Kingdom of the Netherlands-Netherlands
Publication of Financial Sector Assessment Program Documentation: Detailed Assessment of Observance on Basel Core Principles for Effective Banking Supervision (BCP)

The major reforms undertaken in the Netherlands with the adoption of the Twin Peaks regulatory structure have ensured that the recommendations from the Basel Core Principles assessment have been acted upon. The legal and regulatory framework for banking supervision conforms to internationally accepted minimum standards. Executive Directors recommend that supervision has to be more “intrusive and conclusive,” and encourage greater use of formal enforcement powers. However, it is recommended that the allocation of supervisory resources according to the potential systemic impact of regulated firms be evaluated.

Abstract

The major reforms undertaken in the Netherlands with the adoption of the Twin Peaks regulatory structure have ensured that the recommendations from the Basel Core Principles assessment have been acted upon. The legal and regulatory framework for banking supervision conforms to internationally accepted minimum standards. Executive Directors recommend that supervision has to be more “intrusive and conclusive,” and encourage greater use of formal enforcement powers. However, it is recommended that the allocation of supervisory resources according to the potential systemic impact of regulated firms be evaluated.

I. Summary, Key Findings, and Recommendations

1. The major reforms that were undertaken in the Netherlands with the adoption of the Twin Peaks regulatory structure, and underpinned by the Act on Financial Supervision (AFS), have ensured that many of the recommendations from the Basel Core Principles assessment conducted in 2003–2004 have been acted upon. The legal and regulatory framework for banking supervision in the Netherlands now conforms closely to internationally-accepted minimum standards, and this is reflected in this Basel Core Principles assessment.

2. As De Nederlandsche Bank (DNB) has recognized, however, it remains necessary to correct some shortcomings in the actual practice of banking supervision. Until recently, DNB has been committed to a relatively informal approach to banking supervision in which heavy reliance was placed on “moral suasion” to change the behavior of banks. This appears not to have been fully effective in constraining excessive pre-crisis risk taking, and DNB has now embarked on a program of internal cultural change. The aim of this program (“VITA”) is to make supervision more “intrusive and conclusive,” and, in particular, to encourage greater use of formal enforcement powers. The assessment team supports this initiative, as it believes there is a need for DNB to make use of the full range of its powers in future; this is also likely to be the public expectation following the crisis.

3. The resources devoted to banking supervision also require further attention.

Within DNB the number of full fime-equivalent (FTE) posts devoted to banking supervision is fewer than those devoted to either the pensions or insurance industries, both of which are less systemically significant. The scale of the activities of overseas subsidiaries of some large banks justify a greater commitment of resources to their monitoring. The assessment team recommends that the authorities evaluate the allocation of supervisory resources according to the potential systemic impact of regulated firms.

II. Introduction

4. The assessment team1 reviewed the legal framework for banking supervision, held extensive discussions with the staff of DNB, the Authority for Financial Markets (AFM), the Ministry of Finance (MoF), the Netherlands Association of Banks (NVB), the Auditors’ Association (Koninglijk), Netherlands Instituut van Register Accountants (NIVRA), and private sector participants in the banking and financial markets. The team examined the current practice of on and off-site supervision at DNB. The assessment team had the benefit of working with a comprehensive self-assessment completed by DNB, in cooperation with the MoF and the AFM, and received the information it required. The team extends its thanks to the staff of the authorities for their participation in the process.

5. Reaching conclusions required judgements by the assessment team. Banking systems differ from one country to another, as do their domestic circumstances. Furthermore, banking activities are changing rapidly around the world after the crisis, and theories, policies, and best practices for supervision are swiftly evolving. Nevertheless, by adhering to a common, agreed methodology, the assessment should provide the Netherlands authorities with an internationally consistent measure of the quality of their banking supervision in relation to the 2006 Revision of the Basel Core Principles, which are internationally recognised as minimum standards. Observations are in principle made only on the basis of current legislation, unless otherwise stated; prospective legislation has been taken into account where relevant.

6. Within the European System of Central Banks (ECSB), DNB is the central bank of the Netherlands and the prudential supervisor for the financial sector. In 2004 it merged with the pension and insurance supervisor (PVK) as part of a process to change the design of the financial supervisory system. The Dutch model of financial supervision is now characterized by an objectives-based approach. Within this model (often referred to as the Twin Peaks model), DNB is responsible for the prudential supervision of financial institutions and the AFM is responsible for conduct of business supervision.

7. Within this Twin Peaks model, DNB is the prime prudential supervisor of credit institutions, insurance companies, pension funds and investment firms. The AFM has several specific responsibilities relating to the conduct of business aspects. This includes, in particular, the responsibilities of financial institutions to take due care of its customers and the supervision on transparency aspects. In recent years, the AFM has put considerable emphasis on improving the protections available to consumers in the financial market.

