An extract from The Banking Regulation Review, 12th Edition
Prudential regulationi Relationship with the prudential regulator
The ECB is the prudential supervisor of the most significant Dutch banks, while the DCB is the direct supervisor of less significant banks.9 The ECB has far-reaching investigatory and supervisory powers under the Single Supervisory Mechanism (SSM) Regulation.10 In addition, the ECB has at its disposal the supervisory powers granted to the DCB under the FMSA. To the extent necessary to carry out the tasks conferred on it by the SSM Regulation, the ECB may require the DCB to use these powers. The ECB is also exclusively responsible for the withdrawal of a banking licence of both significant and less significant Dutch banks.
The DCB will, in principle, exercise its enforcement powers under the FMSA regarding the banks that are identified as less significant. Under the FMSA, the DCB is entitled to enter any place for inspection and may request information from any party. The DCB is also entitled to request business data and documents for inspection and to make copies of these. Everyone is obliged to fully cooperate with the DCB.
If the DCB concludes that a bank has violated a rule under the FMSA or an EU regulation, it may take enforcement action. The DCB can choose from various enforcement measures and sanctions, including but not limited to:
- imposing a certain course of action to comply with the FMSA (instruction order);
- appointing one or more persons as trustee over all or certain bodies or representatives of a bank;
- imposing a particular duty, backed by a judicial penalty for non-compliance;
- imposing an administrative fine;
- publishing an imposed duty or fine on the DCB's website and by press release;
- imposing a suspension of voting rights of shareholders or partners responsible for a breach of a bank's licence or declaration of no objection requirement (see Section VI);
- imposing a temporary ban against a natural person from exercising his or her functions; and
- imposing higher solvency or liquidity requirements and the termination of banking business activities with a high risk to the solidity of the banks.
The liability of the DCB (and the AFM) under the FMSA is limited to wilful misconduct and gross negligence. The DCB (and the AFM) has had extensive powers to publish warnings and decisions in the event of infringements of the FMSA and to periodically publish overviews of key data of individual banks.11ii Management of banks
Most Dutch banks are limited liability companies. Although a statutory basis exists for the creation of a one-tier board structure, limited liability companies in the Netherlands traditionally have a two-tier board structure composed of a managing board and a supervisory board. The managing board is responsible for carrying out the company's day-to-day affairs. As such, a bank's managing board is responsible for compliance with the FMSA. Rules on managing and supervisory boards and their members are set out in great detail in various EU, ECB and DCB guidelines.12 They contain guidance as regards, inter alia, integrity and suitability, sufficient time commitment, independence, supervisory board committees and their composition, and on the maximum number of executive and non-executive positions a board member may hold. The DCB also has a specific position in relation to the independence requirements of members of a bank's supervisory board.13
The managing and supervisory boards are jointly responsible for compliance (on a comply or explain basis) with the Dutch Corporate Governance Code (if applicable) and the Dutch Banking Code. Adherence to the former is mandatory for listed Dutch banks.14 It includes principles that are held to be generally accepted, as well as detailed best practice provisions relating to both managing and supervisory boards, general meetings, the auditing process and the external auditor.15 The Banking Code contains principles that are based on the Corporate Governance Code, but focuses on the managing and supervisory boards, risk management, auditing and remuneration policy of banks.16 The Banking Code applies to all banks with a banking licence under the FMSA, and compliance is monitored by a special monitoring commission. The Dutch Banking Association recommends that the Banking Code be applied by all entities that operate in the Netherlands (irrespective of their country of incorporation), including banks operating under a European passport.Restrictions on remuneration
A far-reaching act on financial sector remuneration has been in force since 2015. One of the most important restrictions is the bonus cap, which holds that the variable remuneration of all persons working under the responsibility of banks with their registered office in the Netherlands, and Dutch branches of banks outside the EEA, may not exceed 20 per cent of the fixed component. Several exceptions apply, including for persons working predominantly in another country, for persons working for the EEA top holding of a group whose staff work predominantly in another country, for persons falling outside the scope of collective labour agreements and, subject to approval by the DCB or the ECB, for retention bonuses. In such cases, the maximum variable remuneration is as set out in CRD IV: 100 per cent of the fixed component or, depending on the exception, 200 per cent subject to shareholder approval.
