML/CFT policies and monitoring systems across the population, especially for smaller banks not subject to frequent on-site inspections.
  - AC1 (in-house specialist expertise for criminal activities) was not fully assessed during this review.

*Source: IMF country report content provided in the supplied PDF chapter.*

### 2014. As agreed, the assessment of CP18 is thus based on succinct information.

### _cr13133 - 2014. As agreed, the assessment of CP18 is thus based on succinct information.

### Principle 19 — Supervisory approach (overview)
- An effective banking supervisory system requires supervisors to develop and maintain a thorough understanding of the operations of individual banks and banking groups, and of the banking system as a whole, focusing on safety and soundness, and the stability of the banking system.
- Several criteria in Principle 18 require the supervisor to confirm that banks have sufficient controls and systems to prevent, identify and report potential abuses of financial services, including money laundering. It was not sufficiently evidenced that the supervisor had a systematic process to verify adequacy of risk management across the population of banks.

### EC1 — Supervisor policies and processes to understand risk profiles
- The NBB employs a Supervisory Review and Evaluation Process (SREP) which is a comprehensive system building on multiple inputs to assess the risk profile of an institution and to determine the appropriate supervisory actions.
- SREP information inputs include:
  - direct supervisory reporting from the firm;
  - reports from the external auditors (see also CP17);
  - the credit institution’s Internal Capital Adequacy Assessment Process (ICAAP);
  - direct supervisory contact between the firm and the NBB.
- SREP focus areas:
  - institution's exposure to risks;
  - adequacy of an institution's risk identification, measure and monitoring processes;
  - adequacy of an institution's own funds and capital resources;
  - compliance with prudential regulations and requirements.
- SREP features quantitative and qualitative assessment of risks and their management, supported by a structured “scorecarding” approach (see EC3).
- Decision process:
  - On the basis of the analysis of the scorecard, the ICAAP and stress tests the NBB concludes on a final assessment of the firm’s risk profile and devises the supervisory actions that are needed including the capital decision for the entity or group.
  - For groups active within the EU there will be joint decisions on capital adequacy of the group and its component entities as required by the CRD (2006/48/EC as revised).
- Supervisory perimeter:
  - Of the four systemic firms in Belgium, the NBB is the host supervisor of two and the home supervisor for two.
- Evidence reviewed:
  - Assessors discussed the process, reviewed documents illustrating the process and discussed the supervisory process with individual banks.

### EC2 — Monitoring system-wide trends, developments and risks
- A global assessment of risks and trends for the banking sector is carried out mainly by the Prudential Policy and Financial Stability department.
- Regular horizontal analysis is performed on risks and issues, including liquidity risks, capital, market risks or business models; these analyses are supported by peer reviews when data are available.
- Examples of recent studies:
  - sovereign risks (global risk, solvency by comparing PDs and LGD of banks for these exposures, accounting methods);
  - credit risks and in particular corporate risks;
  - interest rate risks.
- Presentation and action:
  - These analyses are regularly presented to the NBB Board, which decides upon policy actions if risks are considered to be significant.
  - Horizontal analyses complement vertical analysis performed by the operational department aimed at assessing the risk of individual institutions.
- Governance enhancements introduced July 2011:
  - Risk Committee (RC)
    - Objectives (as stated):
      (i) provide the Board with advice on relevant regulatory and supervisory issues;
      (ii) foster cooperation and create synergies among the prudential departments, by directing or steering the analysis of horizontal teams;
      (iii) provide horizontal analysis on different risks such as liquidity, accounting or solvency (based on input from the risk teams).
    - The RC acts as a key point between the Board and the risk teams of experts and can act as a “project manager” for longer term projects (additional monitoring tools are being developed).
  - Macro-Financial Committee (MFC)
    - Objectives (as stated):
      (i) to enhance the cooperation and create synergies in the field of macro-prudential surveillance among different NBB departments, in particular, Research, Statistics, Financial Markets and prudential policy department, the department of microeconomic information and International and Eurosystem Coordination;
      (ii) to enhance the exchange of information in particular on macro-financial development on a cross border basis with jurisdictions , which are of particular relevance to Belgian financial institutions and on issues , which may affect financial stability;
      (iii) to provide the Risk Committee and the Board of Directors with information on new macro-financial risks and suggest areas of future analysis.
    - The MFC communicates analysis and risks to prudential departments (for example regular country analyses).
    - Tangible MFC outputs to date include stress testing of specific risks, country exposures and business models.
- Joint objectives of RC and MFC:
  - Determine, each year, the main risks to financial stability to be analyzed by prudential departments (the annual “Risk Review”).
  - Issues identified for the coming year include: real estate, liquidity, interest rates, slow growth.
  - Develop macro-prudential policies.
- Reporting:
  - The main trends, developments and risks of the Belgian financial system are summarized in the NBB’s annual Financial Stability Review.
- Staff feedback:
  - Discussion with NBB staff indicated that the introduction of the RC and MFC had been valuable in identifying issues that previously would not have surfaced in a timely manner.

### EC3 — Methodology for determining and assessing risks (scorecarding)
- The scorecarding system provides structured analysis of risks under the SREP and supports documentation of assessments and structured dialogue with institutions, their accredited external auditors and other relevant prudential authorities.
- The overall risk assessment, to which the scorecarding contributes, forms the foundation of prioritizing prudential activity and allocation of resource.
- Three scores applied to each institution:
  1. an impact score representing the importance of an institution and its activities to the Belgian financial system;
  2. a risk score representing the risk profile of an institution;
  3. a score representing the quality of an institution's shareholder including their capacity (or will) to support the institution.
- Supervisory planning takes all three scores into account; the scorecarding approach provides detailed structured analytics to develop the specific global risk score for each institution and group.
- An institution’s risk score draws together an analysis of four main elements:
  - the overall environment of the institution, (ie governance and financial position);
  - the horizontal control and support functions, such as the internal audit, compliance and risk management functions;
  - the risks inherent in the institution’s activities;
  - the institution’s internal process of assessing its capital needs (ICAAP).
- The scorecarding process has the following objectives:
  1. To summarize prudential analyses and risk assessments;

*Source: _cr13133 - 2014. As agreed, the assessment of CP18 is thus based on succinct information.*

### 3. To help prioritize prudential actions and resource allocation.

### 3. To help prioritize prudential actions and resource allocation.

### Scorecarding methodology and application
- Inputs into the scorecarding approach are: individual risks (weighted according to materiality for the firm); the environment (e.g., governance, financial ratios, economic context,); firm-wide factors (e.g., audit, compliance, risk management); and the ICAAP itself. All individual scores are weighted and aggregated, feeding into a global score.
- A scoring scale covering both quantitative assessment of the level of risks and qualitative aspects of the quality of management control is applied.
- If the level of risk or quality of control is, for some reason, unknown, it is assigned a level “3” score, which could trigger prudential actions to remedy the lack of information.
- The scorecard system was designed to comply with the stipulations of the European Banking Authority (EBA) on joint analysis of the risks of cross-border institutions, as laid down by Article 129(3) of European Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions.
- The scorecarding database contains all the files (solo and consolidated basis) of firms’ individual scorecards. The database receives an automatic feed of prudential data that updates the quantitative components of the relevant risk cards and which proposes a risk score. The analyst can over-ride this score but should provide justifications for doing so (such information is input and held within the data base).
- The scorecarding application can produce bespoke reporting documents, “global” assessment cards or individual assessment cards (by risk element/theme), and produces a benchmark table.

### Validation, archival, and supervisory use
- There is an annual validation process before the information contained in the scorecarding system is archived (at this point it is a historical, point in time, reference for the risk profile of the institution) and the next scorecard is opened. The next scorecard cannot be opened until the previous one has been validated and archived.
- The validation process takes place at the end of the calendar year and involves peer group checking at peer group and divisional level (ie more than one layer of hierarchy) to obtain a clear view on consistency of approach.
- Together with the review of the ICAAP and stress tests, the output of the scorecarding process feeds into the overall risk assessment of the institution and is the basis on which supervisory actions will be determined and planned.
- Within the EU joint decisions are now made for the capital adequacy of groups and the individual solo entities within the group. The final capital decision must be approved by the NBB board. In group scenarios, a member state with an incorporated entity always has the right to make the final decision, even if not agreed by the college; EU directives have created mediation mechanisms and introduced a requirement to have regard to the impact of an individual capital decision on the stability of other group entities and neighboring jurisdictions.

