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© 2011 International Monetary Fund

July 2011

IMF Country Report No. 11/208

Kingdom of the Netherlands-Netherlands: Publication of Financial Sector Assessment Program Documentation—Technical Note on Financial Sector Supervision: The Twin Peaks Model

This Technical Note on Kingdom of the Netherlands-Netherlands was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on June 27, 2011. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of Kingdom of the Netherlands-Netherlands or the Executive Board of the IMF.

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Front Matter Page

Financial Sector Assessment Program Update

Kingdom of The Netherlands-Netherlands

Financial Sector Supervision: The Twin Peaks Model

Technical Note

June 2011

International Monetary Fund

Monetary and Capital Markets Department

Contents

• Glossary

• Executive Summary

• I. Background

• II. Twin Peaks Model in Practice

• III. Twin Peaks Model During the Crisis

• IV. Twin Peaks Model Going Forward

• V. Conclusions and Recommendations

• Table

• 1. Selected Examples of Objective-Based Supervisions

• Box

• 1. Strengthening Prudential Supervision Under the “Twin Peaks” Supervisory Framework: Reforms and Actions

Glossary

Executive Summary¹

The Dutch “twin peaks” model of supervision, with the Netherlands Central Bank (DNB) as prudential supervisor of all financial institutions and the Authority for Financial Markets (AFM) responsible for conduct-of-business supervision, was introduced in 2002. The full transition to the “twin peaks” was completed in 2007, with the introduction of the Act for Financial Supervision (AFS). The Dutch “twin peaks” model has been adopted for implementation, in whole or in part, in many countries, reflecting increasing dominance of large and complex financial institutions (LCFIs) and interconnectedness of their activities and the need to enhance macro-prudential supervision with its focus on systemic risks.

Although the global financial crisis has seriously affected the Dutch financial sector, the case for the “twin peaks” model remains strong for the Netherlands. The crisis has severely affected the Dutch financial institutions, resulting in extraordinary official support that was, as a share of GDP, among the highest in the world. Nonetheless, the crisis has demonstrated that with both micro and macro prudential supervision consolidated within DNB, it was able to take a systemic view across the financial sector and act quickly and decisively during the crisis.

The integration of prudential supervision with the central bank enables the supervisory function to draw on the long standing credibility of the central bank as it ventures into new and highly challenging areas, most particularly that of the identification, development, adoption and enforcement of macroprudential indicators. At a time when there needs to be public acceptance of good conduct-of-business practices, and a history of aberrations from such practices, the existence of an experienced and credible separate agency specifically for this purpose, can make an important contribution to restoring the credibility and standing of the financial institutions, enabling them once again to make their proper contribution to economic growth in the Netherlands.