Severance payments are also restricted. Moreover, the supervisory board may (and under certain circumstances must), inter alia, claw back bonuses where payment was based on incorrect information or the non-achievement of underlying objectives, and revise bonus payments if these were unacceptable according to standards of reasonableness and fairness. The rules also provide for a statutory ban on bonuses for management (and certain others) of state-aided banks. In 2017, the DCB introduced a tweak to the bonus cap in that the international holding exemption would be available not only to Dutch global top holdings of financial groups but also to EEA top holdings, thus making the Netherlands more attractive for EEA top holdings of non-EEA financial groups.
Following an evaluation of the remuneration rules in 2018, the Minister of Finance submitted a legislative proposal to parliament in July 2020 that would introduce a number of restrictions to fixed pay, in addition to the existing restrictions of variable pay discussed above.17 Directors and employees in the financial sector who receive part of their fixed pay in shares or similar instruments whose value depends on the performance of the company will have to retain these for at least five years. Furthermore, financial undertakings will have to describe in their remuneration policy how the remuneration of their directors and employees is proportional to the firm's role in the financial sector and its position in society. Finally, the exception from the bonus cap for persons falling outside the scope of collective labour agreements will be restricted. The next evaluation will be scheduled in 2023.iii Regulatory capital and liquidity
Rules of prudential supervision are provided for in the CRR and its various regulatory and implementing technical standards on a European level, and in the FMSA, the Decree on Prudential Supervision FMSA and regulations issued by the DCB on a national level. These rules relate to, inter alia, regulatory capital, liquidity and additional supervision with respect to financial conglomerates.Regulatory capital
Licensed banks are required to be sufficiently capitalised. A bank's capital is sufficient if the bank complies with the requirements set out in Part 3 of the CRR. These requirements include both quantitative requirements (i.e., a Common Equity Tier 1 (CET1) capital ratio of 4.5 per cent of the bank's risk-weighted assets (RWA), a Tier 1 capital ratio of 6 per cent of a bank's RWA and a total capital ratio of 8 per cent of a bank's RWA) and qualitative requirements (conditions that own-fund items and subordinated liabilities must meet to qualify as CET1 capital, Additional Tier 1 capital or Tier 2 capital). The DCB or the ECB also impose an additional bank-specific Pillar 2 buffer following the supervisory review and evaluation process when they identify risks not adequately covered by the standard capital requirements. In addition, the DCB and the ECB also communicate their expectations for banks to hold additional own funds in the form of capital guidance. In 2018, the ECB published guidance setting out its expectations of banks' internal capital adequacy assessment process.18
In view of the systemic risk in the Dutch housing market, in October 2019 the DCB also consulted on a measure introducing a capital floor to the risk weighting of mortgage loans.19 The measure was expected to enter into force in the course of 2020 but has been postponed in view of the coronavirus pandemic until at least the end of 2021. The DCB clarified that the measure will not come on top of the similar capital floor that will be introduced by the Basel III reform package.Capital buffers
CRD IV prescribes four capital buffers:
- a capital conservation buffer equal to 2.5 per cent CET1 capital;
- an institution-specific countercyclical capital buffer (CCyB) of, in principle, between zero and 2.5 per cent CET1 capital;
- a global systemically important institutions (G-SII) buffer of, in principle, between 1 per cent and 3.5 per cent CET1 capital; or an other systemically important institutions (O-SII) buffer of, in principle, between zero and 2 per cent CET1 capital; and
- as a Member State option, a systemic risk buffer (SRB) of, in principle, between 1 per cent and 3 per cent CET1 capital.
