DNB's capital policy
As a central bank, DNB is responsible for monetary policy, together with the ECB and the other central banks in the Eurosystem. This includes loan facilities for commercial banks and the asset purchase programmes. We also hold our own investments. The loan facilities, asset purchase programmes and own investments entail financial risks. For example, it may be the case that a corporate bond from one of the purchase programmes is not redeemed due to the issuer going bankrupt. DNB maintains financial buffers to absorb these risks.
What buffers does DNB have?
Our current buffers consist of two parts:
- Capital. Capital is DNB's own funds and primarily comprises historically retained profits. Our capital serves as a buffer for structural risks.
- Provision for financial risks. This is a buffer for risks of a temporary nature. We do not expect these risks to materialise, but we want to be prepared for them nonetheless. Central banks in the Eurosystem are allowed to make such provisions, while commercial banks may not.
How are buffers adjusted?
Capital. We calculate our annual profit at the end of each financial year. Some of this profit is then added to our capital. The rest is transferred to our sole shareholder, the Dutch State. The Minister of Finance formally decides on the exact distribution of funds between DNB and state coffers. This is referred to as appropriation of profit.
Provision. Every year, we either add money to the provision or subtract funds from it. We do so prior to calculating our annual profit. This is part of determining profit. DNB's Governing Board decides on this.
Since the appropriation of profit is based on our calculations, we have made agreements with the Minister of Finance. These agreements are at the core of our capital policy.
Agreements between DNB and the Minister of Finance
One of the agreements made is that under normal circumstances, we may add a maximum of 50% of our annual profit to the provision. If risks are higher than our buffers, we will add more to the provision. In times of lower risks, we can release part of the provision.
Another agreement is that our capital will grow in line with the gross national product (GNP) over the long term. The current growth factor has been set at 3.4% and equals the growth of Dutch GNP in the period 1999-2017. We may retain a maximum of 50% of our annual profit for this purpose. If this is not enough to keep up with GNP growth, we may make up the deficit in later years.
A DNB capital policy working group was set up to work out the agreements. The working group comprised experts from DNB and the Ministry of finance and produced a final report with three variants, A, B and C. The Minister and DNB's Governing Board decided to adopt variant B.
Sustainability in the long term
We expect our capital policy to be sustainable in the long term, in economically favourable and unfavourable times. The growth of capital in line with GNP will offer the necessary protection against the structural risks to which DNB is exposed. The agreements were implemented for the first time in 2019. DNB and the Ministry of Finance will evaluate the capital policy in 2024.