In Summer 2011 the Ministry of Finance published an interim report on the policies to be adopted on the separation of commercial banking, investment banking and proprietary trading activities of banks.
This interim report was prepared following discussions between the minister of finance and Parliament after the publication of the UK Banking Commission's interim report chaired by Sir Vickers in April 2011 and comparable initiatives in the United States, such as the adoption of the Volcker Rule.(1) The UK Banking Commission's final report, published in Autumn 2011,(2) resulted in further debate in the Dutch Parliament. In a March 6 2012 letter to Parliament, the minister of finance outlined the possible introduction of legislation that would force banks to separate different business lines if they were combined in a single banking organisation or banking group.
The minster confirmed that the Dutch action plan is similar to that of the UK Banking Commission. In both plans the capital raising requirements, the central clearing of derivatives, liquidity management rules and an enhanced crisis management framework are highlighted as important elements in the move towards an improved regulatory environment for resilient banks.
In line with the UK Banking Commission's recommendations, Dutch banks facing a crisis that cannot be resolved should be subject to proper resolution procedures that allow for ring fencing and separate resolution of activities. However, the Dutch regime will differ from that proposed by the UK Banking Commission because Dutch banks are exposed to a larger retail funding gap than UK banks. Dutch retail and corporate depositors save more with pension funds and life insurers than is the case in the United Kingdom. The aggregate savings of retail depositors and corporate depositors with pension funds and life insurers is estimated at 70% of total savings. Therefore, Dutch banks are more exposed to wholesale funding and direct capital market funding; the business model of Dutch banks also generally makes them dependent on wholesale business activities. Applying ring-fencing methods, as suggested by the UK Banking Commission, to Dutch banks would thus result in adverse consequences. Further, Dutch banks generally have no international investment banking activities representing significant parts of their balance sheets.
The outright separation of investment banking and commercial banking will not be pursued, as far as the Ministry of Finance is concerned. Ring fencing and the forced hive-down of activities in crisis situations will be modelled to reflect the typical organisational and business aspects of Dutch banks. In this regard, the Dutch legislation will likely differ from the UK legislation.
The minister also dismissed the introduction of stricter capital requirements for banks that would deviate from Basel III and the EU Capital Requirements Directive. Dutch banks that are systemically important to the domestic markets will be subject to a generic additional capital requirement of up to 3%. Dutch banks that are considered to be systemically important to the global markets may face comparable additional capital requirements, following on from the November 2011 recommendations of the Financial Stability Board and the recent Basel Committee on Banking Supervision proposals. The Ministry of Finance does not propose to set a higher level of core Tier 1 capital as follows from the Basel III/EU Capital Requirements Directive requirements and the requirements for systemically important institutions. Therefore, the core Tier 1 level of capital for Dutch banks will remain at 7% for ordinary banks and a maximum of 10% for systemically important banks.
With the support of the Central Bank, which wrote a letter on this subject to the Ministry of Finance on February 21 2012, the minister of finance also dismissed the implementation of regulations similar to the Volcker Rule – which prohibits proprietary trading by banks – as irrelevant in the Dutch context. The minister believes that the supervisory model that has developed in the United States following the implementation of Section 619 of the Dodd-Frank Act is too complex. In the Dutch financial industry, the development of large trading portfolios and significant proprietary trading is conducted by specialist proprietary traders which have no retail or wholesale banking or investment firm activities. Therefore, in the Netherlands, the separation of these activities is already a reality and a customary way of organising business.
The minister further indicated that the strict regime introduced under the previous version of the EU Capital Requirements Directive governing capital adequacy levels for trading portfolio positions is sufficient to prevent banks from conducting excessive trading activities for their own account. If the high-level expert group considering structural aspects of the EU banking sector (established on January 16 2012 and chaired by Erkki Liikanen) recommends alternative regulation, the Ministry of Finance may reconsider this position.
On March 27 the Dutch Parliament continued the debate on the desirability of legislation that would separate commercial banking from investment banking. It appears that a majority of members of Parliament are unconvinced by the points made in the minister's letter, and have demanded that the minister establish an expert committee to investigate the potential need for new legislation that would strengthen depositor protection.
For further information on this topic please contact Bart PM Joosen at FMLA Financial Markets Lawyers by telephone (+31 20 348 52 00), fax (+31 20 348 5201) or email ([email protected]).
(1) See www.sec.gov/rules/proposed/2011/34-65545.