Facts Sheet Capital and Supervision
Capital
After the crisis in 2008, there was general agreement, both nationally and internationally,
that the banking sector had to serve better and become more resilient. Making banks more
resilient affects various dimensions: higher capital buffers, sufficient liquidity, bank
liquidation in the event of problems, strengthening governance within banks, improving risk
management, audits and remuneration policy.
Capital buffers
The capital buffers (share capital and reserves) to enable unexpected losses to be absorbed
had to be raised substantially, so that banks can continue to play their role even in times of
crisis. In order to obtain a complete view of the resilience of banks, two ratios should be
considered: The Leverage Ratio (LR) and the Common Equity Tier 1 (CET1%) Ratio. The LR
is a ratio that divides the equity by the balance sheet total (Figure 1). If a bank raises this
ratio, it becomes safer, ‘ceteris paribus’. Unfortunately, the addition of ‘ceteris paribus’
carries a very substantial weight, because the LR does not consider the actual risk profile.
When comparing two banks, the bank with the highest LR cannot be said to be the most
resilient bank. In order to measure the resilience properly, it is necessary to consider the
actual risks and the volume and the quality of the equity that serves as a cushion to absorb
the unexpected losses stemming from these actual risks, known as the CET1% (Figure 2).
Figure 1
Leverage Ratio
5%
Notes:
- From 2017, banks must have a minimum LR of 3%.
This limit is set by the Basel Committee.
- The major Dutch banks have significantly strengthened their LR in
recent years and, with regard to the LR, are positioned at the
European average.
- However, the LR says little about the risk profile of banks. A bank
with a high LR can therefore be very risky and a bank with a low
LR can nevertheless be safe.
4%
3%
2%
1%
0
Basel III
European banks
Average for ABN AMRO, ING, Rabobank and SNS (average)
Figure 2
CET1% Development and future requirements for ABN AMRO, ING, Rabobank
and SNS
15%
10%
5%
0%
2007
2008
2009
2010
2011
2012
Minimum CET1 requirement
Capital conservation buffer (CET1)
System­-relevant buffer (CET1)
Contra cyclische buffer (CET1)
ABN AMRO, ING, Rabobank and SNS (average)
European banks (average)
2013
2014
2015
2016
2017
2018
2019
Notes:
- These Dutch banks have strengthened their risk­-sensitive
CET1 ratio considerably since the crisis and are ahead of
the European average in that regard.
- The Dutch banks are well­positioned to continue to amply
System­relevant buffer (CET1) comply with the rising
minimum ratios in the future.
- At the time of publication, the 2015 figures for European
banks were not available.
In order to calculate this ratio, all assets (loans and other risk­bearing products) are
weighted for the risks they bear and are translated into: ‘risk weighted assets’ (RWA).
The higher the risk of the assets, the higher this figure will be. The Common Equity (core
capital) is divided by these risk weighted assets. This risk­weighted ‘score’ shows the
resilience of the bank and makes banks comparable. In November 2014, the entrance test
for participation in the Banking Union (Comprehensive Assessment) showed that the seven
Dutch banks assessed 1) were well­capitalised. They also had sufficient capital to face sharply
negative economic developments.
Sufficient liquidity
If in an unfortunate event the markets are ‘locked’, banks must have sufficient liquid assets
in these stress situations. Dutch banks have ample liquid assets. This is shown by the
Liquidity Coverage Ratio (LCR). This yardstick measures the extent to which there are
sufficient liquid assets to meet short­term obligations in these periods of stress. Since
1 October 2015, banks in the EU have been required to hold more liquid assets (such
as cash or high quality bonds with a maximum maturity of 30 days) than their short­term
obligations. This means that the LCR must be higher than 100%. At the close of 2015,
the LCRs for the largest Dutch banks were comfortably above 100%.
Bank liquidation
If, unfortunately, an individual bank cannot continue to exist, it must be liquidated, without
major market disruptions, without savers losing their money (up to 1 100,000 is covered by
the deposit guarantee system) and without the need for tax­payers to cover losses.
1 ING Bank, Rabobank, ABN AMRO Bank N.V., SNS Bank, BNG Bank, Nederlandse Waterschapsbank and RBS N.V.
Dutch Banking Association Fact Sheet Capital and Supervision
Hence, it is important that the system­relevant banks have sufficient loss­absorption capital.
