Prudential regulationi Relationship with the prudential regulator
Supervision of the Belgian banking and financial sector is based on the twin peaks model. Since 1 April 2011, the NBB has been responsible for the prudential supervision of Belgian credit institutions. The Financial Services and Markets Authority (FSMA) (which replaced the former prudential bank regulator, the CBFA) is in charge of supervising the financial markets (including listed companies as well as financial products, services and intermediaries), and has heightened powers as regards consumer protection and financial information.
As regards the prudential supervision of credit institutions, the Banking Act must now be read in conjunction with the SSM Regulation of 15 October 2013, which provides for the allocation of supervisory powers between the European Central Bank (ECB) and the NBB. For more information about the applicable rules, see the European Union chapter.
In practice, the ECB is responsible for the prudential supervision of significant credit institutions (i.e., those that meet one of the criteria set out in Article 6 of the SSM Regulation). In addition, the ECB has the power to grant and withdraw the licence of any credit institution, regardless of its size, and to assess the transfer or acquisition of qualifying holdings in a credit institution. In carrying out its supervisory duties, the ECB may apply not only European directives and regulations but also the Belgian legislation applicable to credit institutions, including the Banking Act. In principle, the NBB remains responsible for the supervision of less significant institutions. Practical arrangements for the implementation of SSM cooperation between the ECB and the national authorities (such as the NBB) are specified in the SSM Framework Regulation of 16 April 2104.
At the macroprudential level, the NBB is, without prejudice to the powers of the ECB, responsible for ensuring the stability of the financial system as a whole. To achieve this objective, the NBB has been entrusted with the following tasks: the detection and monitoring of various factors and developments that may affect the stability and robustness of the financial system (e.g., an accumulation of systemic risks); and the issuance of recommendations on measures to be implemented by the competent national authorities, the ECB or other EU authorities to contribute to the stability of the financial system.
In addition, in carrying out its macroprudential duties, the NBB may use any of the following (non-exhaustive) measures: imposing additional or stricter own funds or liquidity requirements; imposing additional or stricter limits on the total level of activity of institutions as a percentage of their own funds (leverage ratio); or imposing asset valuation rules different from those normally imposed under the applicable accounting rules.
Before adopting any of these measures, the NBB must inform the European Systemic Risk Board, the European Commission and the ECB.
At the microprudential level, the supervisory authority (i.e., the ECB or the NBB, depending on whether the credit institution is considered significant under the SSM Regulation) is responsible for ensuring that credit institutions comply with all provisions of the Banking Act and its implementing decrees and regulations, and the directly applicable EU regulations. To fulfil its role, the supervisory authority may request any information concerning an institution's organisation, functioning, situation or transactions; carry out inspections at the institution's premises (including branches in another EEA Member State, provided the competent authority in the host state is informed beforehand) and make copies of all relevant information; and ask an expert to conduct investigations on its behalf at the institution's expense.
In addition, credit institutions must notify the supervisory authority in advance of any strategic decision they intend to take. The supervisory authority then has two months to object, which it may do if it considers the decision to violate any provision of the Banking Act or to be incompatible with sound and prudent management, or if it feels that the decision could have a significant impact on the stability of the financial system.
The supervisory authority may send a formal notice to a credit institution – whether systemically important or not – asking it to remedy a situation if it considers that the credit institution is not acting in accordance with the provisions of the Banking Act or its implementing decrees and regulations, the Capital Requirements Regulation (CRR), the Markets in Financial Instruments Regulation or the Commission Delegated Regulation supplementing MiFID II, or if it considers that the credit institution could fail to comply with any of these instruments in the next 12 months. The supervisory authority may set a deadline by which the credit institution must remedy the situation.
If the credit institution has not remedied its situation, the supervisory authority may:
- impose additional or stricter own funds and liquidity requirements;
- require that all or some distributable profits be booked as reserves;
- order that variable remuneration be capped at a percentage of the institution's profits; or
- require the credit institution to reduce the risks related to certain types of activities or products or to its organisation, if necessary by imposing the sale of all or part of its business.
In addition, the supervisory authority may, at any time, request the credit institution to implement all or part of a recovery plan.
If the institution fails to remedy the situation, the supervisory authority may take any of the following (non-exhaustive) measures:
- appoint a special commissioner to approve some or all of the institution's decisions;
- require the replacement of some or all of the institution's directors or managers, or appoint interim directors or managers;
- suspend or prohibit some or all of the institution's activities for a certain period of time (including the total or partial suspension of existing contracts);
- order the disposal of shareholdings held by the institution; or
- revoke the institution's licence.