8. DNB is an organization with 1572 FTE posts of which 645 FTE posts are dedicated to supervisory activities. The organzation of DNB comprises four supervision divisions. There are three operational divisions for (i) banking; (ii) insurance and trust agencies; and (iii) pension funds and investment firms. There is also a separate supervisory policy division, which is inter alia responsible for developing and implementing rules and regulation. In addition, there is a separate Financial Stability Division that brings together the financial stability tasks of DNB as prudential supervisor and central bank.

9. Plans have been developed to create an additional supervisory division to centralize expertise centers and enforcement activities. This organizational change came into effect in January 2011.

10. A Financial Sector Assessment Program (FSAP) for the Netherlands was conducted in 2003/2004. The overall assessment was that the financial system was sound, resilient and well supervised and it was expected that the then forthcoming revision of financial regulation would further strengthen the already high-standard supervisory regime. All criteria of the BCP were complied with (19 criteria) or largely complied with (6 criteria).

11. Significant changes have taken place since the initial assessment. First, in 2007, the AFS came into effect, completing the reorganization of financial supervision. With the new legislation, several recommendations of the 2004 FSAP have been addressed. Second, in 2006, the Basel Core Principles (BCP) and the associated methodology were revised. Finally, the financial crisis has revealed important lessons for financial supervision and spurred the debate on further strengthening financial regulation. The update of the FSAP and the review of the observance of the BCP is part of a continuous process to strengthen financial supervision and a specific element of an action plan of DNB to strengthen its supervision in reaction to the financial crisis.2

III. Information and Methodology Used for Assessment

12. This assessment has been conducted in accordance with the guidelines described in the Core Principles Methodology by the Basel Committee of Banking Supervisors (BCBS).3

13. Relevant legislation that has been taken into account primarily includes the AFS and its associated regulations. The AFS contains the national implementation of the European Union’s Capital Requirements Directive (CRD), thereby ensuring that legislation is compliant with the Basel II framework. The recent changes of the CRD are scheduled to be translated into the AFS at the end of 2010 (CRD 2) and in 2011 (CRD 3).

14. In recent years, several reports evaluated developments during the financial crisis in general and the role of financial supervision by DNB in particular. Where relevant, observations in these reports have been taken into account in the description of the observance of the criteria and are used to identify the relevant prospective actions to strengthen financial supervision looking forward.

15. To determine the observation of each principle, the assessment has made use of five categories: compliant; largely compliant; materially non-compliant, non-compliant and non-applicable. An assessment of “compliant” is given when all essential criteria are met without any significant deficiencies, including instances where the principle has been achieved by other means. A “largely compliant” assessment is given when there are only minor shortcomings, which do not raise serious concerns about the authority’s ability to achieve the objective of the principle, and there is clear intent to achieve full compliance with the principle within a prescribed period of time. A principle is considered to be “materially non-compliant” in case of severe shortcomings, despite the existence of formal rules and procedures, and there is evidence that supervision has clearly not been effective, the practical implementation is weak, or that the shortcomings are sufficient to raise doubts about the authority’s ability to achieve compliance. A principle is assessed “non-compliant” if it is not substantially implemented, several essential criteria are not complied with, or supervision is manifestly ineffective. Finally, a category of “non-applicable” is reserved (though not used) for those cases that the criteria would not relate to DNB.

A. Institutional and Macro-Economic Setting and Market Structure–Overview

16. The Netherlands has a large and internationally orientated financial sector. Total financial assets of the banking sector currently amount to € 2,852 billion (Q2 2010), which is equal to almost five times GDP. A quarter of assets is ultimately held by foreign institutions (mostly from within the European Economic Area (EEA)).

17. The banking sector has been seriously hit by the global financial crisis, which has resulted in unprecedented write-downs on assets, forcing the authorities to take far-reaching measures to maintain financial stability.

18. Currently, some of the major banks are in the middle of a restructuring process, which has resulted in a consolidation of their balance sheets, a reduction of their risk profile and an increased domestic orientation. In 2009, the banking sector returned to profitability, which is however still considerably below pre-crisis levels. With the economic recovery expected to be modest and the strengthening of regulation, the banking sector will continue to be confronted with a challenging environment in the years ahead.

19. Since the global financial crisis, the financial landscape in the Netherlands has changed significantly. At the end of 2007, the then largest financial institution in the Netherlands, ABN AMRO, was taken over by a consortium of Fortis, Royal Bank of Scotland, and Banco Santander. Almost a year later, in order to maintain financial stability, the Netherlands government decided to buy the Netherlands banking parts of Fortis, including its share within the consortium that contained the Netherlands activities of ABN AMRO. The process of integration of Fortis and ABN AMRO will continue under state ownership. To this end, a new company structure was created in July 2010 under the name of ABN AMRO.