### EC4 — Confirmation of compliance with prudential regulations
- The supervisor confirms banks’ and banking groups’ compliance with prudential regulations and other legal requirements through the SREP, which has a range of inputs including both off-site assessment and focused on-site activity.
- A major component is the annual submission of the institution’s self assessment of the quality of its internal controls. External auditors must give an opinion on the completeness and accuracy of this report.

### EC5 — Notification of substantive changes
- The supervisor requires banks to notify it of any substantive changes in their activities, structure and overall condition, or as soon as they become aware of any material adverse developments, including breach of legal or prudential requirements.
- The NBB expects prompt notification of major developments; a substantive change in activities (for a systemic firm) would require approval as a strategic decision and the NBB would expect to be made aware to ensure compliance with Article 20 of the Banking Law.
- External auditors are expected to alert the NBB should they become aware of any material breach of regulation or adverse change.

### EC6 — Adequacy of information systems; Bank Performance Report (BPR)
- Data reported to the NBB is collected, sorted and subjected to validation tests before being fed into the “Bank Performance Report (BPR).” The BPR is an in-house IT tool processing all standardized, quantitative information collected from firms and is the interface NBB staff use to access, analyze and manipulate prudential data.
- The BPR comprises:
  - A series of basic indicators, such as ROE, ROA, Cost/Income ratio, interest margin
  - A series of pre-defined tables (calculated automatically from reported information), which examine a range of supervisory elements, including under Solvency: Basel Pillar 1 and 2 risks - e.g., credit, market, concentration liquidity and interest rate risk; and under Financial: Global activity, securities portfolio, loans and advances, funding, derivatives, profitability, financial assets impairments, financial instruments. These tables automatically highlight breaches of regulatory thresholds.
  - Pre-defined dashboard, providing an overall picture of the firm with key figures on performance, financial and solvency
- The BPR permits analysis by entity, by risk, by peer group, over time and allows flexible manipulation of data. Bespoke templates can be created by staff using Excel and saved.
- There is a shared (“ecorporate”) database for banks, their external auditors and the NBB housing qualitative reports such as external auditor reports, internal control reports and information on the quality of shareholders.
- The scorecarding application does not provide an automatic prompt for regular updating, although the date at which a scorecard was last refreshed is held on the system. Scorecards should be updated regularly and at the very least in preparation for major supervisory activity or following an on-site inspection.
- A dashboard has recently been designed to provide an overview of an institution's risk profile, its position among peers and the wider industry.

### Enhancements and PRIME program
- The NBB has embarked on a program (“PRIME”) with key projects including “Risk profiles” the next generation scorecarding (new IT environment and more advanced analytical underpinning) and the development of a “Macrodashboard” to better integrate micro and macro prudential data.
- PRIME will support integration of new reporting required by incoming changes to regulation of CRD4 and Solvency 2.
- The NBB has identified the need to:
  - Improve the quality of risk analysis topic by topic (e.g., interest rate risk in the banking book or strategic risk) and upgrade guidance for supervisors.
  - Upgrade the IT system to permit more flexible interrogation of data and promote a more systematic approach to updating scorecard assessments.

### Additional criteria — AC1 forward-looking methodology
- Although there are no specific “forward looking” or “early warning” indicators, methodologies and processes in EC1 to EC3 are intended to provide a forward-looking perspective to enable pro-active supervision by monitoring trends in risk exposure and management control.
- The assessment of Principle 19: Compliant.
- Comments:
  - Supervisory staff demonstrate strong command of portfolios; supervisory resource is allocated on a risk based principle considering three key factors: the impact of failure of a firm, the risk of failure of a firm and the strength of potential shareholder support.
  - The scorecarding methodology distinguishes between assessment of inherent risk and the quality of management or control of that risk.
  - The NBB intends to develop risk analytics more deeply and to integrate insurance risk in group assessments where relevant; systematic scorecarding for insurance is planned.

### Principle 20 — Supervisory techniques: on-site and off-site mix (EC1–EC3)
- EC1 — Mix and organization:
  - NBB carries out both on-site and off-site activities and uses examinations by external auditors (“three layers”).
  - On and off-site supervision falls under the banking supervision department. At the time of the mission the assessors were informed that the supervisory department had approximately 86 staff of which 35 were allocated to non-systemic firms. This includes a separate inspection team, headed by a coordinator, for work in all credit institutions. At the time of the mission, only approximately 10 staff were available in this team, due to 3 vacancies and the past transfer of several staff members in order to strengthen the supervisory teams of complex banking groups. Additional contribution comes from two complementary inspection teams specializing in IT audits and risk models.
  - Off-site: annual supervisory plan for each institution, supervisory planning starts at the beginning of the year with the “opening” of the new scorecard. Off-site supervision is organized through multidisciplinary teams composed of a coordinator, a financial risk analyst (with one or more deputies), and an institutional specialist (with one or more deputies). A supervisory team for a systemically important group would typically have a dedicated team of 5-6 individuals. There is a single team and single coordinator for the systemically important institutions; mid-size and smaller institutions will not have dedicated teams but will have a designated point of contact.
  - Off-site workload: “quick look” financial analysis is required quarterly for all firms and a full (ie extensive) analysis is required at least 6 monthly for systemic firms and at least annually for non-systemic firms.
  - Regular discussions on-site with bank management are maintained; frequency depends on size and systemic importance. For systemically significant firms, the NBB holds quarterly meetings with main risk functions and at least annual contact with the board and internal audit function.
  - Auditors: Banking Law (Article 55) obliges external auditors to cooperate with NBB; Articles 51-54 provide for prior accreditation and cooperation obligations. External auditors’ practical roles include periodic confirmation of prudential reporting, opinion on organization and internal control, checking compliance, submitting special reports when required, and timely reporting of any material breach or adverse change.
- EC2 — Coherent planning and coordination:
  - The head of the inspection team is responsible for planning and delivery; annual planning allocates on-site resources and interim reviews assess progress. The supervisory teams determine mission focus; inspection teams design mission specifics (including budget).
  - Coordination: before missions supervisory team briefs inspection team; close contact maintained during inspections; supervisory team may participate in on-site work and can comment on draft reports. The inspection team signs off when recommendations have been satisfactorily met.
  - Internal guidance ("ProControl") provides standards for supervisory work and is under review (NOVA project). There is no formal model for baseline frequency of on-site activity.
- EC3 — On-site objectives and use:
  - On-site work is used to verify governance, determine reliability of information, obtain additional information needed for assessment and remedial actions, and monitor follow-up on supervisory concerns.
  - The NBB distinguishes between four main kinds of on-site examinations (list begins in source but detail beyond provided text).

*Source: _cr13133 - 3. To help prioritize prudential actions and resource allocation.*

### 1. Deep dive inspections: based on risk assessment of the bank and planned in an

### _cr13133 - 1. Deep dive inspections: based on risk assessment of the bank and planned in an

### Types of on-site inspections and objectives
- Deep dive inspections: based on risk assessment of the bank and planned in an annual action plan (revised quarterly).
- Thematic inspections: based on macroprudential and sectoral analyses, aimed at peergroup benchmarking, explaining outliers, exploring evolutions in new risk types, or focusing on specific areas such as AML.
- Inspections targeting specific issues or in reaction to specific information (crisis management, fraud).
- On-site information gathering: on-site visits aiming at updating the supervisory information and assessment of the bank, its activities and risk management.