Providers of borrowed capital make a larger contribution with this to the liquidation of a
bank. Proposals have been made by the Financial Stability Board (FSB) to impose minimum
requirements for the total loss capacity of banks. This capital must remain available at the
moment when the bank fails. This capital also means that the costs of any failure can be
borne by shareholders and creditors. With these requirements, the loss­absorption capital of
banks will be raised to at least 16% to 20% of the RWA 2).
Supervision
Banking Union as at 4 November 2014
An important step towards the restoration of trust in the banking sector is the creation of
European supervision. Prudential supervision of the banking sector for the (system­relevant)
banks has been transferred to the European Central Bank (ECB). In the new supervisory
system, the ECB supervises the banks together with the national supervisory authorities and
the rules for all banks in the euro zone are the same. Supervision of all non­system­relevant
banks remains the responsibility of the national supervisory authorities. The ECB is
indirectly responsible for supervision of these smaller banks. If the ECB considers this
necessary, it can take over supervision of smaller banks from De Nederlandsche Bank
(DNB). The following banks have been under the direct supervision of the ECB since
4 November 2014: ABN AMRO, BNG Bank, Rabobank, ING Bank, Nederlandse
Waterschapsbank, RBS N.V. and SNS Bank.
Figure 3
The three pillars of the Banking Union
Banking Union
1 Single Supervisory Mechanism (SSM)
2 Single Resolution Mechanism (SRM)
3 Deposit Guarantee System (DGS
1
2
3
EU-wide ‘Single rule book’ *
* The Banking Union is based on the legislative framework
for banks. This harmonises the rules for supervision,
capital, resolution and the DGS.
Single Supervisory Mechanism (SSM)
– Responsible for the significant banks (to be determined on the basis of the balance
sheet total and system­relevance of a bank).
– Ensures consistent application of the EU single rule book.
– Access test for banks.
2 This tightening of the requirements will be introduced in two phases, in 2019 and 2022.
The SSM contributes towards the financial stability within the euro zone and makes cross­
border banking easier for banks.
Single Resolution Mechanism (SRM)
– Regulates how banks in trouble can be saved or restructured through the use of
resolution tools, and who pays for this.
– In the first instance, the losses are borne by the bank’s creditors and shareholders.
– In the course of the next 8 years, banks will set up an emergency fund of approximately
1 55 billion. In 2015, the Dutch banks deposited an amount of 1 550 million.
– The Dutch Banks will contribute approximately 1 4.5 billion to the Single Resolution Fund.
The SRM will sever the interdependence of the national states and the banking sector and
the risk of taxpayers will be transferred in full to shareholders, creditors and the European
banking sector.
Deposit Guarantee System (DGS)
– Each Member State must set up a deposit guarantee system (DGS).
– In the Netherlands, a fund will be built up from Q1 of 2016.
– This fund will consist of 0.8% of all covered deposits in the Netherlands.
If a bank fails, the money in the DGS will be available to cover the savings of account
holders, up to a maximum limit of 1 100,000. Between the end of 2016 and 2024,
a fund amounting to some 1 4 billion will be built up.
Netherlands Authority for the Financial Markets (AFM)
In addition to the prudential supervision of the DNB, the AFM supervises the conduct of
financial institutions. This supervision of conduct concerns the question of whether the
participants in the financial markets are treated correctly and are properly informed. The
AFM must protect investors and consumers against fraudulent institutions, for example or
excessively risky mortgages.
Supervision costs
The foregoing will be reflected in the costs of supervision, which, since 2014, have been
paid by the sector in full.
Supervision costs
5 69.9 mln
Total supervision costs in 2015: 5 152.4 mln. Total supervision costs
in 2009: 1 96 mln. This is a 59% increase.
Costs for the entire euro area (ECB) in 2016: 5 404 mln
Costs of bank supervision (DNB) in 2015:
Conclusion
Because of a substantial increase in capital and liquidity, Dutch banks are well able to
absorb unexpected setbacks. Supervision of the financial sector has been tightened,
broadened and deepened in recent years, both nationally and on a European level.
Dutch Banking Association Fact Sheet Capital and Supervision
© June 2016, Dutch Banking Association, www.nvb.nl
Figure 4