20. In addition to the intervention in Fortis/ABN, the State also supplied capital support to three financial institutions, including Internationale Nederlands Groep (ING). The State also acquired a portfolio of ALT-A mortgages from the U.S. subsidiary of ING. As a condition to this support, the European Commission (EC) has enforced changes to the organization of ING. Within this process, ING has announced its intention to separate its banking and insurance activities, which will thus result in a smaller organization.

21. The Dutch economy is showing gradual signs of recovery after the 2008/2009 recession, and growth is expected to continue at a moderate pace. The fiscal position has deteriorated significantly because of the accommodative fiscal stance taken during the financial crisis and the contraction of GDP in 2009. In 2011, the budget deficit is expected to improve, but will remain at a comparatively high level of 4 percent. In the upcoming years, further fiscal consolidation is expected to further reduce the deficit and to prepare for implications of an ageing population.

IV. Preconditions for Effective Banking Supervision

22. The BCP recognizes that the quality and effectiveness of banking supervision relies on several preconditions that are not entirely within the remit of the supervisor. This section provides a description of the extent to which these preconditions are met in the Netherlands.

A. Sound and Sustainable Macroeconomic Policies

23. The Netherlands has a strong record and a solid institutional framework supporting the conduct of sound macro-economic policies.

24. Monetary policy is conducted by DNB within the ESCB framework. Budgetary policy is conducted within a fiscal framework based on predefined rules and within the requirements of the Stability and Growth Pact (SGP). The fiscal Report on the Observance of Standards and Codes (ROSC) that was conducted by the IMF in 2005 concluded that the Netherlands has a transparent and well understood system of fiscal management, which achieves or exceeds the accepted standards.

25. The recent financial crisis has put severe pressure on financial stability and the budgetary situation of the Netherlands. Measures have been taken in line with the SGP recommendations to ensure that the budget remains on a sustainable path. However, considerable adjustment still needs to be made.

26. The Banking Act (DNB Act of 1998 with subsequent amendments) and the AFS explicitly assign to DNB the responsibility to safeguard the stability of the financial system. Within DNB, the Financial Stability Division (FSD) is primarily responsible for this task. Within this division, a separate department for macro-prudential supervision was created in 2010 to further improve the monitoring of macro-prudential risks.

B. A Well Developed Public Infrastructure

27. The Netherlands has a well developed business climate with an adequate legal framework including corporate, bankruptcy and private property laws. Credit institutions must apply either International Financial Reporting Standards (IFRS) accounting principles or the provisions as laid down in Title 9 Book 2 of the Dutch Civil Code (DCC) (which in itself is largely compliant with the IFRS standards). Their accounts are legally required to be validated by independent auditors to ensure that financial statements are correct and provide a true and fair view of the financial position of the company.

28. The auditing profession is subject to self-regulation through the NIVRA and to regulation by the AFM. These bodies ensure that the audit profession is subject to licensing and appropriate professional training.

C. Payment and Settlement Systems

29. DNB participates in the ‘Trans European Automated Real-Time Gross Settlement Express Transfer 2 (TARGET2), the Real-Time Gross Settlement (RTGS) of the Eurosystem and operates ‘TARGET2.NL’. Equens provides clearing services for the interbank market through the systems ‘Equens CSM’ (international Single European Payment Area (SEPA) compliant transactions), and ‘CSS’ (domestic transactions). Point of Sale (POS) and ‘guest use’ Automated Teller Machine (ATM) transactions are routed and authorized through the ‘SWITCH’ system, which is operated by Equens as well. Currence4 is the legal owner of the payment products ‘PIN’, ‘iDEAL’, and ‘Direct Debit’.

30. Securities traded on Euronext Amsterdam are cleared by the Paris-based Central Counter Party LCH Clearnet SA (CCP LCH). Clearnet SA are settled in the Central Securities Depository (CSD) Euroclear Nederlands system ‘ESES’. ESES uses DVP model 1 and is a platform with an integrated settlement model in the Central Bank Money (CeBM). ESES is also used by the CSDs in Belgium and France in co-operation with DNB, the National Bank of Belgium (NBB) and Banque de France (BdF). The (I) CSD Euroclear Bank provides settlement for Euronext Amsterdam in the Commercial Bank Money (CoBM). European Multilateral Clearing Facility (EMCF), the Amsterdam based CCP, provides clearing services to a number of trading venues across Europe (the UK, Hungary, and Scandinavia).

Effective Market Discipline

31. The Netherlands is a market-oriented economy. Market participants have access to essential financial information that is accurate and publicly available. Investors are free to engage in (financial) contracts. The DCC provides adequate safeguards of property rights and protection against unlawful actions.

32. The Netherlands has implemented a corporate governance code that applies to all listed companies and contains rules, principles and best practice provisions that regulate relations between the management board, the supervisory board, and the shareholders.

33. During the financial crisis several exceptional measures were taken to protect financial stability and contain systemic risk. These support schemes have been publicly disclosed. They include a capital support scheme and a loan guarantee scheme to enable financial institutions to place loans under government guarantee. Both schemes have sunset clauses and it is intended that they will be wound down as soon as appropriate.