If the supervisory authority takes any of the above-mentioned actions against a credit institution with a branch in another EEA Member State or that provides cross-border banking services in the EEA, it must inform the host country's competent authority of the measures taken, without delay.
If the supervisory authority finds that an EEA credit institution providing banking services in Belgium, either through a branch or on a cross-border basis, does not comply with its obligations in Belgium, it must notify the competent authority in the home country. If the credit institution continues to act in a way that is clearly prejudicial to the interests of Belgian investors or to the proper functioning of the markets, the supervisory authority may take any of the measures listed under points (a), (b) or (c), above, if the institution acts through a Belgian branch, or under (c) if the institution acts on a cross-border basis. With regard to the supervision of Belgian branches of non-EEA credit institutions, the NBB can exercise the same powers and tools as it does for Belgian credit institutions.
If a credit institution has ceased providing banking services for more than six months or has been declared bankrupt, the ECB will revoke the institution's licence.ii Management of banks
To ensure the efficient and prudent management of their activities, credit institutions must have a solid and adequate business organisation. In particular, they must have:
- an appropriate management structure based on a clear and transparent allocation of functions, powers and responsibilities within the institution;
- an adequate administrative and accounting organisation, and appropriate internal controls;
- efficient procedures for the identification, assessment, management, monitoring and internal reporting of risks to which the institution is likely to be exposed, including the prevention of conflicts of interest; and
- adequate independent internal audit, risk management and compliance functions.
Each financial institution must prepare and update a corporate governance memorandum containing information about its internal organisation.
In addition, credit institutions must establish four specialised committees within the board: audit, risk, remuneration and nomination. They are also required to establish a management committee. All members of the management committee must also be members of the institution's board of directors, which is responsible in this case for supervising the management committee's activities, determining a bank's general policy and strategy, and performing all other duties reserved to it by law. In particular, the board plays a key role regarding the implementation and control of the bank's risk appetite, assessment of its internal control mechanisms and verification of compliance by the institution with various regulations.
All managers and members of the board of directors must be natural persons. They are required to devote sufficient time to the exercise of their functions within the credit institution, and the external offices or functions they may hold or perform are subject to limitations. In addition, directors, managers and heads of independent control functions must be deemed fit and proper to carry out their duties at all times. An NBB circular of 18 September 2018 on the suitability of directors, members of the management committee, heads of independent control functions and senior managers of financial institutions provides additional insight into how the NBB interprets and assesses this requirement.
In December 2015, the NBB published a manual on the governance of credit institutions, describing the main governance requirements applicable to credit institutions with reference to all relevant policy documents (i.e., the Banking Act and its legislative history, Belgian regulations and circulars, European legislation and international standards). The NBB manual was updated in October 2018 to implement the EBA guidelines of 26 September 2017 on internal governance.
With respect to the remuneration of bank managers and employees, the Banking Act implements the requirements of the CRD IV. As a general rule, credit institutions must have a remuneration policy that ensures sound and prudent risk management and prevents excessive risk-taking. The remuneration policy should apply to all risk-takers (i.e., those whose professional activities have a material impact on the institution's risk profile (e.g., directors, managers, heads of independent control functions).
Annex II to the Banking Act provides that the variable remuneration of risk-takers must be capped at 50 per cent of their fixed remuneration when the latter exceeds €100,000. In addition, the Banking Act provides for penalties and clawback mechanisms in the event of considerable losses, non-compliance with the fit and proper standards, or participation in fraud. As regards golden parachutes, any compensation exceeding 12 months' remuneration must in principle be approved by the general meeting of shareholders. Furthermore, golden parachutes must reflect the actual performance of the beneficiary in the long term, and should not be granted in the event of shortcomings or irregular behaviour.iii Regulatory capital and liquidity
The CRD IV and the CRR, which transpose the Basel III standards into EU law, entered into effect on 17 July 2013. The Banking Act implements these regulations into Belgian law.
As a general rule, a credit institution must have a liquidity and capital requirements policy that is appropriate to its activities. To this end, the board of directors must define a prospective management policy that identifies the current and future liquidity and capital requirements of the institution. The policy must take into account the nature, volume and characteristics of the institution's activities and the associated risks. It should be regularly assessed and updated when necessary. If the supervisory authority learns that an institution's policy is not in line with its risk profile, it may impose additional solvency, liquidity, risk concentration or risk position requirements.