Previously, with regard to the G-SII, O-SII and SRB, in principle only the highest of the three applied. Since December 2020, however, under CRD V, the G-SII or O-SII buffer has become cumulative to the SRB. To keep capital requirements constant, the DCB has indicated that it will reduce the SRB to zero per cent and apply O-SII buffers of 2.5 per cent to ING, 2 per cent to Rabobank, 1.5 per cent to ABN AMRO and maintain an O-SII buffer of 1 per cent for de Volksbank and BNG Bank. In the Netherlands, the G-SII buffer only applies to ING (1 per cent). In addition, the DCB has indicated that it will gradually increase the CCyB, which has been at zero per cent since its introduction in 2016, to 2 per cent.
Banks can be subject to a combination of buffers, referred to as the combined buffer requirement. When banks fail to meet the combined buffer requirement, specific restrictions apply and certain measures may be imposed, such as a limitation to make distributions or payments in connection with their CET1 and Additional Tier 1 instruments, and the required production of a capital conservation plan.Dividends
In normal times, restrictions to distributions only apply if banks fail to meet the combined buffer requirement, as set out above. In March 2020, however, the ECB strongly recommended that banks do not pay out dividends for the financial year 2019 and 2020 and refrain from share buy-backs aimed at remunerating shareholders. Instead, banks were to conserve capital to retain their capacity to support the economy in an environment of heightened uncertainty caused by the covid-19 crisis.20 This recommendation was extended in October 2020. In December 2020, the ECB recommended that banks continue to refrain from paying out dividends until at least September 2021, although subject to conditions, dividends of up to 15 per cent of profits could be made. The recommendations are also applied by the DCB.Liquidity
Banks must hold a sufficient amount of liquid assets.21 On the basis of the CRR, two liquidity requirements apply: the liquidity coverage ratio (LCR) and stable funding requirements. The LCR, as further specified in the LCR delegated regulation, has a binding minimum of 100 per cent.22
For the stable funding requirement, only a general rule currently exists, requiring institutions to ensure that their long-term obligations are adequately met with a diversity of stable funding instruments under normal and stress conditions. A binding minimum standard for a net stable funding ratio (NSFR) of 100 per cent is included in CRR II and will become applicable as of June 2021.
In addition to these requirements, the DCB normally also imposes bank-specific liquidity requirements as part of a bank's Pillar 2 requirement, such as regarding specific liquidity survival periods and diversification of sources of funding and liquidity, including through an NSFR proxy requirement. In November 2018, the ECB published a guide to the internal liquidity adequacy assessment process for significant banks.23Leverage ratio
Banks are required to calculate their leverage ratios in accordance with the methodology set out in Part 7 of the CRR, report them to the relevant supervising authority and disclose them. CRR II introduces a binding minimum leverage ratio of 3 per cent, which will become applicable as of June 2021. In addition, CRR II introduces an additional leverage ratio buffer requirement for G-SIIs, applicable as of January 2022. The Dutch government has argued for the extension of this buffer to O-SIIs. However, CRR II only includes an instruction to the Commission to carry out an appropriateness study for such extension.Consolidated application of regulatory capital and liquidity requirements
The above-mentioned capital, liquidity and leverage requirements apply to banks on both an individual and consolidated basis. The DCB or ECB may, when certain criteria are met, waive the requirement to comply on an individual basis. The capital and leverage requirements apply on the basis of the consolidated situation of a bank's highest holding entity in each Member State and in the EU as a whole. The liquidity requirements must be met on the basis of the consolidated situation of the highest holding entity in the EU. In addition, the application of the capital requirements on a sub-consolidated basis applies in the case of subsidiary banks, investment firms and financial institutions in a third country.