Mechanisms for providing an appropriate level of systemic protection (or public safety net)

34. The deposit guarantee scheme protects individual depositors up to € 100,000. Currently the scheme is financed ex-post by the financial sector, but plans are being developed to create an ex-ante scheme with risk-based premiums and a more rapid pay out process.

V. Legal Framework

A. The structure of the Act on Financial Supervision and Secondary Legislation

35. The regulatory framework applied by DNB comprises three levels. The most fundamental is the AFS which came into force on January 1, 2007. The AFS is supplemented by various orders in council and ministerial orders and decrees. Finally, DNB is vested with the power to issue rules and policy guidelines, which mainly concern the interpretation of the law.

36. The AFS consists of seven parts and three annexes. Part 1 concerns general provisions, including such matters as definitions and the objectives and powers of DNB and the AFM. Part 2 concerns licensing and market access matters. Part 3 concerns the prudential supervision of financial intermediaries, including the various prudential standards, such as minimum solvency, liquidity, accounting, and reports. Part 4 concerns standards for the conduct of financial businesses, while Part 5 relates to conduct of business in the financial markets. Part 6 relates to the supervision of providers of settlement services, while Part 7 contains final provisions.

VI. Supervisory Approach (Financial Institutions Risk Analysis Method)

37. DNB’s supervisory approach is based on the Financial Institutions Risk Analysis Method (FIRM) methodology. The FIRM manual is publicly available on the open book section of DNB’s website: The FIRM methodology is embedded in DNB’s supervisory approach; the way in which the FIRM tools are used is currently under review. As part of DNB’s culture change project (“VITA”), these tools will be improved to bring them more in line with supervisory best practice, and to ensure their more consistent application.

38. DNB’s supervisory approach on banking supervision consists of three elements: (1) the base program; (2) the risk identification program; and (3) the risk-mitigation program. The base program involves periodically reviewing risk management policies and reports and conducting interviews with senior management and risk managers. The risk identification program is a more in-depth review of specific risk areas. Finally, if high risks are identified, a risk mitigation program is adopted. The FIRM serves as an important tool for regular benchmarking exercises where experts from the Supervision Policy Division (SPD), the Banking Supervision Division (BSD), and the FSD compare the quality of the assessed risk management practices.

39. DNB’s assessment of the quality of risk management takes into account the size, nature, complexity, and risk profile of the bank. Particular attention is paid to the set-up of the risk management framework which should be seen in the context of the so-called “3-lines of defence” model. The first line of defence is the controls, procedures, and culture within the business unit. The second line of defence is the risk management of the bank as a whole. The third line of defence is the audit function overseeing the business and risk management.

40. Off-site examinations are primarily performed on the basis of reports sent to DNB. Reports to DNB consist of standardized periodic returns of quantitative prudential data, the so called Common Reporting Program (COREP) and Financial Reporting Program (FINREP) reports designed by the Committee of European Bank Supervisors (CEBS). DNB requires supplementary quantitative returns, as necessary. The standardized returns are certified each year by the institution’s external auditor. The management letters sent by the internal and external auditors are also made available to DNB. DNB has unlimited access to the internal management information of each of the major banks. Together, these sources allow for the identification of performance trends in individual banks. This information can also be used for the analysis of developments in the banking system as a whole and comparative analysis between individual banks.

41. The results of off-site examinations serve as input for risk analyses and for on-site inspections. The risk analysis process (RAP) consists of three layers of risk assessment:

  • The inherent risks of the individual bank: risks that arise from the strategy, size of the business, and from external (financial market) developments;

  • Assessment of the quality of the control mechanism: adequacy of internal control, governance and control framework, assessment of control functions, and the “3 lines of defence model”; and

  • Residual risks: risks that could arise from failures of management or internal control.

42. On-site inspections are not held according to a fixed schedule. The frequency of visits to individual banks is determined according to available resources and risk analysis. Comprehensive on site-examinations are not conducted on the largest banks. Instead, they are subject to thematic risk-based examinations on specific aspects of their operations such as governance structure, risk management, assets and liability management, internal audit, integrity and compliance, and information technology (IT). The selection of the topics for thematic examination is based on the risk assessment of the bank. The work programs have been combined in a work programs manual (Handboek Werkprogramma’s–available in Dutch only).

43. Both off-site and on-site examinations, and other supervisory processes, are described in the quality manual (Handboek Kwaliteit–in Dutch only). The processes are periodically assessed for quality, compliance with procedures, and consistency. This is done by means of internal audits within the BSD division according to procedures laid down in Section 9.6 of the quality manual.

