On 20 March 2020, the Dutch Central Bank (De Nederlandsche Bank, DNB) issued a press release on its approach with respect to Less Significant Institutions (LSIs) in light of the coronavirus pandemic (COVID-19). This follows the measures announced by the European Central Bank (ECB) providing temporary capital and operational relief to Significant Institutions.
DNB welcomes and fully supports the measures taken by the ECB, as they help banks to continue servicing the economy by financing households and corporates which are experiencing temporary difficulties. The capital and liquidity buffers which have been built up in recent years are intended to be used in stressed situations like the current one. DNB is open to discussions as to how institutions can make use of this flexibility and announces the following:
- LSIs will be allowed to temporarily operate below the level of capital as defined by the Pillar 2 Guidance and the capital conservation buffer. For liquidity purposes LSIs will be allowed to operate below the liquidity coverage ratio (LCR); and
- Pillar 2 Requirements (P2R) can partially be met by capital instruments that do not qualify as Common Equity Tier 1 (CET1) capital. The P2R does no longer need to be composed entirely out of CET1 capital, but can be a reflection of the minimal capital composition under Pillar 1 requirements, being at least 56.25% CET1, 18.75% Additional Tier 1 instruments (AT1) and 25% Tier 2 instruments. This change in capital composition under P2R was initially scheduled to come into effect in January 2021, in line with the revised approach under the Capital Requirements Directive V (CRD V), but is being brought forward. It should however be noted that DNB can still request banks to hold a different P2R composition, depending on bank-specific circumstances.
Furthermore, DNB has decided to:
- lower the systemic buffers for the three largest Dutch banks (ING, Rabobank and ABN Amro), as detailed in our earlier blog post. However, these measures do not have an impact on LSIs;
- temporarily postpone the introduction of a floor for mortgage loan risk weighting. This forthcoming regulation would have obliged banks using internal models to apply a minimum floor to their risk weighting of domestic mortgage loan portfolios. Implementation will be postponed for as long as necessary; and
- as part of Pillar 2 supervisory requirements on a case-by-case basis impose limits on asset encumbrance. Given current circumstances DNB may, allow, on a case-by-case basis for some temporary relaxation of these asset encumbrance limits, provided that this is well substantiated by the institution concerned.
According to DNB, these measures provide capital and liquidity relief to LSIs which should be used in support of the economy. As also expressed by the ECB, banks are not to use these measures to increase dividend distributions or variable remuneration. In addition, LSIs should continue to apply sound underwriting standards, pursue adequate policies regarding the recognition and coverage of non-performing exposures, and conduct solid capital and liquidity planning and robust risk management.
Besides the abovementioned measures, DNB may also consider providing operational relief to LSIs. DNB notes that it is aware of the operational challenges institutions are facing and that they are looking to take this into account in their supervisory activities. Therefore, DNB may adjust prudential timetables, processes and deadlines on a case-by-case basis, depending on individual circumstances. However, DNB notes that it is not planning to adjust essential data requests to monitor current developments, such as the daily liquidity monitoring requests, or any data DNB is required to request under law on this.
Finally, DNB indicates to have noticed that banks have been able to swiftly operationalise their business continuity plans, which is of great importance. DNB urges all LSIs to stay in close contact with their account supervisor at DNB and swiftly raise any concerns or issues that may come up. As part of this, DNB still expects LSIs to immediately notify DNB of early warning signals, including if it is expected that the institution will fail to meet the Pillar 2 Guidance.