### Scope and prioritization of on-site missions
- Missions can be very comprehensive in scope or highly targeted.
- Drivers of missions:
  - Thematic horizontal investigations in the sector.
  - Risk assessment of the individual institution.
- For complex groups:
  - Targeted missions to examine specific issues (e.g., risk management, valuation models).
  - Thematic missions (e.g., liquidity, quality of reporting or dealing rooms).
  - Missions driven by the risk assessment of the individual institution.
- For other groups (domestic and international banks) prioritization is carried out on the basis of clustering analysis, on a multi-year planning cycle, thematic missions (e.g., interest rate risk, liquidity risk) or missions driven by issues identified during the risk analysis/scorecarding process.

### Most recurrent topics examined during on-site examinations
- Internal governance.
- Control functions (internal audit, compliance, risk management).
- Qualitative and quantitative assessment of interest rate risk, credit risk, market risk, liquidity risk, operational risk, derivatives.
- ICAAP.
- Supervision of commercial networks.
- Use of on-site missions to verify reliability of prudential and other data, noting that the NBB more typically looks to verification of financial data performed by external auditors as formally, twice a year, the accuracy and completeness of the data is confirmed by the external auditors.

### Recent mission patterns and management expectations
- Missions finalized in 2012 (a number begun in 2011) were divided evenly between those focused on systemic firms and those focused on international and domestic banks.
- Topics in 2011–2012 included control environment (internal controls, risk management, compliance) and specific risk focused inspections (e.g., market risk, ALM).
- Internal management review mid 2012 concluded that inspections should be more risk focused, put greater emphasis on testing, be more focused in mission specification, and have reports provide a greater indication of work carried out on site.
- These management expectations and guidelines have been put into place.
- The assessors reviewed samples of on-site reports.

### EC4 — Off-site work: purpose and inputs
- Purposes of off-site work:
  - regularly review and analyse the financial condition of individual banks using prudential reports, statistical returns and other appropriate information, including publicly available information;
  - follow up on matters requiring further attention, evaluate developing risks and help identify the priorities and scope of further work; and
  - help determine the priorities and scope of on-site work.
- Off-site work is used to assess financial and institutional risk for each credit institution.
- Frequency and reporting:
  - Off-site teams conduct a regular risk assessment and report the analysis and findings to the supervisory team and management of the NBB, for discussion.
  - Each institution will be assessed on an annual basis at a minimum (as required by EU law) but this can be more frequent.
  - Typically for institutions assessed in colleges there will be at least 6 monthly updates.
- Off-site inputs include:
  - prudential returns (many subject to OLAP (“on line analytical processing’) which provides standard analysis, trends and peer group comparisons),
  - ICAAP submission,
  - published financial reports,
  - reports from external auditors,
  - annual management reports on internal controls, compliance,
  - on-site inspection reports,
  - horizontal and thematic inputs and reviews conducted by the NBB,
  - meetings with the institutions (regular contact with management; contact with finance, risk management proportional to size and systemic nature; annual meetings with the internal and external auditor).
- Use of analysis:
  - Reports feed into the scorecarding approach, the identification of the risk profile, and the determination of priorities for the annual supervisory plan including remedial measures if necessary.
- The assessors reviewed samples of on-site reports and assessments.

### EC5 — Frequency and level of supervisory contacts
- Contacts with bank management at all relevant levels are scheduled as part of the annual supervisory plan for the individual institution.
- Objective: have at least one comprehensive discussion at the highest management level a year with all banks.
- Contact level depends on nature, importance and sensitivity of the issue.
- For systemically important banks:
  - quarterly discussions with the chief financial officers and the chief risk officers;
  - bi-annual meetings with the compliance officer;
  - regular meetings organized for follow-up of on-site inspections or other supervisory actions.
- NBB management contacts:
  - For the most significant, i.e., systemic, firms, the NBB management will have direct contact with Board members, including non-executive directors, on a formal and informal basis.
  - The head of supervision of the prudential department for banking supervision will meet the executive management of the systemic and mid-size banks at least annually.
  - It is standard practice for the NBB to meet the chair of the audit committee.
- Confirmation:
  - Systemic firms confirmed regular contact with the NBB through on-site presence and meetings at management level.
  - Records of supervisory activity for large and mid-size firms confirm a consistent pattern of meetings between the NBB and these categories of firms.

### EC6 — Assessment of Board and management quality
- The quality of governance and management is a basic component of the annual assessment exercise.
- The quality of the Board and management is assessed in the yearly scorecarding approach (the quality of governance and of management control is subject to separate analysis).
- On- and off-site functions have periodic meetings and discussions with the Board and management through the year.
- Inspectors open and close examinations with meetings with executive management irrespective of mission focus.
- Supporting information gathered includes allocation of tasks between members of the management committee, minutes of meetings of supervisory and management bodies (Board of Directors, Audit Committee, Executive Board), and establishment of Board committees (e.g., audit, remuneration, risk management).

### EC7 — Evaluation of internal audit function
- The supervisor evaluates the work of the bank’s internal audit function and determines whether, and to what extent, it may rely on internal auditors’ work to identify areas of potential risk.
- NBB approach:
  - Deploys on- and off-site processes to assess the internal audit function.
  - Prudential expectations regarding internal audit are based on Article 20 of the Banking Law and expanded upon in Circular D1 97/4 of 30 June 1997.
- Inputs to assessment (off-site and on-site):
  - The governance memorandum (expected to contain the audit charter and specify location and reporting lines of internal audit).
  - The management report on internal controls.
  - The audit plan.
  - AML/CFT and compliance reports.
- Assessment outcomes:
  - Assessment of internal audit is drawn together during the annual scorecarding analysis, drawing on on- and off-site teams’ work.
  - On-site examinations recurrently assess whether internal audit has sufficient standing and authority within the bank.
  - For systemic firms, contact with the audit committee is an important and regular component of supervisory contact.

### EC8 — Communication of supervisory findings
- The supervisor communicates findings of on- and off-site supervisory analyses by written reports or through discussions or meetings with management.
- Off-site findings are communicated through correspondence or meetings with the relevant level of management.
- For systemic firms, regular program of contact includes quarterly meetings with the chief risk officer.
- The NBB does not routinely send an annual letter setting out the planned supervisory program for the year, but will share the output of the joint risk assessment of a firm/group with the entity (following the EU system of joint assessment and capital decisions).
- Post-examination communications:
  - An on-site examination is followed by a report including recommendations.
  - An information visit is followed by a letter in which recommendations for action may not be necessary.
  - After an on-site examination, an informal debriefing with management takes place, followed by a draft written report to management; management can comment on the report and recommendations.

*BELGIUM INTERNATIONAL MONETARY FUND*

### conclusions. The inspection team will incorporate the management’s reactions in finalizing

### _cr13133 - conclusions. The inspection team will incorporate the management’s reactions in finalizing

### Supervisory process and Principle 20: Overall assessment and gaps
- Assessment of Principle 20: Largely Compliant
- Findings:
  - Supervision performed by the NBB comprises good quality on and off-site supervisory practices.
  - Evidence of a comprehensive supervisory approach toward systemic firms.
  - Absence of a systematic approach to the supervisory program that covers the entire population of credit institutions, specifically non-systemic firms.
  - NBB management monitors supervisory activities at a global level and there is a clearly documented supervisory action plan for each individual institution and group.
  - Missing: a risk based approach to ensure each institution systematically receives appropriate intensity of supervisory attention proportionate to its profile.
  - Lack of documentation and full overview to monitor and ensure that two similar institutions receive appropriately similar supervisory attention.
  - Much of a risk-based approach is taking place de facto based on skilled and informed senior management decisions; multi-year inspection programs exist for individual institutions, but consistency across similar institutions is unclear.
- Initiatives and remedies:
  - NBB is developing tools critical to greater structural consistency: projects on “clustering” and on “proportionality”.
    - Clustering project: improve peer group clustering on a more refined and risk-focused basis.
    - Proportionality project: permit adjustments to the profile of institutions in the scorecarding application based on impact/risk classification; linked with clustering.
  - Recommendation: couple these projects with a “baseline” analysis of supervisory needs to deliver a stable, systematic and risk-sophisticated approach to supervision.
  - Note: supervisory tools for insurance companies are being upgraded as part of the PRIME program; opportunity to enhance integration of insurance risk assessment within banking and conglomerate groups.