44. In all cases, the results of the on-site examination are discussed with the bank concerned, and subsequently recorded in a senior management letter. Such a letter usually details required improvements. The progress in implementing the improvements is monitored on a regular basis. Follow-up of supervisory issues is also monitored by assessing the effectiveness of the relevant bank’s internal follow up system, which is usually applied for both internal and external audit findings. In addition, examination findings are used to update a bank’s risk analysis. After each examination, an internal DNB evaluation is performed on the basis of a fixed set of criteria.

VII. Main Findings

A. Objectives, Independence, Powers, Transparency and Cooperation (CP1)

45. In 2007, the AFS introduced a new legal framework for the supervisory authorities in the Netherlands. Compared to the situation prevailing during the previous Basel Core Principles assessment in 2004, this has resulted in substantially improved clarity of mandates and objectives for supervisory authorities. DNB and the AFM appear to possess a clear understanding of their respective roles and responsibilities under the Twin Peaks system, and cooperation and coordination between the two agencies appear to have functioned well in practice, including during the period of greatest financial stress during the crisis.

46. The structure introduced by the AFS does, however, provide for a larger role for the MoF than in most other comparable systems. For example, DNB has relatively limited rule-making authority of its own, since most regulation is either directly contained in the AFS itself or in decrees that are the responsibility of the MoF. This arrangement gives the MoF a more active role in the supervisory policy process than is typical, although the authorities explain it on the grounds that rule-making powers are a delegated authority from parliament and that close MoF involvement is necessary to ensure proper accountability mechanisms that are compatible with the Netherlands constitution. The same justification is given of the provision in the AFS, which empowers the minister to overturn DNB rules that are deemed to constitute an “unreasonable administrative burden” on the financial markets. DNB is authorized by law to “lay down temporary, generally binding regulations in order to contribute to the stability of the financial sector.” Such regulation must be reported to the MoF without delay. Furthermore, DNB is exempted from the provision in the Dutch Independent Administrative Authorities Act (Zelfstandig bestuursorganen, ZBO’s) which stipulates that the minister may set policy rules with regard to the exercise of duties by an independent administrative authority.

47. Nonetheless, the circumstances in which this power might be invoked need to be more closely defined, either by amendment to the law or a public statement from the MoF of a non-exhaustive list of circumstances in which these powers might be invoked.

48. There may also be a case for greater DNB involvement in the rule-making process, as policies are generally more effective if they are directly informed by the experience of application and enforcement.

49. It is also argued that there is a clear distinction to be made between the rule-making process and the execution of these rules through supervision. The latter is clearly reserved by DNB, which is therefore, fully independent in operational matters, except for exceptional cases that would need to be justified on the grounds of “public good.” As with the provision of the law relating to an “unreasonable administrative burden”, a more precise definition of the circumstances in which such powers might be invoked would be desirable.

50. The AFS also gives the MoF a role in approving DNB’s supervisory budget. It is not clear to what extent the MoF uses this power to influence the allocation of supervisory resources and what criteria it may use in deciding on the reasonableness of DNB’s proposed budget. It is also unclear to what extent this arrangement may have contributed to a situation in which the resources devoted to banking supervision do not appear to be proportionate to the size and complexity of DNB’s supervisory task. The Netherlands banking system is one of the largest in the world relative to GDP; and contains a number of large, diversified, and internationally active financial conglomerate groups that require close monitoring and intensive interaction with host-supervisors overseas. DNB devotes fewer FTE posts to banking supervision than to either insurance or pensions supervision, both sectors which are considered less complex and which pose fewer risks to the state than the banking sector. The assessment team recommends that DNB and the MoF jointly conduct a review of the adequacy of resources currently devoted to banking supervision; for example, by benchmarking against other countries with banking systems of comparable size and complexity.

51. The AFS also provides DNB with an extensive range of legal sanctions and powers to ensure compliance with law and regulation. Nonetheless, until recently, DNB has been less reliant on the use of these powers to the full, preferring instead to rely on “moral suasion.” In part, this preference may reflect a traditional concept of the bank supervisor’s role, and in part it may reflect a degree of uncertainty about the extent of the powers of DNB staff, given that the AFS is a relatively new instrument. However, there is some evidence that reliance on moral suasion has not always been effective and has become progressively less-effective, given changes in the Netherlands banking system over the past decade. In recognition of this, DNB recently engaged in a major cultural change project (“VITA”), one component of which is to encourage supervisors to make more use of their formal powers. The assessment team strongly supports this initiative and encourages DNB to use to the full its range of enforcement powers.

52. The AFS also provides adequate legal protection to individual staff members of DNB. The assessment team is aware of the discussions that have been taking place between the supervisory authorities and the respective ministries to limit the authorities’ prospective financial liability in the event of a law suit being brought against them. However, since the limitation of the legal liability of regulatory agencies (as opposed to the staff of those agencies) is not a feature of this core principle, the team is satisfied that the relevant Core Principles (CP) component is fully complied with.

