Kingdom of the Netherlands-Netherlands
Detailed Assessment of Standards and Codes

This Detailed Assessment of Standards and Codes on the Kingdom of the Netherlands—Netherlands reviews Basel Core Principles for effective banking supervision. Because of the highly developed nature of the Netherlands insurance market and the large exposure to international financial activities, this assessment comments on both the essential and advanced criteria, underpinning each core principle. The authorities in the Netherlands are actively pursuing a number of legislative and supervisory initiatives that hold the potential to materially improve the level of observance.

Abstract

This Detailed Assessment of Standards and Codes on the Kingdom of the Netherlands—Netherlands reviews Basel Core Principles for effective banking supervision. Because of the highly developed nature of the Netherlands insurance market and the large exposure to international financial activities, this assessment comments on both the essential and advanced criteria, underpinning each core principle. The authorities in the Netherlands are actively pursuing a number of legislative and supervisory initiatives that hold the potential to materially improve the level of observance.

I. Basel Core Principles for Effective Banking Supervision

A. General

1. The assessment of the Basel Core Principles for Effective Banking Supervision1 was undertaken as part of the Financial Sector Assessment Program (FSAP) that the IMF has conducted at the request of the Dutch authorities. The assessment was conducted October 27 to November 7, 2003, onsite in the Netherlands by Jean Moorhouse (UK-FSA) and Thordur Olafsson (IMF-MFD).2

Information and methodology used for the assessment

2. The assessment is based on several sources. These include; (i) a self-assessment in August 2003, by the Dutch Central Bank (De Nederlandsche Bank-DNB); (ii) detailed interviews with staff from the DNB; (iii) review of legislation, regulations and other documentation on the supervisory framework and on the structure and development of the Dutch financial sector; (iv) meetings with other authorities and independent bodies, such as the Ministry of Finance, the Ministry of Justice; and the auditing profession; (v) meetings with the banking industry, the Netherlands Bankers’ Association and individual institutions representing different categories, such as large and complex financial institutions, foreign bank’s subsidiary, and cooperative banks, and (vi) numerous publications available from the DNB and background material from various industry sources.

3. The assessment was performed in accordance with the guidelines set out in the Core Principles Methodology.3 For instance, the guidelines require that the assessment be based on the legal and other documentary evidence in combination with the work of the supervisory authority as well as the implementation in the banking sector. Full compliance requires that all these three prerequisites are met. The guidelines allow that a country may fulfill the compliance criteria in a different manner from the ones suggested as long as it can prove that the overriding objectives of each Core Principle are reached. Conversely, countries may sometimes be required to fulfill more than the minimum standards, e.g., due to structural weaknesses in that country. The Core Principles guidelines also state that the assessment is made on the factual situation of the date when the assessment is terminated. However, changes, which are clearly underway, e.g., in laws or practices, which will alter compliance with the principles, will be mentioned in the assessment.

4. In view of the highly developed nature of the Dutch banking sector, this assessment takes into account both the essential and the additional criteria that have been set out in the Core Principles Methodology.

5. The assessors have had full cooperation from the Dutch authorities and have received all information necessary for the assessment

Institutional and macroprudential setting – overview

6. Banking dominates the financial sector in the Netherlands. As at the end of 2002, the banks accounted for over 60 percent of total financial assets, equivalent to around four times GDP. Of the total, around 35 percent of the banks’ assets are generated from non-domestic sources with around 45 percent of the banking systems’ income being generated internationally. Banks’ total income is equivalent to 5.5 percent of GDP with banking employees accounting for 2.3 percent of the active workforce.

7. Currently, there are 97 domestic banks registered in the Netherlands and 28 foreign branches (of which the majority has passported into the Netherlands from the rest of the EU under the Banking Coordination Directive). Of the total, three banks—ABN AMRO, ING, and Rabobank—account for 80 percent of total bank assets and rank in the 30 largest banks worldwide. They are considered to be Large Complex Financial Institutions (LCFIs): ABN AMRO has a strong international presence; ING Group includes a large involvement in the insurance sector as well as the banking sector, and Rabobank has a co-operative structure.