### Principle 21: Supervisory reporting — assessment and operational detail
- Assessment of Principle 21: Compliant
- EC1 (power to require information):
  - Basis: Article 44 of the Belgian Law on the supervision of credit institutions (22 March of 1993).
  - Reporting requirements:
    - Prudential returns: submitted on a quarterly basis.
    - Financial accounts: submitted quarterly at consolidated level, and monthly at solo level.
    - Consolidated reporting aligned with Finrep (Committee of European Banking Supervisors, 2005).
    - COREP imposed for capital adequacy (Committee of European Banking Supervisors, 2006).
    - Corep and Finrep framework in line with Basel II and Basel 2.5; includes composition of own funds, capital requirements, credit risk under SA or IRB, market risk, currency risk, settlement risk, operational risk, and large exposures.
    - For Pillar 2: liquidity reporting (liquidity of assets, cash in and cash out) and a concentration report covering data by economic sector and by geography; interest rate risk report also required.
    - Solo reporting since 1994: Schema A based on Belgian GAAP (BGAAP) covering on- and off-balance sheet items, profit and loss, asset quality, loan loss provisioning, related party transactions; annual accounts using a mandatory chart.
    - Consolidated annual accounts: IFRS; for prudential purposes NBB requires FINREP standardized format.
- EC2 (report instructions and accounting standards):
  - NBB has detailed instructions publicly available on its website.
  - Finrep (consolidated): banks use IFRS. Solo reporting: Belgian GAAP. COREP: either IFRS or BEGAAP as starting point.
  - Different accounting methodologies add complexity to offsite analysis and valuation understanding.
- EC3 (valuation rules):
  - Consolidated Finrep uses IFRS; solo Schema A uses BGAAP with rule of prudence.
  - Under BGAAP:
    - Derivatives other than hedging measured at market value; P&L accounting of gains/losses when active market exists; if no active market only capital losses recorded in P&L.
    - Hedge accounting: gains and losses recorded in P&L on a pro rata temporis.
    - Investment portfolios valued at LOCOM (Lower of cost or market) instead of fair value through equity as in IFRSs.
  - Conclusion: availability of different accounting methodologies for valuations does not meet EC3.
- EC4 (frequency of data collection):
  - Frequency is consistent across sector regardless of size, activities and risk profile.
  - Most items: quarterly frequency for financial information, capital adequacy and interest rate risk.
  - Liquidity: monthly frequency.
  - Concentration: annual frequency.
  - Observation: concentration reporting annual frequency does not align with quarterly frequency of other material prudential data.
- EC5 (comparability across banks):
  - Scope and periodicity are the same for all banks; reporting requirements enable satisfactory transparency across banks.
  - Corep, Finrep and liquidity reporting collected for holding companies.
- EC6 (power to request information from related companies):
  - Article 44 gives NBB power to request internal management information; examples of higher-frequency reporting mandated in exceptional cases (e.g., daily liquidity reporting for larger systemic banks).
- EC7 (access to records and staff):
  - Article 46 gives NBB access to all bank records by on-site or off-site inspection.
- EC8 (enforcement of timely and accurate submission):
  - Article 103 provides power to impose penalties with a maximum of 2.500.000 millions of Euros or 50.000 Euros by day of delay if the information is not corrected.
  - Article 44 requires effective management to declare that periodic reports reflect accounts and inventories; Board held responsible for accuracy of financial accounts in this statement.
- EC9 (validation and integrity of supervisory information):
  - NBB has validation rules for templates; automatic error messages sent to banks if rules not respected.
  - NBB financial analysts regularly review data quality; analysis looked high quality.
  - For year-end and half year-end reporting, external auditor must inform NBB on audit results (full for annuals, limited review for half yearly) and confirm reporting contains all data from accounting records and that same measurement criteria applied.
- EC10 (roles of external experts):
  - Article 55, section 1, paragraph 2 defines role of banks' external auditors.
  - External auditors inform NBB on results for year-end and half-year reporting; principle of materiality applies.
- EC11 (external experts reporting shortcomings):
  - Banking Law requires auditors to inform NBB as soon as aware of:
    - decisions, facts or developments that may influence significantly the bank's financial position or its administrative/accounting system or its internal control;
    - decisions or facts indicating infringement of company law, bylaws, banking act and related regulations;
    - other decisions or facts that could lead to refusal to certify annual accounts.
  - NBB published a Circular letter explaining these legal obligations with examples.
- Comments and issues:
  - Availability of different accounting approaches raises consistency questions (solo vs consolidated).
  - Reporting dates for major balance sheet and risk items not aligned. Example: monthly solo financial and prudential returns submitted 11 (to 25) days after end of period, whereas reporting lag for IRRBB and FINREP, COREP consolidated, concentration risk is 2.5 months.
  - Lack of consistency in data timing doesn’t support comprehensive and timely analysis; should be addressed in PRIME project.

### Principle 22: Accounting and disclosure — assessment and practices
- Assessment of Principle 22: Compliant
- EC1 (power to hold management/Board responsible for record-keeping):
  - Banking Law Articles: Article 20, §1 and §32 require appropriate administrative and accounting systems and internal control systems; Article 44, paragraph 2 requires senior management to confirm returns conform with accounts and inventories and with NBB instructions.
  - References do not specifically mention responsibility of the Board.
- EC2 (external verification and auditor responsibility):
  - Article 55 requires annual and semi-annual prudential returns verified by external auditors (full audit for annual, limited review for semi-annual).
  - External auditors must be licensed and obtain preliminary authorization from the NBB (article 50).
  - All credit institutions must make available a yearly Pillar 3 report (Title XIV of NBB regulation dated 06.12.2011).
  - Explicit reference in Banking Law for Board responsibility is less clear.
- EC3 (valuation rules and profit provisioning):
  - Royal Decree of 23.09.1992 sets BGAAP measurement rules; Articles 15 to 19 cover consistency, realism and prudence.
  - Solo: BGAAP; Consolidated: IFRS.
  - NBB has performed ad hoc work to determine differences between IFRS and BGAAP (e.g., leverage ratio implementation measures); no comprehensive review undertaken.
  - Observed divergence: some banks use mark-to-market, others mark-to-model for traded products; need for clear regulatory guidance on valuation methodologies; applicability could extend to the banking book.
  - Assessors question ease of continuously understanding differences between IFRS and BGAAP to interpret quarterly consolidated group reporting.
- EC4 (scope of external audits):
  - Article 55 allows NBB to define further scope or require special purpose audit; costs borne by the bank. NBB has exercised this power in recent examples.
- EC5 (audit coverage per supervisory needs):
  - All credit institutions must publish yearly Pillar 3 report (NBB regulation 06.12.2011); disclosures include related party transactions, risk exposures, restructured loans, provisioning, risk management practices.
- EC6 (power to reject external auditor appointment):
  - NBB approves external auditors; after fixed term auditors will need to be rotated. Article 53 requires NBB approval of appointment; NBB can review engagement letters and audit contracts.
- EC7 (annual audited financial statements based on international standards):
  - Solo accounting rules defined by Royal Decree (BGAAP); NBB can grant waivers and provide guidelines for solo prudential reporting (Schema A).
  - Consolidated financial statements based on IFRS as issued by IASB and endorsed for EU application under Regulation EC 1606/2002.
  - No plan to apply IFRS on a solo basis and no quantitative evaluation of differences between BGAAP and IFRS.
- EC8 (public disclosures):
  - Banks required to publish complete information timely and regularly pursuant to EU Directives and Company Law Code (articles 92 to 129) and two specific accounting regulations for banks.
  - Annual Pillar 3 report required; NBB preparing a horizontal assessment of Pillar 3 reports of some major Belgian credit institutions.
- EC9 (disclosure content):
  - Requirements on general purpose financial statements and Pillar 3 include qualitative and quantitative information on financial performance, position, risk management, risk exposures, related party transactions, accounting policies, business, management and governance.
  - Banks report quarterly prudential returns, half yearly accounts and annual accounts. Internal Controls Report by management, accompanied by external auditor report, will comment on governance.
- EC10 (enforcement of disclosure standards):
  - Pillar 3 reports are included in the supervisory process; management reports and published accounts input into the risk scorecarding process.
- EC11 (publication of aggregate banking system information):
  - NBB publishes an annual financial stability report available on its website.
- Additional criteria (AC):
  - AC1: NBB meets frequently with external auditors; NBB has the right to meet external auditors without bank approval; external auditor considered collaborator (article 55, section 1).
  - AC2: Safe harbour provision exists for auditors making reports in good faith (article 55, section 2).
  - AC3: Audit engagement partner rotation after six years required by audit profession standards (standard dated 29.06.2008 - paragraph 6.2).
  - AC4: NBB determines minimum information credit institutions must disclose (Article 20ter) but no specific requirement for a bank to have a formal disclosure policy.
  - AC5: NBB has no power to access external auditors’ working papers; working papers are confidential and only quality control inspectors or an examining magistrate may access them.
- Comment:
  - IFRS applied only at consolidated level and BGAAP at solo level. No plan to migrate to IFRS on a solo basis. No comprehensive review of differences between BGAAP and IFRS has been performed, though ad hoc work has been completed (e.g., leverage ratio differences).