B. Licensing and Structure (CPs 2–5)

53. The AFS defines clearly the permissible activities of a bank as well as prohibits institutions, which are not licensed by DNB to pursue the business of banking from using the word “bank” in their name. The conditions that must be met to obtain a license to pursue the business of a bank are set out in the AFS, as supplemented by the Decree on Prudential Regulation (DPR). The criteria allow DNB sufficient discretion to set conditions and to assess to what extent these conditions have been fulfilled and to determine whether the requested license should be issued. Among the criteria to be considered are that the owners and senior management should be “fit and proper” persons. In the light of lessons learned from recent cases, a change in the AFS is being prepared to replace the separate assessments for fitness and properness, with a single suitability assessment. This assessment is meant to cover fitness, properness and other facts and/or circumstances that may influence the suitability of a person.

54. The AFS also provides for DNB or in certain cases, the minister of finance, to issue a “declaration of no objection” either to significant changes in control of banks or of significant acquisitions by banks. DNB undertakes detailed scrutiny of such applications before deciding to issue a declaration of no objection.

C. Prudential Regulation and Requirements (CPs 6–18)

55. Capital adequacy rules are based on Basel II, as transposed into EU law by the CRD. The CRD provides for a comprehensive set of requirements with respect to credit market, and operational risks. In practice, the DPR and the rules made by DNB follow CRD requirements very closely, and the Netherlands has chosen not to apply a higher national standard where provided for in the directive, with the exception of the definition of “own funds” (capital) where DNB enforces a de-facto maximum limit of 25 percent of hybrid capital instruments in Tier 1 (the CRD imposes a 50 percent limit). The Netherlands legislation provides for the full range of options in respect of advanced and standardized approaches within the CRD, and banks are subject to detailed assessments before being permitted to adopt the advanced approaches with respect to credit, market, and operational risks.

56. The standard Pillar 1 minimum solvency ratio for all banks is 8 percent. In practice, however, banks operate at capital levels that are much higher than the legal minimum. DNB sets capital requirements on a bank-by-bank basis, using an assessment methodology that builds on the Basel II, Pillar 2 process. Banks are required to develop their own Internal Capital Adequacy Assessment Program (ICAAP), which is assessed against independently developed supervisory benchmarks. DNB also requires banks to engage in regular stress-testing exercises and conducts an annual macro stress test of its own.

57. Banks’ compliance with prudential requirements is assessed through regular supervisory returns that are based on the standard format developed by the CEBS and through regular on-site contacts with bank management and risk control functions. DNB is increasingly making use of thematic examinations by expert teams. A review of banks using the Advanced Measurement Approach for Operational Risk (AMO) was recently concluded and resulted in significant supervision action to remedy the deficiencies identified.

58. DNB has had in place a comprehensive set of liquidity rules since 2003. These are being enhanced in the light of lessons learned from the crisis and will also be amended to incorporate the recommendations contained in Basel 3. Currently, reporting forms do not distinguish between liquidity in the major currencies (reporting is in euros only) and the assessment team recommends that DNB’s standardized liquidity report be amended to permit analysis according to major currencies.

59. DNB does not set any specific rules with respect to problem assets, provisioning and reserves. Instead, the level of required provisions is set according to the Expected Loss (EL) estimates calculated in accordance with the Internal Ratings Based approach under Basel II/Capital Requirements Directive (CRD). This methodology does not distinguish conceptually between provisions and capital, as the level of required capital increases in line with increasing EL. This is in accordance with the Basel II/CRD methodology. Provisioning policies are set on an individual bank basis in compliance with the requirements of IFRS or to the DCC that broadly conforms to IFRS. The primary responsibility for assessing the adequacy of provisions resides with the external auditor. Reliance on accounting standards for loan valuation and provisioning may be reasonable, given high levels of competency and integrity in the Dutch accounting profession. However, the supervisor should aim to provide guidance on the definition of default and outline its expectations concerning the level of provisions that would be appropriate when assets are impaired.

60. DNB does not set any specific limits on exposures to related parties. DNB argues that provisions of the AFS Section 3:17 provide an adequate legal basis for controlling related party lending, although this section does not make a specific reference to such lending. The definition of a related party is based on the Dutch Commercial Code. DNB uses “moral suasion” to ensure that transactions are appropriately arms length. Although the assessors found no evidence to suggest that related party lending is, or has been, a significant issue in the Netherlands, and therefore this relatively informal system of control may be judged effective, nonetheless for purposes of full compliance with CP11 DNB needs to put in place a more formal framework of limits and prohibitions on lending to related parties.

61. DNB adopts a principles-based approach that is aimed at addressing possible conflicts of interest and preventing abuse arising from exposures to related parties, rather than relying on detailed formal requirements. Maximum limit for intra group transactions is set at 25 percent.