8. Economic activity in the Netherlands has stalled since 2001. Following strong economic growth between 1996–2000, real GDP fell by ¼ percent in 2002, is projected to increase by only 1½ percent this year before picking up by a further 1½ percent in 2004. At the same time inflationary pressures remain subdued, with retail prices increasing by about 2 percent in an annual basis. These low levels of inflation reflect both a weak level of domestic demand and the appreciation of the Euro over the past year. Large swings in asset values have also been associated with the current business cycle. During the 1996–2000 boom, the Amsterdam stock market index nearly tripled in value, but since 2001 almost all of these gains have been reversed. Property prices have also shown a strong cyclical pattern. House prices rose sharply from the middle to late 1990s until early 2002 but have remained at a constant level since then, despite continuing low interest rates, including mortgage rates.

9. During the second half of 2002 a new cross-sector structure for financial supervision was introduced in the Netherlands to replace the existing supervisory regime which was predominantly sector-oriented. The driving force behind the reform was the continuing cross sector market integration. In the Netherlands, the LCFIs account for about 90 percent of banking, 80 percent of securities, and 70 percent of insurance (measured in market shares). Given the trend for financial institutions to operate across financial sectors, regulatory policy has increasingly had to take on a cross-sector perspective. Institutionally, a first step for this was taken in 1999, with the introduction of the Board of Financial Supervisors. This offered the three then existing sectoral supervisors (banking, insurance and capital markets) a platform to discuss cross-sector issues. The recent reforms have changed the system more fundamentally into one of a cross sector nature.

10. The new financial supervisory structure consists of two pillars, organized along the two main objectives of supervision: financial stability and conduct of business. Macro prudential oversight of the stability of the financial system continues to be the responsibility of the DNB. Prudential supervision on all individual financial institutions (micro prudential) on the other hand has become the sole responsibility of the DNB and the insurance and pensions supervisor PVK (Pensioen-& Verzekeringskamer). While DNB focuses on banks, investment funds and securities firms, the PVK deals with insurance companies and pension funds. DNB and PVK cooperate closely and have integrated their cross-sector activities through cross board appointments at executive and non executive levels, as well as through joint teams and practices on operational level for prudential supervision of financial conglomerates. This co-operation will lead to a full merger of activities in the course of 2004. As a result, (micro) prudential supervision across all sectors will be closely associated with macro prudential supervision (systemic stability) which remains the responsibility of the DNB.

11. A further development has been the fact that the former sectoral supervisory authority for the securities sector (Securities Board) has evolved into the Authority for the Financial Markets (AFM). The AFM is responsible for the supervision of the conduct of business (including consumer information and advice) of all financial services providers in the market domain: securities market, banks, investment funds, insurance companies and securities firms.

12. To provide the new financial supervisory system with a solid legal basis all existing sectoral legislation will be replaced by new legislation to fit the functional supervisory model. This substantial project is expected to be completed by January 2005.

General preconditions for effective banking supervision

13. The rule of law prevails in the Netherlands. The legal framework for the banking sector is comprehensive and regularly updated. The judicial system is efficient. There are no indications of political or industry interference on the ongoing supervision of the credit institutions by the responsible authority, DNB.

14. The auditing and accounting rules applicable to banks generally comply with international standards. The Dutch accounting rules comply with the corresponding EU Directives. Further harmonization will be achieved in 2005 when it is expected that the whole EU-area will implement the IAS.

