A new step towards manageable systemically important banks

Background

Prudential supervision in the Netherlands is geared to minimising the probability of bank failure and instability in the financial sector. The banking sector in the Netherlands is large and concentrated and plays a pivotal role for both the financial sector and the economy. This carries the drawback that a breakdown in an SIB’s vital functions has an immediate adverse impact on other financial institutions, consumers, the corporate sector and the whole society. DNB therefore also focuses on containing the consequences of an unexpected failure of SIBs.
 
To reduce the likelihood and contain the impact of an SIB’s failure, DNB tightened its supervisory policies for these banks in 2010. One component of these tighter policies is that Dutch SIBs must consistently hold higher capital buffers to be able to absorb losses. Other components are that DNB has intensified its supervision of SIBs and requires SIBs to compile and implement recovery plans. In these recovery plans SIBs formulate measures that they themselves can take to remain viable in a crisis. The Dutch SIBs are now finalising their recovery plans. The last component is the reinforcement of the national resolution regime; in line with national and international agreements, DNB has been working on this reinforcement since 2009.
 
Reinforcement of the national resolution is regime is a long-term process that rests on two pillars. The first pillar is the reinforcement of the set of resolution tools, which was effected in the Netherlands by the entry into force of the Intervention Act. This Act gives DNB and the Minister of Finance new powers to timely intervene at a financial institution in difficulties. The second pillar is sound preparation, which should enable authorities to effectively apply the set of resolution tools to failing banks. The organisation of SIBs especially is usually complex as they engage in cross-border economic and operational activities that stretch through their entire legal structure. This complexity makes an orderly resolution more difficult. With a view to sound preparation, DNB, with the close involvement of the Ministry of Finance, will use the information supplied by the banks to develop resolution plans for the Dutch SIBs.

Objective of resolution plans

Resolution plans are intended for cases in which banks are no longer independently capable of averting an impending calamity. If such a situation arises, the resolution phase begins and the resolution plan is activated (see Figure 1). The aim of the resolution plan is to safeguard a bank’s critical economic activities in an effort to limit the consequences of a failure for financial stability and the taxpayer. The resolution plan must make it possible for shareholders and creditors to absorb losses as they would in a regular liquidation process in the event of a failure, and for a bail-out by taxpayers to be avoided.

Approach and scope

The Resolution Plans policy framework gives a detailed description of DNB’s approach (see attachment and Figure 2), which follows the Financial Stability Board’s guidelines and the European Commission’s proposed Directive on the recovery and resolution of banks. DNB’s approach is also largely the same as that of the UK and Swiss authorities. Both countries are at the forefront in resolution planning and, like the Netherlands, have large and concentrated banking sectors. 
 
The development of the resolution plans is an extensive and complex project that will require considerable capacity at the authorities and the banks involved. The project will be carried out in two phases. The first phase consists of the collection of information and analysis by the participating banks. Four different modules will be used in this process. For each module, DNB will hold discussions with the institution on the information and analyses provided and will arrive at an assessment. These modules form the foundation stones for the resolution plan.