D. Methods of Ongoing Banking Supervision (CPs 19–21)

62. DNB’s supervisory approach is risk-based, drawing on a comprehensive risk analysis framework, FIRM, and an associated RAP. The FIRM methodology is currently under review to reflect lessons learned from the financial crisis. Prior to the financial crisis, the risk-assessment methodology appears not to have adequately identified the main systemic vulnerabilities, such as increased leverage, increased reliance on wholesale funding, and the acquisition of substantial portfolios of structured securities that lead to the need for public sector capital support. The authorities are taking measures to address these lessons, including closer integration of macroprudential and microprudential supervision. In addition, as part of its “VITA” project DNB is also taking steps to enhance the intrusiveness of its supervision and to ensure that it results in adequate follow-up and enforcement actions (“conclusiveness”).

63. For the purposes of off-site supervision, DNB makes substantial use of banks’ internal management reports. This practice means that the amounts of data collected in standardized form are relatively limited (e.g., there is no standardized reporting of nonperforming assets) and are at different reporting dates. This makes it difficult to conduct comparative or aggregate analysis (stress tests). With the increased emphasis being placed on macroprudential surveillance, DNB needs to introduce more standardized and more granular reporting to facilitate this type of analysis. In addition, the standardized data currently collected by DNB is mainly at the consolidated level and does not contain sufficient solo reporting for “relevant entities” that are part of the consolidation group. DNB needs the data to be able to identify risks that arise in particular group companies as well as at the consolidated group level. The required extension of the supervisory reporting framework may imply that DNB’s legal powers to collect data need to be extended.

64. On-site inspections are not held according to a fixed schedule. The frequency of visits to individual banks is determined according to available resources and risk analysis. Examination findings are discussed with the bank concerned and subsequently recorded in a senior management letter. Comprehensive on-site examinations are not conducted on the largest banks. Instead, they are subject to thematic risk-based examinations on specific aspects of their operations, such as governance structure, risk management, asset and liability management, internal audit, integrity and compliance, and IT. In light of the financial crisis, DNB should consider supplementing these thematic examinations with periodic broader scope examinations with the intention of gaining a comprehensive understanding of the interaction of risks within a particular financial group.

65. Among the main shortcomings of the supervisory process in the pre-crisis period would appear to be that DNB did not sufficiently integrate the vulnerabilities identified in the course of its financial stability assessments with its supervision of individual banks. DNB was not unique among supervisors in lacking this perspective. The measures currently being adopted by DNB should go some distance towards remedying these shortcomings. For the purposes of compliance with the relevant Core Principles, however, the assessors are satisfied that DNB’s practices were in accordance with those envisaged when the Basel Core Principles were last revised in 2006.

E. Accounting and Disclosure (CP 22)

66. Netherlands banks are required to compile their financial statements in accordance with either IFRS (for publicly listed banks) or the DCC (for banks that are not publicly listed), the disclosure provisions of which are substantially the same as IFRS. In practice, many non-publicly listed banks voluntarily apply IFRS. Under the Twin Peaks structure, responsibility for monitoring compliance with accounting and disclosure standards is primarily with the AFM. However, DNB conducts a regular dialogue with both the auditors of individual banks and the accounting profession more generally. It has also established a comprehensive set of disclosure standards for banks based on Basel II, Pillar 3.

F. Corrective and Remedial Powers of Supervisors (CP 23)

67. The AFS provides DNB with a comprehensive set of intervention powers. However, in the past, DNB has not invoked its powers to the full, preferring instead to deal with emerging problems through the use of “moral suasion” rather than formal enforcement measures. While this technique of supervision may have been relatively successful in the past, the evidence suggests that in recent years moral suasion has become a much less effective tool, in part due to changes in the structure and ownership of the Netherlands financial system. DNB has recognized the shortcomings of moral suasion and has embarked on project VITA to ensure that its supervision becomes more “intrusive and conclusive.” The assessment team supports the objectives of this initiative and encourages DNB to make further progress on implementing it. In particular, there is a need to ensure that supervisory staff are fully aware of the range of legal powers at their disposal and that they should be prepared to use those powers whenever necessary.

68. With regard to resolution powers, DNB currently does not have at its disposal the full range of instruments that are necessary to conduct the orderly resolution of banks. Although DNB is empowered to give directions or appoint a special administrator to a problem bank, there exist no instruments to force an orderly resolution without shareholder approval. The MoF and DNB are jointly working on legislation to introduce additional crisis management tools, including the option of being able to transfer deposits of a failing bank to another bank. The assessment team also supports this initiative and encourages DNB and MoF to finalize this work as soon as practicable.

G. Consolidated and Cross-Border Banking Supervision (CPs 24–25)

69. DNB undertakes banking supervision on both a consolidated and on a solo basis in accordance with the CRD. In practice, supervisory activities are performed on both a consolidated and a solo basis, including quarterly returns provided by the banks, capital adequacy calculations, large exposures, exposures to related parties, and the supervisory review process. DNB also possesses extensive information-gathering powers with respect to subsidiaries and affiliated companies of a bank, and has the power to review the overall activities of a banking group, both domestic and cross-border. DNB also works in close cooperation with the AFM. If foreign affiliates or subsidiaries are involved, memorandum of understanding (MoUs) with foreign supervisors or colleges of supervisors facilitate the exchange of information between the supervisors.