15. The Collective Guarantee Scheme provides for a measure of protection for creditors (depositors) of and investors with participating credit institution. Credit institutions with their head offices in the Netherlands are mandatory participants in the scheme. The scheme adheres to the European Directive on minimum requirements for deposit insurance, e.g., on the 20,000 Euro limit for depositor protection. Likewise investors are protected to a maximum 20.000 Euro for losses suffered if the insolvent institution should be unable to return securities held on behalf of these investors. The DNB administers the scheme which is not funded but guaranteed by the participating institutions. In the event of insolvency of an institution the DNB would pay the creditor or investor and then apportion the total amount of compensation paid among the institutions taking part in the scheme on the basis of an apportionment formula. By paying compensation, the DNB is subrogated, up to the amount of compensation paid, to the rights of the relevant creditor(s) or investor(s) toward the credit institution concerned.

16. There is a legal framework for the liquidation or restructuring of credit institutions. However, in almost all cases, the resolution of problem banks is being sought within the banking system itself. A bank has not been declared bankrupt or liquidated in the Netherlands since 1983.

B. Principle-by-Principle Assessment

17. The assessment of each principle is made on a qualitative judgment basis using five categories: compliant, largely compliant, materially non-compliant, non-compliant, and not applicable.

18. A principle will be considered compliant whenever all essential criteria are generally met without any significant deficiencies. A principle will be considered largely compliant whenever only minor shortcomings are observed, which do not raise any concerns about the authority’s ability and intent to achieve full compliance within a prescribed period of time. A principle will be considered materially non-compliant whenever, despite progress, the shortcomings are sufficient to raise doubts about the authority’s ability to achieve compliance. A principle will be considered non-compliant whenever no substantive progress toward compliance has been achieved. Principles will be considered not applicable whenever the CP does not apply given the legal, structural or institutional features of a country.

19. For each principle there is a descriptive part, which sets out the pertinent laws, regulations, policies and practices. Based on this, and on its implementation, the assessment is concluded. There is also a comment section, specifying the character of any deficiency and providing guidance on how it might be remedied in order to improve compliance with the principle.

Table 1.

Detailed Assessment of Compliance of the Basel Core Principles

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Table 2.

Summary Compliance of the Basel Core Principles

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C: Compliant.

LC: Largely compliant.

MNC: Materially non-compliant.

NC: Non-compliant.

NA: Not applicable.

Recommended action plan to improve compliance with the Basel Core Principles for Effective Banking Supervision

Largely compliant, and measures underway to achieve compliance

20. CP 1 (1) Objectives. The mission was aware that the legislation supporting banking supervision was in the process of being revised. The revisions as explained to the team should be sufficient to enable the Dutch supervisory authorities to become complaint with this Principle.

21. CP 6 Capital adequacy. The mission noted the authorities’ intention to review the prudential reporting requirements during the implementation of the new Basel Capital Accord and believe this would be a positive step forward to become compliant with this Principle.

Largely compliant, but no measures underway to achieve compliance

22. CP 3 Licensing criteria. The mission felt that the supervisory process in the Netherlands would benefit from expanding the fitness and propriety criteria and assessment process to cover the ‘senior management’ of the banks as stipulated in the Methodology. The team recommends that key functions are identified and that the personnel undertaking those roles be assessed under the criteria set out for this principle.

23. CP 4 Ownership. The mission noted that the transfer of ownership for banks rested with the Ministry of Finance rather than the DNB who was the supervising body. It stipulated that the powers be transferred to the DNB in the new proposed legislation.

24. CP 15 Money laundering. The mission recommended that the DNB require the banks to have a designated senior officer with explicit responsibility for ensuring that the banks policies and procedures are, at minimum in on accordance with local statutory and regulatory anti money laundering requirements.

25. CP 22 Remedial action. There would appear to be no technically legal penalties that can be imposed on the ‘management’ of a bank to help bring about timely and corrective action when it fails to meet prudential requirements or when there violations of regulations. It is recommended that this would be addressed in future legislation.

Table 3.

