Prudential regulationi Relationship with the prudential regulator
As the prudential supervisor of the most significant Dutch banks, the ECB has far-reaching investigatory and supervisory powers under the Single Supervisory Mechanism (SSM) Regulation. 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, if applicable, a European 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 who is held responsible for non-compliance with the CRR provisions from exercising his or her functions; and
- imposing certain measures including, but not limited to, 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. In July 2018, rules entered into force to make financial sector supervision by the DCB (and the AFM) more transparent. The regulators were given greater 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.ii 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, a number of which have recently been revised. 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 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. 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. 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. 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, or persons working for the EEA top holding of a group whose staff work predominantly in another country, 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.
The Act also restricts severance payments. 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 March 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.
An evaluation of the remuneration rules was completed in 2018. Following this evaluation, the Minister of Finance announced he would, in addition to the existing restrictions of variable pay discussed above, introduce a number of restrictions to fixed pay. 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 its directors and employees is proportional to the firm's role in the financial sector and its position in society. Subject to advice from the Council of State, expected at the end of Q1 2019, the Minister of Finance is also considering the introduction of a claw back of fixed pay for directors of systemically relevant banks in cases of state aid. Finally, the exception from the bonus cap for persons falling outside the scope of collective labour agreements will be restricted. Another evaluation will be scheduled in five years.
In March 2018, opposition parties in Parliament proposed an act that would require the award of all fixed remuneration to directors of systemically relevant Dutch banks to be subject to ex ante approval by the Minister of Finance, who would have to assess whether it fits a sound, proper and sustainable remuneration policy, taking into account public support. The ECB has indicated that the act does not conflict with its own powers. However, the proposal was heavily criticised by the Council of State, and it is very uncertain that it will gather enough support be adopted.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, solvency (regulatory capital), liquidity and additional supervision with respect to financial conglomerates.Solvency
Licensed banks are required to be sufficiently solvent. The Decree on Prudential Rules FMSA provides that a bank's solvency 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 (SREP) when they identify risks not adequately covered by the standard capital requirements. In addition, since 2016 the DCB and the ECB also communicate their expectations for banks to hold additional own funds in the form of capital guidance. This practice has been included in the latest EBA SREP guidelines, and will be given a formal basis in the forthcoming amendments to CRD IV and the CRR. In November 2018, the ECB published guidance setting out its expectations of banks' internal capital adequacy assessment process.
The DCB has issued a regulation on the specific provisions set out in CRD IV and the CRR (DCB CRD IV and CRR regulation). The DCB CRD IV and CRR regulation sets out how the DCB uses certain options and discretions that the CRR grants to competent national authorities, including a number of (transitional) provisions set out in the CRR, and implements the method for calculating the maximum distributable amount. In 2016, the ECB set out how it will use these options and discretions in relation to significant banks, and issued guidance on the exercise of those options and discretions by competent national authorities in relation to less significant banks. The ECB also annually publishes a recommendation on dividend distribution policies, which should take into account capital demand due to future changes in the EU's legal, regulatory and accounting frameworks.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 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 and 3.5 per cent CET1 capital; or another systemically important institutions (O-SII) buffer of a percentage, in principle, of between zero and 2 per cent CET1 capital; and
- as a Member State option, a systemic risk buffer of, in principle, between 1 and 3 per cent CET1 capital.
With regard to the G-SII, O-SII and systemic risk buffers, in principle only the highest of the three applies. In the Netherlands, the G-SII buffer only applies to ING Bank (1 per cent), and the O-SII buffer applies to ING Bank, Rabobank, ABN AMRO (each 2 per cent) and de Volksbank and BNG Bank (both 1 per cent). The government has chosen to apply a systemic risk buffer of 3 per cent to ING Bank, Rabobank and ABN AMRO. The DCB has kept the countercyclical capital buffer at zero per cent since its introduction in 2016. It continues to review the necessity of increasing this percentage on a quarterly basis. In 2019, the phase-in period of the capital buffers ended; they are now applicable in full.