### Principle 23: Corrective and remedial powers — framework and instruments
- EC1 (raising concerns, remediation, monitoring):
  - When applying remedial measures under Article 57, NBB may apply a timetable for compliance or act without determining a timescale in extreme urgency.
  - Remedial actions under Article 57 are communicated formally to the board in a written document; progress reports are required in writing.
  - Examples reviewed by assessors include recent cases using Article 57 powers.
- EC2 (participation in resolution decisions):
  - Article 57bis: when acting in interests of state stability or international financial system, the King (Federal Government), on own initiative or at NBB recommendation, can issue a Royal Decree for resolution of a credit institution following consultation with Council of Ministers.
  - If initiative does not come from NBB, NBB opinion must be sought but is not binding.
  - Royal Decree may require transfer or sale of:
    - assets and liabilities, one or more branches of activity, or all or part of rights and obligations of the credit institution;
    - any securities or shares whether or not they represent capital or grant voting rights.
  - NBB powers under Article 57 include designation of a special commissioner and total or partial suspension or prohibition of activities to preserve or re-establish financial position; measures affecting third party rights in other Member States need public disclosure (Article 109/1 et seq.).
- EC3 and EC4 (range of supervisory tools and sanctions):
  - Remedial and restructuring measures available under Articles 57 and 57bis include:
    - appoint a special commissioner whose approval is required for all or part of acts and decisions;
    - enforce additional requirements regarding solvency, liquidity, risk concentration;
    - require limitation of amounts of variable remuneration;
    - suspend all or part of credit institution’s activities and require transfer of shares held (Articles 32, sections 4 and 5 Banking Law);
    - order replacement of directors or appoint temporary directors if non-compliant;
    - revoke the credit institution’s authorization.
  - Under Article 57bis via Royal Decree and when financial stability is threatened, NBB may order disposal of assets and liabilities, branches of activity, rights and obligations, or any securities or shares.
  - NBB also has a range of administrative orders and sanctions under Articles 102 and 103 Banking Law.
  - Enforcement fines:
    - If institution fails to comply within set timescale, NBB may impose a fine up to a maximum of 2.5million Euros or 50,000 Euros for each day of delay (Article 103).
    - The NBB may also impose an administrative fine of between 2,500 and [text truncated in source].
- Overall: NBB possesses a broad and appropriate toolkit for corrective supervision, including powers to require remedial action, impose penalties, restructure institutions, appoint commissioners, and revoke authorizations where necessary.

*Source: _cr13133 - conclusions. The inspection team will incorporate the management’s reactions in finalizing*

### 2.5 million Euros (Article 103). The NBB may publicly disclose the failure of a credit

### _cr13133 - 2.5 million Euros (Article 103). The NBB may publicly disclose the failure of a credit

### Penalties, public disclosure, and committee structure
- The NBB may publicly disclose the failure of a credit institution to comply with orders to adhere to the Banking Law or its implementing decrees (Article 102).
- Fines and administrative penalties (including "2.5 million Euros" referenced in the title) would have to be imposed by the Sanctions Committee.
- At present no Sanctions Committee is constituted at the NBB.

### Criminal sanctions and competent authority
- Criminal sanctions can be imposed upon individual management and board members (Article 104 of the Banking Law).
- The NBB is not the competent authority for criminal proceedings.

### Principle of proportionality
- The NBB must apply the principle of proportionality in exercising its powers.

### EC5 — Supervisor powers on capital adequacy and early intervention
- The supervisor has the power to take measures should a bank fall below the minimum capital ratio.
- The supervisor seeks to intervene at an early stage to prevent capital from falling below the minimum.
- The supervisor has a range of options to address scenarios where capital approaches or falls below required minima.
- The NBB can impose specific solvency requirements upon a credit institution (Article 43).

### Document identifiers and context
- EC5
- BELGIUM
- 158
- INTERNATIONAL MONETARY FUND

*Source: _cr13133 - 2.5 million Euros (Article 103). The NBB may publicly disclose the failure of a credit — PDF chapter/section provided.*

### section 3 of the Banking Law).

### _cr13133 - section 3 of the Banking Law)

### EC6 — Penalties and Sanctions (supervisor can apply penalties to bank and individuals)
- If the NBB finds serious deficiencies (Article 57) it will determine a timeframe for rectification; may act faster in an emergency.
- Powers if deadline not met include:
  - appoint a special commissioner whose approval is required for all or part of the acts and decisions of the credit institution (written, general or specific authorization obligatory; NBB can limit the kinds of operations requiring authorization);
  - order the institution’s directors to be replaced or, failing compliance, appoint one or more temporary directors.
- The NBB must apply the principle of proportionality in exercising its powers.
- Criminal sanctions can be imposed on individual management and board members (Article 104 of the Banking Law), but the NBB is not the competent authority for such proceedings.

### AC1 — Laws/regulations to guard against supervisor delaying corrective action
- There are no laws or regulations that guard against the supervisor unduly delaying appropriate corrective actions.
- In practice, the NBB contacts the concerned credit institution as soon as it is aware of non-compliance or safety and soundness concerns.
- The basic principle: a credit institution in breach must be given a period to take corrective action; recovery measures can be taken immediately in case of urgency.

### AC2 — Remedial actions and ring-fencing powers
- Under Article 57bis the NBB can formally initiate remedial actions including ring-fencing, although recommendations need ratification by Royal Decree.
- The NBB has frequently used powers of suasion; documentation reviewed shows instances where voluntary compliance followed NBB recommendations.

### AC3 — Coordination with non-bank financial regulators when taking remedial action
- Article 59 obliges the NBB to inform the FSMA or other relevant supervisory authorities within the EEA of its actions under Articles 56 and 57 (withdrawal of authorization and exceptional measures). Notification is ex post, not ex ante.
- Law does not impose an obligation to cooperate/exchange information with supervisory authorities outside the EEA due to professional secrecy constraints, though the NBB seeks cooperation arrangements.