Recommended Action Plan with Respect to the Basel Core Principles

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C. Authorities’ Responses to the Assessment

26. The Netherlands authorities agree with the main findings of the assessment, which they consider to be fair and comprehensive. They are satisfied with the overall judgment that banking supervision in the Netherlands complies to a very high degree with the Basel Core Principles. Many of the recommendations that have been made will be addressed in the bill on financial supervision that is due to come into effect in 2005. The authorities intend to address the recommended actions for which this is not the case in the following manner:

  • Extending prudential reporting to capture institutions at the solo as well as the consolidated level. The authorities point out that introducing such a requirement for guaranteed subsidiaries would increase the burden of supervision without materially improving its quality. In the light of the decisions on the new capital requirements taken in Basel (Basel II) and in Brussels (Capital Adequacy Directive 3), the Dutch Authorities will review the solo prudential reporting regime.

  • Reviewing fitness and propriety requirements and the powers to take remedial actions to ensure they capture all personnel in key management positions. The authorities point out that all supervisory board members and members of boards of directors are already tested for fitness and propriety. With respect to second tier management positions, the authorities will carefully investigate for which positions fitness and propriety testing and the potential use of remedial actions could be useful and what the criteria for identifying such positions should be. The benefits of any extension of fitness and propriety testing will be balanced against the additional administrative burden this would entail for the banks and a decision will then be taken accordingly.

  • Strengthening and widening the requirements for an audit committee to cover all but the smallest banks. Although the rating on this principle is ‘compliant’, the authorities will review their current recommendation that only larger banks need to have an audit committee, taking into account the new Dutch code on corporate governance.

  • Requiring banks to have a designated money laundering reporting officer with senior status within the organization. The authorities intend to introduce an explicit requirement to this effect, attributing this role to the person who is responsible for the compliance function.

  • Communicating the supervisor’s overall risk assessment of a bank back to that bank. The authorities will review the benefits and drawbacks of doing so and take a decision accordingly.

  • Considering formalizing the approach to peer assessment of foreign supervisors. The authorities intend to investigate how other supervisors determine to what extent they can rely on their foreign counterparts in the supervision of foreign banks established in their own country and domestic banks established abroad. The outcome of this investigation will be the basis for a review of their own approach to peer assessment.

II. IAIS Insurance Core Principles

A. Introduction

General

27. This is an assessment of the observance of the core principles of the International Association of Insurance Supervisors (IAIS) in the Netherlands. Insurance is supervised in the Netherlands by two supervisors: the Pensions and Insurance Supervisory Authority (Pensioen- & Verzekeringskamer – PVK) and the Authority for the Financial Markets (Autoriteit Financiële Markten – AFM). The PVK is responsible for prudential supervision of insurance companies and pension funds. The AFM currently has a limited range of responsibility in the supervision of market conduct in these sectors and will acquire additional responsibilities in 2004. Although this assessment relates to the jurisdiction as a whole, for the most part it focuses on the responsibilities and powers of the PVK. This assessment was done in the context of the IMF and World Bank Financial Sector Assessment Program (FSAP). It includes recommendations for strengthening the supervision of insurance in the Netherlands.

28. This assessment was conducted during a mission to the Netherlands from October 27–November 7, 2003 and is based on the circumstances in place and the practices used at that time. The Netherlands is undergoing significant changes in its supervisory structure and practices and, while some of these changes are mentioned below, prospective changes have not been considered in the assessment.

29. This assessment was conducted by Michael Hafeman, a consultant formerly with the Office of the Superintendent of Financial Institutions Canada. Kazunari Ohashi, of the International Capital Markets Department of the IMF, assisted in the preparation of the overview of the institutional and macroprudential setting.

Information and methodology used for assessment

30. This assessment has been based on the Insurance core principles (ICP) of the IAIS dated October 2003. Given the highly developed nature of the Netherlands insurance market and the large exposure to international financial activities, this assessment comments on both the essential and advanced criteria underpinning each core principle. However, in accordance with Annex 2 of the ICP, only essential criteria have been taken into account in assessing the overall level of observance of a core principle.