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, including at least an estimate of income and expenditure and a forecast balance sheet, measures to increase the capital ratios, and a plan and time frame for increasing own funds with the objective of meeting the combined buffer requirement.Liquidity
Banks must hold a sufficient amount of liquid assets. Since 2018, the previous Dutch liquidity requirements and reporting rules have been fully replaced by the two liquidity requirements of the CRR: 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.
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), as agreed upon by the Basel Committee, will be introduced in 2021, following the amendment of CRD IV and the CRR.
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.Leverage 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. In January 2016, the Basel Committee agreed upon a binding minimum leverage ratio of 3 per cent. This requirement is expected to be introduced in the EU in the second half of 2019 at the earliest, following the amendment of CRD IV and the CRR. The Basel Committee also agreed on an additional leverage ratio buffer requirement for G-SIIs. This buffer will also be included in the forthcoming amendment of CRD IV and the CRR. The Dutch government has argued for the extension of this buffer to O-SIIs. However, the current amendment of CRD IV and the CRR will only include 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.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. 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, intragroup 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.DCB policy rule in respect of EBA guidelines
In December 2017, the DCB issued an updated policy rule that lists which of the European supervisory authorities' guidelines it applies. This includes practically all guidelines issued by the EBA, including the Guidelines on internal governance, the Guidelines for the joint assessment of the elements covered by the SREP, and the Guidelines on sound remuneration policies.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 became fully applicable in 2016. 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. 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 (SRM), 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 has set out a number of technical details on how it intends to use the bail-in tool. 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 2018, the SRB and the DCB continued the process of drafting resolution plans for the major Dutch banks and of setting each bank's minimum requirement for own funds and eligible liabilities (MREL). In 2018, the SRB split its cycle in two waves: less complex banks will receive their first binding MREL target in Q1 2019, while for the most complex banks, new binding MREL targets will be set in Q3–Q4 2019 on both consolidated and individual levels, following the decision-making process in the resolution colleges. The SRB plans to set binding targets for all banking groups under its remit by 2020. MREL targets for complex banks are expected to average around 25 per cent of RWA.
Meanwhile, the rules for the calibration and method of calculation of the MREL have already been subject to review. The EU Banking Reform Package, on which the EU institutions reached agreement in February 2019, will see a sweeping revision of the MREL requirements, in particular by aligning them with the international standard for total loss-absorbing capacity (TLAC), which was finalised by the Financial Stability Board in 2015. Once these new rules are in force, the SRB and the DCB will adapt their policy accordingly.Deposit insurance
The Dutch deposit insurance framework is based on the (third) Deposit Guarantee Scheme (DGS) Directive, which has been in force since 2015. 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. In July 2017, the DCB adopted a number of more detailed rules in relation to the Dutch DGS. Most importantly, the DCB introduced a new pay-out 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. In August 2018, the Minister of Finance submitted a proposal to Parliament, supported by the Dutch banking sector, clarifying how banks can use customers' personal identification numbers in implementing their DGS obligations. In February 2019, the DCB also implemented a number of tweaks to the detailed rules to further clarify the DGS framework.
Progress on the European Commission's proposal for a European Deposit Insurance Scheme (EDIS), first circulated in 2015 to reinforce deposit protection by mutualising national deposit guarantee funds in the eurozone, continued to be slow in 2018. A number of Member States, including the Netherlands, insist that further risk reduction must precede further risk sharing. In January 2019, the Eurogroup decided that EDIS discussions would move from a technical to a more political level by establishing a high-level working group that is due to report in June 2019.Dutch Intervention Act
Ahead of the BRRD and the SRM Regulation, Dutch rules for bank recovery and resolution were introduced by the Dutch Intervention Act in 2012. Pursuant to this Act, the DCB had the power to take various measures in respect of banks if it perceived signs of dangerous developments regarding a bank's solvency or liquidity. These powers have largely been replaced by those following the implementation of the BRRD. The powers granted by the Act to the Minister of Finance to take immediate measures if he or she is of the view that the situation of a bank causes a serious and immediate danger to the stability of the financial system continue to apply. 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.