The equity structure of credit institutions is currently divided into Tier 1 (Common Equity Tier 1 and Additional Tier 1) and Tier 2 items. Tier 1 capital is considered to be going concern capital and is intended to allow an institution to conduct its activities and prevent insolvency. Tier 2 capital is known as going concern capital and consists of hybrid instruments, undisclosed reserves and subordinated debt. Its purpose is to absorb losses and repay depositors and creditors if the institution fails.
The Royal Decree of 25 November 2015 approving the NBB's regulation of 24 November 2015 determining the rate of the countercyclical Tier 1 capital conservation buffer entered into force on 1 January 2016. The countercyclical capital buffer is defined by the NBB as a macroprudential instrument designed to mitigate cyclical systemic risk and counter pro-cyclicality in lending. On 24 November 2015, the NBB set the countercyclical capital buffer at zero per cent. This decision is reassessed quarterly. As of 1 April 2019, the countercyclical capital buffer was still set at zero per cent.
The main consequence of the implementation of the CRD IV and the CRR for liquidity supervision of Belgian financial institutions is the transition from the NBB's liquidity ratios to the European LCR. The LCR aims to ensure, on the basis of a stress test, that financial institutions have sufficient liquid reserves to cope with outflows for a period of 30 days.iv Recovery and resolution
On 15 April 2014, the European Parliament adopted the BRRD, which provides common tools for addressing a banking crisis proactively and managing failures of credit institutions in an orderly way. The Banking Act, several royal decrees and the Act of 27 June 2016 amending the Banking Act transpose the provisions of the BRRD into Belgian law.
The Banking Act requires all credit institutions to implement and update a recovery plan. The plan must be analysed and approved by the institution's legal and administrative bodies, and should consider different scenarios (such as a serious financial or macroeconomic crisis) and provide for various measures – other than a state guarantee – to be implemented in the event of significant deterioration of the institution's financial situation. These measures should enable the institution to recover its financial position quickly and without negative effects. The recovery plan must be established within six months of the company being accredited as a credit institution, and must cover the credit institution as well as its Belgian and foreign subsidiaries. Its adequacy will be assessed by the competent supervisory authority, which may take specific measures if it finds that the plan does not meet the applicable statutory requirements (e.g., it may order the credit institution to adjust its risk profile or review its strategy and structure). On 21 March 2018, the NBB issued a communication setting out its expectations for the recovery plans of Belgian credit institutions and their parent undertakings. The communication also provides information on the structure and content of the plan.
The Act of 25 April 2014 on various provisions, which was adopted on the same day as the Banking Act, created a Resolution Authority within the NBB. The Resolution Authority is responsible for preparing the resolution plan provided for by the Banking Act. Rules on the functioning and organisation of the Resolution Authority are set out in the Royal Decree of 22 February 2015.
Pursuant to the Banking Act, the resolution plan defines the measures, other than a state guarantee, that may be implemented by the Resolution Authority in the following circumstances:
- failure of the credit institution is confirmed or expected;
- when it is unreasonable to believe that prudential action could prevent the failure of the credit institution within a reasonable period of time; and
- if a resolution measure is necessary in the public interest to ensure the continuity of the institution's critical functions, avoid disruption of the Belgian and international financial systems, and protect insured deposits.
The resolution plan must cover the credit institution as well as its Belgian and foreign subsidiaries.
Pursuant to the BRRD, as from January 2016, bank failures are in principle resolved by contributions from shareholders and creditors of the failing institution (bail-in), and no longer by public intervention (bail-out). This measure is intended to minimise the cost of resolution for taxpayers, and to give bank shareholders and creditors a greater incentive to efficiently monitor the institution's financial situation. Further provisions on bail-in obligations were inserted in the Banking Act by the Royal Decree of 18 December 2015.
Rules on the transfer and mutualisation of ex ante contributions to be made by credit institutions to the Single Resolution Fund are provided for in a separate intergovernmental agreement entered into between 26 Member States of the Banking Union, including Belgium, on 21 May 2014. The Single Resolution Fund is the resolution financing arrangement for the Single Resolution Mechanism. It can only be used to the extent necessary to ensure effective application of the resolution tools and for specific purposes (e.g., to guarantee the assets or liabilities of, or make loans to, the institution under resolution).
This intergovernmental agreement was approved on 27 November 2015.