The crisis has clearly shown that early risk detection by financial institutions is vital. In this light, DNB announced in its Supervisory Strategy 2010-2014 that it would be paying more attention to the strategies and business models of banks and insurers.
An important legal requirement of the Dutch Financial Supervision Act [Wft], Section 3:17, stipulates that in order to conduct a bank or insurance business, a firm must ensure that its operations are sound and controlled. A sustainable money-making model is a necessary precondition. Consequently, DNB regularly assesses the strategic choices made by institutions. This starts with the authorisation application and is continued in the ongoing supervision. The information used for the assessments is diverse. DNB discusses the business models and strategies with Boards of Management, for instance, but also conducts in-depth analyses and organizes panel discussions between examining officers and (internal and external) experts.
The assessment of strategies and business models may result in financial institutions having to implement changes. These may sometimes be comprehensive. In the past year, DNB urged various banks and insurers to adjust their strategies and policies, as they must constantly remain aware of the choices they make to ensure a sustainable money-making model.
Obviously, this does not mean that the supervisor will take over the helm at institutions, but it does signify that DNB will demand from institutions that they acknowledge potential risks at an early stage, which will enable them to take timely preventative action based on a thorough analysis of the business models and strategies.
In 2011, supervision of the business models and strategies led to several decisions at a number of banks. For example, decisions were taken to reduce the banking balance sheet or make the funding profile more sustainable. One measure by DNB involved setting restrictions on raising funding via covered bonds. Special attention was also paid to banking institutions with exposures concentrated on emerging economies. This brought about higher capital requirements or a diversification of funding. The expected result is a further reduction of the risk profile of the banks concerned.
For insurers, the assessment of business models likewise led to adjustments. During an institution’s authorisation process extra conditions are now set for governance and funding. With respect to new life insurances, DNB published good practices for price setting and risk management. In the car insurance sector, supervision of business models contributed to more sustainable price setting.
It is crucial that financial institutions actively work on a healthy business model and keep reflecting on the impact of their strategic choices. The profitability of many players is under pressure. It is therefore all the more important to increase sustainability of the money-making model. In the past year, this was a focus area for DNB and various institutions were pointed in the right direction. DNB will keep supervision of business models and strategies high on the agenda in the future.
You can read more about DNB’s supervision of institutions’ strategic conduct in DNB’s Quarterly Bulletin 'Closer supervisory attention to business models and strategies'.