31. Major sources of information used for the assessment included the PVK’s answers to the questionnaire submitted by the IMF prior to the mission, a comprehensive self assessment carried out by the PVK in collaboration with the AFM, information available from the PVK web site, and additional background information provided by the PVK. In addition, meetings were held with representatives of a wide range of organizations: the PVK; the AFM; the DNB; the Ministries of Finance, Social Affairs and Employment, and Justice; the Actuarial Society; the Netherlands Institute of Registered Accountants; the Association of Company Pension Funds; the Association of Industry-wide Pension Funds; and senior executives from the insurance, pension and banking sectors. All concerned gave willingly of their time and were cooperative, and this added significantly to the effectiveness of the assessment team.

Institutional and macroprudential setting—overview

32. The insurance sector is an important part of the financial system in the Netherlands. The total assets of the insurance companies amount to 67 percent of GDP in 2001 (60 percent life insurers and 7 percent non-life insurers). Market penetration is high, with gross domestic premium income accounting for 9.8 percent of GDP in 2001 (5.8 percent life and 4.0 percent non-life). Insurers employ approximately 47,500 people.

33. In 2001, there were 95 licensed life insurance companies and 247 licensed non-life insurance companies. Some very small funeral insurance-in-kind and mutual non-life insurers are partially or wholly exempted from the supervision; of these, 170 companies are registered with the supervisor.

34. The life insurance sector is concentrated, with the largest and the largest five companies, respectively, accounting for 25 percent and 55 percent of the sector’s total insurance liabilities. The next five largest companies account for 20 percent. Large life insurance groups are significantly internationalized. The largest three groups of companies generate 80 percent of their income. In terms of asset mix, the life insurance sector invests 23 percent of its assets in equities, 70 percent in fixed-income products, and 8 percent in real estate. All large life insurers are part of the financial conglomerates, the structures of which can sometimes be complex. In general, however, they usually have a banking arm and an insurance arm under a holding company. In terms of risk management, they tend to have a centralized risk management unit directly responsible to the board. In addition, they are increasingly organized by product line, both in terms of strategies and internal controls. Domestically, the cross-selling of retail products has become very common. Typically, mortgage-linked products have grown rapidly, reflecting the strong housing market and the tax-deductibility of mortgage interest. These organizational and market developments have led to the change in supervisory regime, especially the consolidation of the Dutch National Bank (DNB) and the PVK.

35. In contrast to life insurers, non-life insurers are small and the market is much less concentrated. The ten largest companies account for 40 percent of the premiums. Their asset mix is 30 percent equities, 65 percent fixed income instruments and the balance in other investments. Many of the larger non-life insurers are part of financial conglomerates. One of their main products is property insurance. In the Netherlands, health and disability insurance are written by non-life insurers.

36. Insurers have had to cope with a difficult environment in the last few years. Production has been declining and share prices have fallen significantly. Many companies exhausted their equity revaluation reserves and, therefore, had to recognize some of the drop in asset values in their income. Low interest rates have reduced the level of income from new fixed income investments. Reinsurance costs have increased dramatically, in response to the terrorist attacks on September 11, 2001. This environment has put a strain on insurers’ solvency margins. However, the industry and government have developed an arrangement to limit future insurance losses arising from acts of terrorism in the Netherlands.

37. The primary supervisor for the insurance sector is the PVK, which supervises insurers on a “solo plus” basis, in accordance with agreed insurance supervision practices in the European Union. This contrasts with the consolidated supervision approach under which banks are supervised by the DNB, with whom the PVK is in the process of merging. A protocol has been in place since 1990 to permit the PVK and the DNB to cooperate in the supervision of conglomerates, and cooperation is underway in other aspects of their operations, as well.

