DUTCH CENTRAL BANK SUPERVISION OUTLOOK 2017
At the end of last year, the Dutch Central Bank (De Nederlandsche Bank (DNB)) published its Supervision Outlook 2017, which presents the DNB’s priorities relating to their supervision of financial industries. Furthermore, the document identifies the DNB’s view on the principal risks and challenges to the Dutch financial industry. This article summarises the contents of the DNB’s Supervision Outlook 2017.
The DNB identifies the following industry-wide risks and challenges: low interest rates; technological innovations; capacity for change; legislative complexity; terrorist financing, money laundering and sanctions; climate risks; and financial economic and political risks.
The financial institution-related supervision priorities of the DNB are based on the abovementioned risks and challenges. The document includes the DNB’s priorities for banks, insurers, investment firms, investment funds and payment institutions, which are discussed below.
The ongoing low interest rates and more stringent legislation may exert pressure on the profitability of banks. In that context, the following priorities apply in respect of banks:
■ Low interest rates: The DNB aims to create better awareness on the impact of ongoing low interest rates, and will identify whether banks adapt their risk profiles accordingly.
■ Ongoing amendment of legislation: The revisions of the Basel Committee are heading towards their end. The DNB will assist in declining unfunded differences in risk weightings for capital requirements performed by banks.
■ Phase-out of non-performing loans (NPLs): The DNB will be involved in the Single Supervisory Mechanism’s (SSM) harmonised process to phase-out NPLs by banks with too high levels of NPLs.
■ Reassessment of the internal models: The DNB will play a role in the SSM initiative to reassess internal models of significant banks on market risk, counterparty risk and credit risk. The reassessment will continue for two years.
■ Credit risk: The DNB will investigate the level of controlling credit risks of certain portfolios held by banks. The portfolios of focus for 2017 are loans granted to small and medium sized companies, commercial real estate loans, and commodities and trade financing.
The DNB recognizes that the insurance sector is facing big challenges. According to the DNB, limited technical innovation (FinTech), low interest rates and changing client behavior lead to structural changes in the insurance sector with the effect that insurers are compelled to re-invent themselves The following priorities apply in respect of insurers:
■ FinTech: The DNB recognizes that FinTech has great potential in the insurance sector. In this light, the DNB aims to investigate the potential impact of FinTech on insurers’ revenue models.
■ Stress tests of general insurers: To gain better insight into the risk exposure of general insurers, the DNB will conduct stress tests in 2017.
■ Product Approval and Review Process (PARP): According to the DNB, several general insurers have sold loss-making products, due to amongst others, high competition and pressure on profit margins. To gain better insight into this development, the DNB will investigate the extent to which loss making products are sold.
■ Risk management function: The DNB will investigate whether the implementation of the risk management function complies with the obligations for key functions addressed in Solvency II.
Investment firms and managers of investment funds
Expressing its concern on inadequate capital buffers, the following priorities apply in respect of investment firms and managers of investment funds:
■ Revenue models: The DNB will investigate revenue models. In light of the importance of ongoing legislative compliance, the DNB will particularly focus on how adjustments in revenue models affect compliance and risk within an institution. Furthermore, the DNB will investigate revenue models of asset managers that are part of a group of financial institutions.
■ Liquidity-risk open-end investment funds: The DNB will perform stress tests to identify investment funds with serious liquidity risks. If any such funds are identified, the DNB will approach those funds to require them to mitigate these risks.
■ On-site investigations: The DNB intends to perform on-site investigations at large investment firms and investment fund managers. The DNB will inter alia investigate risks in the revenue models, outsourcing risks, IT risks and the internal models for the calculation of capital of these firms. Payment institutions The DNB recognises that the market for payment services is changing rapidly and that competition is strong. The following priorities apply for payment institutions:
■ Vulnerable payment institutions: Vulnerable payment institutions will be asked to take measures in order to make their profit models future-proof or to choose for a controlled exit.
■ Recovery and exit plans: In order to be aware of the recovery options at an early stage, the DNB will ask payment institutions to draft recovery and exit plans.
■ Integrity: The DNB believes that payment institutions give too little priority to integrity risks. The integrity supervision of the DNB will focus, amongst others, on systematic integrity risk analysis, the prevention of terrorism financing and compliance with the Dutch Law on sanctions (de Sanctiewet).
■ Medium-sized and large payment institutions: In 2017, the DNB will increase its supervisory capacity to intensify supervision on medium-sized and large payment institutions