70. DNB has recently taken measures to enhance the functioning of the college of supervisors arrangements in line with the recommendations of the Financial Stability Board (FSB). There are currently 14 colleges in place for banks, banking groups or financial conglomerates, which have regular exchanges of information and conference calls and meet at least once a year. For eight of the (largest) banks, operating on a cross-border basis, a multilateral written agreement is signed between members of the respective colleges. These agreements provide for further formal arrangements for home and host supervisors.

71. Although DNB has the necessary legal and regulatory powers to apply effective consolidated supervision of cross-border banking groups, there have been examples where DNB appears to have relied to a large extent on the supervision exercised by the host supervisor. Within the current institutional framework and the resulting division of home-host responsibilities as well as the general resources constraint under the risk based approach it would appear that DNB could intensify its capacity towards large, diversified cross-border groups to the degree of intensive scrutiny that their risk profiles warrant. The constraints on supervisory resources noted in relation to CP 1(2) above, may have contributed to this state of affairs. DNB may wish to consider strengthening the resources it devotes to its oversight of subsidiaries located outside the Netherlands and its practices and procedures for obtaining relevant information concerning their operations and the risks that they pose to the group.

Table 1.

The Netherlands: Summary Compliance with the Basel Core Principles–Detailed Assessments

article image
article image
article image
article image
Table 2.

The Netherlands: Detailed Assessment of Compliance with the Basel Core Principles

article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
Table 3:

The Netherlands: Summary Table of Basel Core Principles Compliance

article image
Source: IMF Team

H. Recommended Action Plan and Authorities’ Response

Recommended action plan

Table 4.

The Netherlands: Recommended Action Plan to Improve Compliance with the Basel Core Principles

article image
article image

Authorities’ response to the BCP assessment

72. The Dutch authorities want to express their appreciation to the IMF and the assessment team for their comprehensive work. The Financial Sector Assessment Program has been a useful exercise. The worldwide experience of the IMF and the use of a common methodology have delivered a useful insight in the current state of financial regulation and supervisory practice in the Netherlands.

73. The authorities welcome the overall assessment that indicates a high level of observance of banking supervision with the well respected Basel Core Principles of Effective Banking Supervision. Notwithstanding this good result, the developments in the financial sector and the experience from the global financial crisis continue to call for vigilant action. The recommendations of the IMF are therefore well received and will be considered carefully by the authorities in their continuous efforts for strengthening supervision.

74. Since the conclusion of the FSAP-mission, several initiatives have already been taken up. As the report already indicates, DNB has initiated a reform program to make its supervisory approach more intrusive and conclusive. This includes the creation of a new supervisory division within DNB since January 2011 that comprises several expertise centers and a separate department with a focus on intervention policy. In addition, the Ministry of Finance has published in March 2011 draft legislation for consultation to strengthen the formal powers of DNB.

75. In February 2011, DNB has published its supervisory themes for 2011. In addition to its continued focus on strategy and conduct of business, the implementation of the new supervisory framework and strengthening risk management, the further strengthening of data collection has been identified as a specific theme that will require extra attention.

76. The Minister has recently announced proposals with regard to the institutional framework and the division of responsibilities between the Ministry of Finance and the supervisors. Also, the Ministry of Finance and the Ministry of Justice are exploring the possibilities to limit the liability of the financial supervisors by explicitly laying down the limitation in legislation.

77. The FSAP-analysis rightfully points out that the Dutch financial sector is characterized by large and internationally orientated institutions. This results in several challenges, as reflected in the recommendations with regard to consolidated supervision and available resources. The recommendations are well received. Progress needs to be realized within the current international institutional framework with the division of supervisory responsibilities between home and host supervisors. In that context, DNB will continue to strengthen its international cooperation, both bilaterally as well as in colleges of supervisors and crisis management groups. In addition, DNB will increase its supervisory resources, as recommended by the IMF, although available resources will remain constrained compared to the size of the financial sector and it will continue to be necessary to set priorities on the basis of a risk-based approach.

78. With regard to the assessment of BCP-principle 11 (“exposures to related parties”), DNB notes that its current practice contains more than an informal approach based on moral suasion (paragraph 60). As part of the FINREP reporting requirements, institutions are required to report a standardized table to DNB on a regular basis. Moreover, institutions must assess and disclose the exposures to related parties in their annual accounts. As such, these exposures form an integral part of the annual discussion between DNB and the external auditor. The exposures will be assessed against the background of controlled and sound business operations. This enables DNB to establish that the credit institution has adequate limits with respect to intra group exposures. We have provided the IMF with evidence that this approach is actively enforced with use of its formal powers under the AFS.</