B. Principle-by-Principle Assessment

38. Insurance supervision in the Netherlands is in the midst of change. In recent years, the PVK has adopted a more proactive approach, as evidenced by initiatives such as the implementation of a risk-based supervisory methodology (MARS) in 2003 and the proposal for a more forward-looking approach to solvency assessment (FTK), which is currently under discussion. The level of resources employed by the PVK has also increased significantly. This change in approach has clearly been noticed by the industry and, for the most part, appears to have its support (in principle, although not always on the specifics). Further changes are ahead, as the merger of the PVK and the DNB will soon create an integrated prudential supervisor for the financial sector, with the AFM handling market conduct supervision. The restructuring process presents an opportunity to clarify and formalize the objectives and responsibilities of the supervisory authorities.

39. Most of the principles have been assessed as being observed or largely observed. Furthermore, the authorities in the Netherlands are actively pursuing a number of legislative and supervisory initiatives that hold the potential to materially improve the level of observance in the coming months or years. In some cases, this will flow from the coming into effect of legislation and guidance that has already been decided. In other cases, work is underway but has not yet been completed.

40. A few principles were assessed as partly observed. Both supervisory guidance and professional standards, e.g., for the actuarial profession, are in some cases either absent or fairly high level in nature. Accordingly, the level of observance for these principles can be improved through the issuance of more complete and explicit guidance to industry regarding supervisory expectations, e.g., in the areas of governance, risk management and internal controls. Greater transparency by the supervisor is recommended in several areas, e.g., regarding its internal policies and procedures, risk assessments of institutions and stages of intervention.

41. The ability for the supervisor and others to assess the financial condition of insurers could be improved by narrowing of the range of acceptable actuarial and accounting practices and increasing the level of disclosure and frequency of reporting. The PVK is relying upon developments internationally to address some of these issues, e.g., the evolution of International Financial Reporting Standards, and is actively involved in international standard setting initiatives. Its own FTK project, when completed, should also be a significant step forward. However, further steps might also be taken in the shorter term to improve the level of observance with the principles, including requiring quarterly reporting on supervisory returns, publishing more information from the supervisory returns, and establishing and communicating a solvency control level.

42. Only principle 24 – Intermediaries – has been assessed as not observed. In this case, legislation is currently being drafted which could provide a stronger and more comprehensive basis for the supervision of insurance intermediaries.

43. The level of observance for each principle reflects the assessments of the essential criteria established by the IAIS. A principle is considered ‘observed’ whenever all the essential criteria are considered to be observed or when all the essential criteria are observed except for a number that are considered not applicable. For a criterion to be considered ‘observed’, it is usually necessary that the authority has the legal authority to perform its tasks and that it exercises this authority to a satisfactory standard and ensures that requirements are implemented. The existence of a power in the law is insufficient for full observance to be recorded against a criterion except where the criterion is specifically limited in this respect. In the event that the supervisor has a history of using a practice for which it has no explicit legal authority, the assessment may be considered as ‘observed’ if the practice is substantiated as common and undisputed.

44. A principle is considered to be ‘not applicable’ when the essential criteria are considered to be ‘not applicable’. A criterion would be considered ‘not applicable’ whenever the criterion does not apply given the structural, legal and institutional features of a jurisdiction.

45. For a principle to be considered ‘largely observed’, it is necessary that only minor shortcomings exist which do not raise any concerns about the authority’s ability to achieve full observance with the principle. A principle will be considered ‘partly observed’ whenever, despite progress, the shortcomings are sufficient to raise doubts about the authority’s ability to achieve observance. A principle will be considered ‘not observed’ whenever no substantive progress toward observance has been achieved.

46. While it is generally expected that full observance of a principle is achieved through the observance of the essential criteria, there can be instances, where observance with a principle has been achieved through different means. Conversely, due to specific conditions in a jurisdiction, meeting the essential criteria may not be sufficient to achieve observance of the objective of a principle. In these cases, additional measures are needed in order for observance of the particular principle to be considered effective. In the judgment of the assessor, such a case exists in the Netherlands with respect to principle 15 on enforcement or sanctions.

Table 4.

Detailed Assessment of Observance of the IAIS Insurance Core Principles

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