Since December 2020, CRD V has brought financial holding companies and mixed financial holding companies directly within the scope of the EU prudential framework by introducing an approval requirement along with direct supervisory powers. These holdings will become directly responsible for ensuring compliance with regulatory requirements on a consolidated level. An exemption from the approval requirement is available under conditions, including that the holding company's activities are limited to acquiring holdings and that it does not engage in management, operational or financial decisions affecting the group.Supplementary supervision of banks in a financial conglomerate
The Financial Conglomerates (FICO) Directive was implemented in the FMSA and the Decree on Prudential Supervision of Financial Groups FMSA.24 The FICO Directive introduced the supplementary supervision of banking (insurance and investment) activities carried out in a financial conglomerate. The rules relate, inter alia, to supplementary capital adequacy requirements, risk concentration, intra-group transactions, internal control mechanisms and risk management processes. The holding company of a financial conglomerate must calculate the supplementary capital adequacy in accordance with certain methods described under the FMSA.iv Recovery and resolutionBank Recovery and Resolution Directive and Single Resolution Mechanism Regulation
The Dutch Act implementing the Bank Recovery and Resolution Directive (BRRD) entered into force in 2015, and the Single Resolution Mechanism Regulation (SRMR) became fully applicable in 2016.25 These two legal acts, with the international agreement on the transfer and mutualisation of contributions to the Single Resolution Fund, provide a comprehensive European framework for the recovery and resolution of banks. Both the BRRD and the SRMR were amended in 2019 by the Banking Reform Package, resulting in BRRD II and SRMR II.26 The amendments, in particular, included a substantial revision of the minimum requirement for own funds and eligible liabilities (MREL) requirements, so as to align them with the international standard for total loss-absorbing capacity (TLAC) set by the Financial Stability Board. The changes took effect for G-SIIs in June 2019 and for other banks in December 2020.
The rules aim to ensure that:
- banks and authorities make adequate preparation for crises;
- supervisory authorities are equipped with the necessary tools to intervene at an early stage when a bank is in trouble;
- resolution authorities have the necessary tools to take effective action when bank failure cannot be avoided, including the power to bail-in creditors; and
- banks contribute to an ex ante funded resolution fund.
The DCB has been designated as the national resolution authority for the Netherlands. However, on the basis of the Single Resolution Mechanism, for significant banks and other cross-border groups in the eurozone, the Single Resolution Board (SRB) is the competent resolution authority in cooperation with the national resolution authorities. In a 2017 communication, the DCB set out a number of technical details on how it intends to use the bail-in tool.27 For example, conversion of liabilities by bail-in will result in the creation of claim rights, which are transferable and entitles holders to new shares once issued.
During the course of 2020, the SRB and the DCB continued the process of drafting resolution plans for the major Dutch banks and of setting each bank's MREL requirements. The SRB also continued to further develop its MREL policies in line with the requirements of BRRD II and SRMR II. In December 2020, the Eurogroup agreed to introduce a 'common backstop' to the Single Resolution Fund in the form of a revolving credit line from the European Stability Mechanism.Deposit insurance
The Dutch deposit insurance framework is based on the (third) Deposit Guarantee Scheme (DGS) Directive, which has been in force since 2015.28 The framework comprises an ex ante funded guarantee scheme to which banks must contribute on a quarterly basis. The fund should reach a target level of 0.8 per cent of insured deposits. The guarantee covers natural persons and businesses, with the exception of financial undertakings and governments, for an amount up to €100,000. The DCB adopted a number of more detailed rules in relation to the Dutch DGS. Most importantly, the DCB introduced a new payout system in which banks must compile and deliver a uniform single customer view, containing an overview of customers' deposits and other relevant data. The new system will enable the DCB to meet the requirement of the DGS Directive that, by 2024, the payout of insured deposits must be made within seven business days of a bank's failure.29 In August 2019, an act supported by the Dutch banking sector entered into force clarifying that banks can use customers' personal identification numbers in implementing their DGS obligations.30
Progress on the European Commission's proposal for a European Deposit Insurance Scheme, first circulated in 2015 to reinforce deposit protection by mutualising national deposit guarantee funds in the eurozone, remained slow in 2020, as it had been in previous years. A number of Member States, including the Netherlands, insist that further risk reduction must precede further risk sharing.Dutch Intervention Act
The Dutch Intervention Act grants powers to the Minister of Finance to take emergency measures in times of serious and immediate danger to the stability of the financial system. These include the temporary suspension of shareholder voting rights, the suspension of management or supervisory board members, and the expropriation of assets or liabilities of a bank or its parent companies with a corporate seat in the Netherlands.