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.10 The ECB has far-reaching investigatory and supervisory powers under the Single Supervisory Mechanism (SSM) Regulation.11 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 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.12ii Management of banks
Most Dutch banks are limited liability companies. Although, from a corporate perspective, 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 the executive function 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.13 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.14 On suitability, the DCB increased its focus on sustainability and anti-money laundering (AML) knowledge of each board member.
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.15 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.16 The Corporate Governance Code was updated in December 2022. The Corporate Governance Code now further defines the concept of sustainable long-term value creation and offers a description with respect to best practices on stakeholder dialogue. Additional focus is furthermore placed on company culture, specifically in the context of the supervisory board's self-evaluation. The revision was partially inspired by the Corporate Sustainability Due Diligence Directive, which is reflected in the requirement that the Management and Supervisory Boards of institutions must duly consider the impact of the company and its affiliated enterprise on individual and groups of stakeholders, as well as in the field of sustainability, including the effects on people and the environment. 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.17 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 these 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, new legislation was adopted in the first half of 2022 to introduce a number of restrictions to fixed pay, in addition to the existing restrictions of variable pay discussed above.18 The new law entered into force on 1 January 2023 and requires 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 to retain these for at least five years. Furthermore, financial undertakings 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 has been restricted and can no longer be applied to those persons who fulfil internal control functions or who are directly involved with the provisions of financial services to (non-professional) consumers. The next evaluation is scheduled to take place 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 may 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.19
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.20 This measure entered into force on 1 January 2022 and will be in force until at least 1 December 2024. 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 another 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 (SyRB) of, in principle, between 1 per cent and 3 per cent CET1 capital.
Previously, with regard to the G-SII, O-SII and SyRB, 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 SyRB. To keep capital requirements constant, the DCB has abolished the SyRB and, for 2022, applies O-SII buffers of 2.5 per cent to ING, 2 per cent to Rabobank and 1.5 per cent to ABN AMRO, and maintains 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).21 In May 2022, the DCB announced that it will raise the CCyB, which has been at zero per cent since its introduction in 2016, to one per cent, taking effect as per 25 May 2023.22 As banks are required to apply the CCyB to their exposures to Dutch counterparties, this raise also affects foreign banks that have loans outstanding in the Dutch market. The DCB has expressed its intention to further raise the CCyB for exposures in the Netherlands to 2 per cent assuming a standard risk environment but has also stressed its preparedness to lower the CCyB, for example if the general risk environment should deteriorate significantly.
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 no dividends should be paid by banks for the financial years 2019 and 2020 and that banks should 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.23 It was only in July 2021 that the ECB decided not to extend its recommendation that all banks limit dividends beyond September 2021. The recommendations were also applied by the DCB. In October 2022, the DCB urged banks to 'exercise restraint' in dividend pay-outs and share buybacks and to maintain above the requirement as far as possible, to anticipate potential credit losses considering the inflation levels could increasingly result in payment difficulties for consumers and businesses alike.Liquidity
Banks must hold a sufficient amount of liquid assets.24 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.25
The stable funding requirement requires all institutions, as of June 2021, to ensure that their long-term obligations are adequately met with a diversity of stable funding instruments under normal and stress conditions, and to this end maintain a minimum standard for a net stable funding ratio (NSFR) of 100 per cent. Anticipating the implementation of the NSFR, the DCB introduced this requirement in 2017 under Pillar 2. From 2021, this NSFR requirement is no longer part of the Pillar 2 requirements as it is part of the CRR Pillar 1 requirements.
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.26Leverage 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 became applicable as of June 2021. The possibility for credit institutions to operate below the level of capital defined by the Pillar 2 Guidance and the CCyB, and to include central bank exposures from the leverage ratio calculation, which was provided for by the ECB in March 2020 in light of the covid-19 crisis, has not been extended. This means that as of 1 January 2023, the ECB again expects banks to operate above the Pillar 2 Guidance while they were expected to reinclude central bank exposures as of 1 April 2022. 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 this 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 have since 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.27 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 2016.28 Both the BRRD and the SRMR were amended in 2019 by the Banking Reform Package, resulting in BRRD II and SRMR II.29 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 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.30 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.
Over the course of 2022, the Single Resolution Board and the DCB continued the process of drafting resolution plans for the major Dutch banks and of setting each bank's MREL requirements. The Single Resolution Board published an updated MREL policy in June 2022 in line with the requirements of BRRD II and SRMR II. Those amendments have resulted, among other things, in more subsidiaries being in scope for internal MREL setting by the Single Resolution Board, and further substantiation on the assessment of 'free transferability' to obtain a waiver for internal MREL. The date 1 January 2022, furthermore, marked the first intermediate deadline for meeting internal and external MREL targets, while the second informative deadline was passed on 1 January 2023. The final deadline for meeting the targets is 1 January 2024.Deposit insurance
The Dutch deposit insurance framework is based on the (third) Deposit Guarantee Scheme (DGS) Directive, which has been in force since 2015.31 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. The DCB also introduced a 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.32 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.33
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 2022, as it had been in previous years, although the topic seemed to regain traction following the turmoil surrounding the US Silicon Valley Bank and Credit Suisse. 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.