### Assessment of Principle 23
- Assessment: Compliant
- Comments:
  - The NBB enjoys broad powers and uses remedies; often uses suasion before legal remedies.
  - The NBB is examining making disciplinary powers more graduated and proportionate.
  - Current legal framework: NBB Organic Law (amended by Twin Peaks Royal Decree) provides for the NBB Sanctions Committee to impose fines ("geldboete"/"amende") and periodic penalty payments ("dwangsom"/"astreinte") on supervised institutions.
  - Distinction: periodic penalty payments are intended to create an incentive to respect a requirement; fines punish illicit behavior ex post.
  - Procedures for the Sanctions Committee are elaborate; separation of prosecution and assessment processes required (Articles 36/9 and seq. of the Organic Law of the NBB).
  - In FSMA law (Law of August 2nd 2002 as modified by Twin Peaks Law of 2 July 2010) periodic penalties are not classified as a formal sanction and can be imposed by the FSMA Board.
  - Intention: adopt a new law removing the qualification of “administrative sanction” from periodic penalty payments ("dwangsom"/"astreinte") for the NBB to mirror the FSMA model.
  - Note: draft EU legislation (CRD IV) intended to introduce greater consistency between EU jurisdictions regarding sanctioning powers.

### Principle 24 — Consolidated supervision (overview)
- Purpose: supervisors should supervise banking groups on a consolidated basis, monitoring and applying prudential norms to all group business worldwide.

### EC1 — Understanding group structure and activities
- Legal basis: Article 49, sections 2 and 4 of the Banking Law — NBB applies supervision on a consolidated basis whether parent is a credit institution or a financial holding company.
- NBB obtains and assesses comprehensive group information: consolidated financial statements, ICAAP at group level, intra-group transactions, fit and proper assessments, ad hoc requirements.
- NBB requires a “group memorandum” (Internal Governance Circular) covering:
  - description of objectives, interests, fields of activity and interests of subsidiaries;
  - organization of supervision of subsidiaries by the group;
  - allocation of responsibilities between parent and subsidiaries;
  - organization chart including corporate bodies/persons responsible for policy, operational management, business lines, centralized services, and control functions;
  - policy and rules on intragroup outsourcing, management of conflicting interests.
- On-site inspections in a group context are used (legal basis Article 49, section 2 of the Banking Law).
- NBB assesses where decision-making power lies within group and potential incentives to transfer assets to Belgian entities; checks quality of assets and local management decision powers.
- NBB considers nature, size, complexity, risk profile, stakeholders, and binding character of financial solidarity within the group.
- Legal/regulatory requirements (e.g., Article 20 of the Banking Law and the Internal Governance Circular) ensure appropriate internal governance and information provision to supervisor.

### EC2 — Power to review group activities, domestic and cross-border
- Scope: Article 49 sections 2 and 4 — consolidated supervision applies where parent is credit institution or Belgian/foreign holding company.
- NBB can include participations and affiliates not full subsidiaries in consolidation scope.
- Consolidated supervision applied to non-typical structures (consortia, control by undertakings alone or together).
- NBB approves significant changes in group structure (new shareholder at bank level Article 24 of the Banking Law; at financial holding company Article 4, section 3 of Royal Decree of 12 August 1994).
- Information powers under Article 49 section 2 extend to non-regulated undertakings; NBB can request information directly from non-regulated undertakings.
- On-site verification powers: Article 13 of the Royal Decree of 12 August 1994; on-site inspections can be performed in group undertakings in Belgium and, under conditions, abroad.
- NBB can implement changes by Royal Decree if EU-level evolution occurs regarding scope of group supervision (Banking Law Art 49 Section 2).

### EC3 — Framework evaluating risks from non-banking activities
- Royal Decree of 12 August 1994 (Article 1) permits extending group supervision to regulated and unregulated entities, including undertakings outside the financial sector.
- Special attention to relationships with insurance undertakings (Royal Decree Article 9 paragraph 2; Banking Law Article 49bis; Royal Decree of 21 November 2005).
- Mixed holdings: Royal Decree Articles 8, 8bis, 9 — mixed holding company and subsidiaries must provide information to assess influence on bank(s); NBB can restrict transactions threatening bank soundness.
- NBB has conducted group risk assessments incorporating non-banking risks; supervisors demonstrate familiarity with complex group structures.
- Conglomerate supervision powers include:
  - supervision of ownership of financial conglomerate (Article 14 of Royal Decree);
  - fit and proper requirements for directors/senior management of mixed financial holding company;
  - access to information from all regulated and unregulated entities in the financial conglomerate (Article 21);
  - conglomerate supervision covers capital adequacy, risk concentration, intra-group transactions, internal control and risk management (Article 13);
  - administrative sanctions towards regulated institutions and holding companies that are part of a financial conglomerate (Article 27).
- Royal Decree allows supplementary group supervision to any group with at least one regulated entity.
- When amendments to the European Financial Conglomerates Directive come into force, consolidated banking supervision and supplementary conglomerate supervision can be applied together at the highest level.

### EC4 — Power to impose prudential standards on a consolidated basis
- Legal basis: Banking Law (Article 49).
- Consolidated supervision covers:
  - soundness of consolidated group's financial position (consolidated periodic reports);
  - governance of the group (intragroup transactions, risk management, internal control procedures, qualities required of shareholders and senior management, “four eyes” principle, statutory auditor tasks);
  - assessment of influence among consolidated companies, especially influence on banks;
  - limitations on holdings and participations by banks;
  - solvency and risk concentration; requirement for appropriate internal capital adequacy assessment policy;
  - certain publication requirements (Article 20ter of the Banking Law).
- NBB participates in supervisory colleges, reaching joint decisions on capital adequacy for cross-border groups on consolidated and solo basis.

### EC5 — Arrangements with other supervisors to receive information
- Legal framework: Royal Decree of 12 August 1994 (Articles 9bis to 13) sets cooperation arrangements with supervisory authorities inside and outside the EU for consolidated supervision.
- Article 9bis expectations for colleges: exchange information, assign tasks, delegate powers voluntarily, develop prudential programs, avoid duplication, apply EU directive 2006/48/EC prudential requirements; consolidating supervisor makes final decision in disagreements.
- NBB must share all information deemed "essential" on its own initiative (Article 9bis, section 1), including group structure, information collection procedures, adverse developments, major sanctions, exceptional measures, and additional capital charges.
- NBB must consult other competent authorities on changes to shareholder, organization or management structure, approvals, and internal methodologies for solvency calculation (Article 9bis, section 1).
- NBB participates in 12 supervisory colleges: 5 as home authority and 7 as host authority.
- Bilateral arrangements with non-EU supervisors possible; NBB has bilateral MoUs (subject to confidentiality provisions at least equivalent to Belgian/EU law) published on NBB website.
- Domestic: outstanding legal amendments to the Twin Peaks law required to provide full legal basis for exchange of information between the NBB and the FSMA; practical information exchange is occurring while an MoU is discussed.

### EC6 — Power to limit group activities and locations
- NBB powers under Articles 57 and 57bis to impose measures, including prohibition of certain activities; applicable at group level.
- NBB can block group projects to acquire or establish subsidiaries or branches (Articles 30 and 34) if they threaten safe and sound conduct or increase risk beyond capacity.
- For domestic systemically important firms, NBB approval required for strategic decisions including range of activities of the group (Article 36/3 of the Organic Law NBB).
- NBB analyzes material disposals for impact on group risk profile, business model sustainability, and future profitability.
- Establishment of a subsidiary abroad requires notification to the NBB (Article 33 bis); no explicit approval/refusal power, but NBB may oppose establishment if it hinders prudential supervision (Article 20, section 7).
- Article 32 (consolidated level) sets limits on nature of shareholdings a bank can hold, imposing structural limitations on group activities.
- See EC2 of Principle 10 for limitations on intragroup exposures.

### EC7 — Management oversight of foreign operations
- Banks must have appropriate governance mechanisms at group level (Article 20 of the Banking Law) ensuring bottom-up and top-down information flow; branches and subsidiaries included in group-wide internal control and risk management procedures; fit and proper policies required at group level.
- Internal Governance Circular (PPB-2007-6) applies to parent companies subject to NBB supervision and Belgian regulated subsidiaries; recognizes international complexity and need for international consultation and accommodation of differing rules/supervisory schemes.
- NBB expects group-wide mechanisms to apply to foreign subsidiaries whether regulated or not; group governance does not prejudice application of local supervisory rules.
- Supervisory colleges provide structured framework to discuss group-wide risks including internal controls and risk management.

### EC8 — Adequacy of information reporting and internal controls for foreign operations
- Obligations on senior management of parent or financial holding company for group internal controls and risk management and verification of completeness and accuracy of group reporting (Article 6 section 3 of Royal Decree of 12 August 1994).
- Royal Decree Article 12 requires free information flow between all entities in consolidation scope, including entities excluded from consolidation or minority interests.
- NBB adopts Basel Committee paper on “Know your customer” risk management (2004) as a main reference for information sharing.
- NBB assesses internal controls, group organization of risk management, quality of management information, and management review; checks group internal governance memorandum for intra-group information flow arrangements (Internal Governance Circular paragraph 99, point ii).
- Remedial measures under Articles 57 and 57bis permit restricting activities or, if jeopardizing financial stability, requiring disposal of subsidiary or business lines if information flow is restricted.

### EC9 — Power to require closing of foreign offices or limit activities
- NBB can restrict activities or require disposals in cross-border context under Articles 57 and 57bis when oversight or supervision is inadequate or when access to required information is denied.
- EU directives provide structure for coordination and a binding mediation mechanism in case of disputes.
- NBB aims to make at least an annual visit to host supervisor and local entity when local entity risks are material from the group perspective; bilateral visits enhance mutual trust and insight into local management quality.
- If a non-regulated subsidiary does not cooperate, NBB may contemplate closing the entity and apply prudential enforcement against the group.

### EC10 — Closer oversight when foreign activities have higher risk profile or differing regimes
- Legal framework (Article 9bis, section 5 of Royal Decree of 12 August 1994) requires NBB, as consolidating supervisor, to plan supervisory activities for the group based on the group’s risk profile involving other authorities as appropriate.
- Banking Law and secondary regulation require management to have consolidated oversight of group structure, activities, and risks (Article 20 sections 1-2 and Internal Governance Circular).
- NBB evaluates scope and intensity of firm’s risk-based management via its supervisory program (see CP19 and CP20); ICAAP reporting required on solo and group-wide basis; internal control statements required on solo and group-wide basis.
- NBB supervisory program pays specific attention to organization of internal control functions; requests independent audit, risk management, and compliance functions in all material group entities reporting to group-wide functions and subsidiary senior management/board.
- Audit, risk, or other specialized board committees should have group-wide scope and arrangements for information flow; groups must have escalation procedures for material governance/risk/audit/compliance issues.
- NBB applies principle of proportionality in supervisory evaluation, informing consideration of cross-border activities; uses on-site visits to non-domestic entities when specific risks identified.
- Principle on offshore activities / know your structure principle referenced under EC1.

### AC1 (additional) — Powers regarding parent companies and owners
- Financial holding companies and non-regulated subsidiaries are included in consolidated supervision scope but are not supervised on a solo stand-alone basis by default.
- NBB has extensive information and review powers in consolidated supervision.
- For non-regulated non-domestic entities, NBB can demand information via Belgian regulated entities; if information already with another authority, NBB seeks it through that channel where possible.
- Subsidiaries excluded from consolidation must still provide information when needed (Article 10 of Royal Decree of 12 August 1994).
- NBB can perform on-site inspections in all entities mentioned; for non-domestic entities NBB coordinates with foreign authorities (Article 13 Royal Decree of 12 August 1994).
- NBB has powers to consider changes in ownership including ultimate beneficial owner (Article 24 of the Banking Law; Article 4,...).

*Source: section 3 of the Banking Law).*

### section 3 of the Royal Decree of 12 August 1994).

### section 3 of the Royal Decree of 12 August 1994)

### Fit and proper requirements
- Executive (or where applicable other senior management) and non-executive directors of financial holding companies must be fit and proper (Article 4 section 4 of the Royal Decree of 12 August 1994; see also principle EC 8 of BCP 3).
- AC2

### Home supervisor assessment of foreign supervision (AC2)
- The home supervisor assesses the quality of supervision conducted in the countries in which its banks have material operations.
- Description and findings re AC2:
  - The harmonized legal framework for consolidated supervision set out in EU legislation contains the concept of “mutual recognition” and therefore the NBB does not formally assess the quality of supervision conducted in EU/EEA Member States.
  - With respect to non-EU/EEA jurisdictions, there is legal provision (Article 7bis section 2 of the Royal Decree of 12 August 1994) that requires the NBB to assess whether the parent of the regulated Belgian institution is subject to consolidated supervision that is equivalent to supervision standards set out in the Decree.
  - The NBB shall consult with the other EU/EEA competent authorities on the equivalence that consolidated supervision also taking into account any guideline issued by the European Banking Committee.

### Visits and on-site examinations (AC3)
- The supervisor arranges to visit the foreign locations periodically, the frequency being determined by the size and risk profile of the foreign operation. The supervisor meets the host supervisors during these visits. The supervisor has a policy for assessing whether it needs to conduct on-site examinations of a bank’s foreign operations, or require additional reporting, and has the power and resources to take those steps as and when appropriate.
- Description and findings re AC3:
  - In its capacity of home supervisor the NBB aims, in principle, to visit the non-domestic jurisdictions, which are material for the Belgian banking group.
  - A typical visit comprises a meeting with the local supervisors in order to discuss in detail the risk profile and assessment of the subsidiary, as well as a joint visit at the premises of the subsidiary for in-depth discussions with the local management of the bank.
  - Such visits are in addition to periodic college meetings.
  - Whether as the home or host supervisor for groups with EU/EEA parent entities, the NBB participates in the annual global risk assessment of the consolidated group that is coordinated by the consolidating supervisor.
  - The NBB regularly conducts joint on-site examinations at parent and local level and employs a proportionate risk based approach. This is common practice in the field of ICAAP assessments and IRB model validation.
  - Themes of joint inspections have included governance and internal control functions.
  - The assessors were able to review documentation covering regular visits by the NBB team for a systemic bank to the most material foreign subsidiaries.

### Assessment of Principle 24
- Assessment: Compliant
- Comments:
  - The NBB has the necessary legal powers and has implemented the necessary regulatory structure to facilitate the practice of consolidated supervision.
  - An effective practice of consolidated supervision depends not only on legal framework and access to data but also on the relationships with other relevant supervisory authorities for the consolidated group and this dimension is highly relevant to the Belgian authorities given the cross border nature of the systemically relevant groups.
  - The evolution of the international regulatory framework, particularly at the EU level with the

*IMF staff report content (section 3 of the Royal Decree of 12 August 1994).*

### introduction of more structured colleges of supervisors (see also CP25) has provided a

### _cr13133 - introduction of more structured colleges of supervisors (see also CP25) has provided a

### Overview of consolidated supervision and colleges of supervisors
- Introduction of more structured colleges of supervisors has provided a vehicle for enhanced oversight of consolidated groups that operate on a cross border basis.
- The NBB is actively using the college environment to:
  - create opportunities to test the quality of risk focused management within groups by their own management;
  - ensure an adequate distribution of capital within the group.
- The NBB noted that governance requirements for groups could be enhanced by stating more explicitly what is expected of the parent company in respect of coordinating and controlling the group in a holistic way. The assessors agree and encourage the NBB to act on this.

### Regulatory perimeter and inter-agency cooperation
- International regulatory reform increasingly focuses on the regulatory perimeter, which may affect the future scope of consolidation and encourages understanding of risk interaction within larger, diverse groups.
- Recommendation: NBB and the FSMA should quickly finalise the MoU setting out modalities of cooperation (as also noted in CP 1(6)).
- The ability to communicate and cooperate effectively with all domestic regulators as well as international authorities is critical to identifying non-banking and non-financial risks that may be present in only a small part of a group.

### Crisis context and NBB transition
- Consolidated supervision comes under stress during crises; not all significant decisions will be made within the supervisory community.
- The financial crisis led to structural change in the Belgian financial system, making the NBB both home and host supervisory authority for systemic groups active in Belgium.
- The assessors note that the NBB has managed this transition well so far.

### Principle 25 — Home-host relationships (summary and assessment)
- Principle 25: Cross-border consolidated supervision requires cooperation and information exchange between home supervisors and other supervisors involved, primarily host banking supervisors. Local operations of foreign banks must be conducted to the same standards as domestic institutions.
- Assessment of Principle 25: Compliant.

### Essential Criteria (EC) — key findings by criterion

- EC1 — Information to be exchanged by home and host supervisors should be adequate for their respective roles and responsibilities.
  - Supervision and home-host relationships governed by European directives (notably directive 2006/48/EC and subsequent amendments), transposed into Belgian legislation.
  - EBA has drafted a template for multilateral cooperation and coordination agreements for EU/EEA groups.
  - Structured framework for exchange of information to support colleges of supervisors (joint risk assessment, joint capital decision, follow-up).
  - Typical shared topics: strategy and activities of the group; changes in group structure/business model; restructuring plan; financial situation; prudential ratios and risk profile; model validation; ICAAP; EBA stress tests; findings of on-site inspections.
  - In crisis situations, sharing becomes more frequent, comprehensive, intensive, and focused.
  - Since 2011 EU colleges required to make a joint risk assessment and a joint ICAAP assessment; must lead to a joint decision regarding capital adequacy and minimum capital requirements for entities within the group.
  - Practice of information sharing is well established; mutual trust and supervisory relationships key.

- EC2 — Identification of relevant supervisors and arrangements for information sharing.
  - NBB carried out mapping of all EEA and non-EEA subsidiaries and branches in groups to set up supervisory colleges according to organization, scale and complexity.
  - EEA members required to sign formal MoU for supervision of an EEA bank or banking group; non-EEA members participate via formal bilateral MoUs, exchange of letters, or informal arrangements.
  - NBB participates in 12 supervisory colleges: 5 as home authority and 7 as host authority.
  - NBB has signed 26 MoUs altogether, of which 18 are intra-EU (this excludes insurance MoUs).
  - NBB informs the banking group of college setup and agenda, debriefs group on main conclusions; senior management regularly invited to attend part of college meetings.
  - Banks reported positive experiences being involved and informed of college processes by the NBB.

- EC3 — Home supervisor provides timely information to host supervisors on framework, group, host operations, and significant problems.
  - NBB optimizes exchange of key information to college members; current practices deemed generally adequate.
  - At college meetings, each member presents risk assessment of supervised entity, including materiality estimates and planned supervisory actions.
  - NBB’s main focus areas as home supervisor:
    - functioning of the college in conformity with European/international regulation and good practices;
    - finalisation of joint risk assessment, joint ICAAP assessment and joint capital decision;
    - joint home/host supervisory plan and execution of joint on- and off-site investigations;
    - set up of infrastructure to deal with important crises;
    - extension of college role to macro-prudential control, IT risks and non-financial risks;
    - EBA stress-tests.
  - Once a year, each college summarises all material risks in a formal joint risk assessment report, discussed and endorsed by participating supervisors.
  - NBB uses multiple communication channels: college meetings, bilateral meetings, secured college webtool, official letters, mail, conference calls, bilateral phone calls.
  - Secured college webtool structures and standardizes information exchange, enables straight through process, instant planning, central hub for prudential knowledge, contains updated contact list.
  - Host authorities, including non-EU supervisors, show increasing confidence and contributions in colleges.

- EC4 — Host supervisor provides timely information to home supervisors on non-compliance, adverse developments, qualitative assessments, and remedial actions.
  - NBB as host informs home supervisor and college on activities, developments, main risks, financial position (liquidity, profitability, solvency ratios), and supervisory activities/measures of local entities.
  - Adverse developments or material concerns reported to home supervisor on a timely or urgent basis.
  - Frequency of exchange: periodic (college meetings) or ad hoc for adverse developments with potential spill-over.
  - Bilateral and multilateral MoUs aim to ensure full and effective flow with home authority acting as “hub.”
  - NBB is host authority for two institutions of domestic systemic relevance; participation in college practices and bilateral dialogue with relevant home authorities is a priority.
  - Host authority focus: active contribution to core college work; specific interest in risks taken by the entity in the home country (including intragroup exposures and asset and liabilities transfers).

- EC5 — Host laws/regulations require foreign banks’ cross-border operations be subject to similar prudential, inspection and reporting requirements as domestic banks.
  - Belgian laws/regulations make no distinction between domestic banks and banks with foreign ownership regarding prudential, inspection and regulatory reporting requirements.
  - Belgium is subject to EU law, which stipulates non-EU entities may not be treated more leniently than domestic entities.
  - For branches, EU law assigns responsibility for cross-border branches (within EU/EEA) to the home authority except for AML/CTF and liquidity supervision.

- EC6 — Host supervisor establishes no objection from home supervisor before issuing a license; assesses home supervisor’s practice of consolidated supervision.
  - For subsidiaries and non-EEA branches, NBB must consult home supervisor before issuing a licence (Articles 9 and 79 of the Banking Law; Article 15 of Directive 2006/48/EC).
  - For EEA-branches, licence based on prior notification from home supervisor (Article 65 of the Banking Law).
  - Royal Decree of 12 August 1994 on consolidated supervision states which regulator is responsible for consolidated supervision.
  - For non-EEA banking groups in Belgium, regulation requires NBB to ascertain that home supervisor exercises consolidated supervision equivalent to that exercised in EEA.

- EC7 — Home supervisors given on-site access to local offices and subsidiaries; they inform host supervisors of intended visits.
  - NBB has never experienced refusal of on-site access.
  - NBB frequently arranges on-site visits to material subsidiaries and branches, including joint visits with host supervisor and “deep dive” working sessions.
  - Where NBB is home supervisor it seeks at least annual visits to material subsidiaries and branches, including joint on-site examinations both inside and outside the EU.
  - Standard procedure: NBB notifies intention to conduct on-site visit and forwards agenda; host supervisor often accompanies NBB but not mandatory.

- EC8 — Host supervisor supervises shell banks and booking offices consistent with international standards.
  - Not applicable.

- EC9 — Supervisor taking consequential action based on information from another supervisor consults that supervisor beforehand.
  - As general rule and per MoUs, exchanges specify permitted uses of information and prior consultation occurs before consequential action.
  - Within EU/EEA, NBB must consult peer college authorities before final determinations on certain issues (e.g., capital or models approval).
  - Documented instances exist of the NBB taking consequential action arising from information received from another supervisory authority.

### Additional Criteria (AC) — communication strategy
- AC1 — Home supervisor develops agreed communication strategy with relevant host supervisors where necessary.
  - Communication strategy is agreed in the college beforehand or on an ad hoc basis.
  - Home supervisor communicates college decisions and requests on a consolidated basis to the parent bank (joint risk assessment, joint capital decision, validation of IRB-models).
  - Communication by home supervisor to the group does not prevent host supervisors from discussing local implications with the local entity.

### Key statistics and concrete figures (preserved exactly)
- NBB participates in 12 supervisory colleges: 5 as home authority and 7 as host authority.
- NBB has signed 26 MoUs altogether, of which 18 are intra-EU (this excludes insurance MoUs).
- Since 2011, EU colleges have been required to make a joint risk assessment and a joint ICAAP assessment for each cross-border group.
- NBB is the host authority for two institutions which are of domestic systemic relevance.

### Conclusions and recommendations
- The NBB places great value on college processes and is strongly motivated to contribute to and participate fully and effectively in home-host relationships.
- The depth and quality of information sharing, joint projects, and documentation of exchanges attest to a maturing dialogue between supervisors.
- Recommendation reiterated: NBB and the FSMA should quickly finalise the MoU setting out modalities of cooperation.
- Assessors encourage the NBB to more explicitly state governance expectations of parent companies in coordinating and controlling groups holistically.

*Source: IMF staff report text (Belgium) as provided in the content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13133.pdf_