Collateral plays a crucial role in DNB's activities. Banks must provide securities as collateral in order to be able to use DNB's services. This collateral is, for instance, provided as security against possible losses due to default of the debtor. DNB provides three main services to the banking sector. The first of these is monetary credit transactions, which are loans that the Eurosystem, of which DNB is part, extends to commercial banks. At the end of 2012, these loans represented a value of about EUR 24 billion. The second service is intraday credits, which DNB provides to ensure smooth functioning of the Eurosystem’s Target2 payment system. The values of payments fluctuate during the day, but are zero by definition when Target2 closes at the end of the day. And thirdly, DNB offers its own facilities, which are aimed at strengthening the safety and efficiency of payments and securities transactions in the Netherlands. The main facility provided in this respect is the guarantee model, which allows DNB to block collateral that Dutch banks hold with it as security for the clearing of securities transactions. Another example is the distribution of cash: banks retain the banknotes issued by DNB rather than transporting them back and forth, which saves on transport. The risk that DNB runs by not having the banknotes in its possession is covered by the blockage of collateral provided by the banks. Constituting an amount of over EUR 2 billion, this last category is fairly small.
Until November 2013, a proportion of the collateral deposited for monetary credit transactions was used as collateral for this last category of services, sourced from the same collateral deposit. However, if there is only one single collateral deposit in place, possible claims arising from DNB's own facilities are subordinated to those arising from monetary policy operations, owing to agreements made in the Eurosystem. At the same time, for such claims DNB cannot rely on loss sharing within the Eurosystem, which applies for monetary facilities and Target2 intraday credits. In order to be able to manage the risk exposure on its own facilities better, DNB decided to create a separate deposit to eliminate the uncertainty about rights to collateral held with DNB in case of possible claims. The creation of a separate collateral deposit has made it possible to impose discretionary requirements on the collateral framework prevailing for these facilities. The collateral framework prevailing for monetary tasks is determined by the Eurosystem and saw significant accommodations these past few years as a consequence of the financial crisis. These accommodations were mainly driven by the need for additional collateral from institutions in peripheral countries, and were necessary for financial stability. This situation does not apply to DNB's own facilities, meaning that with a separate collateral deposit with its own framework in place, DNB is able to implement risk management for its own facilities independently and more stringently.
Tightening aimed at market conformity and credit risk
When creating the separate deposit for its own facilities, DNB also created a separate collateral framework. This collateral framework is more stringent than that of the Eurosystem’s current monetary framework, which saw a number of accommodations over the past years. DNB has not copied these accommodations into its framework for its own facilities. The minimum requirement for credit risk – the minimum rating that securities must have in order to qualify as collateral has for instance been set at A -, rather than BBB-. The exemption made for the BBB-rating requirement for government guaranteed bonds of problem countries has not been incorporated into DNB's own framework, and the temporary acceptance of bonds denominated in foreign currencies for monetary policy operations has not been taken over either. DNB neither allows unsecured bonds issued by financial institutions nor government-guaranteed bank bonds in its collateral framework. And credit claims without Dutch government guarantees are not accepted as collateral either in DNB’s own framework. The valuations and haircuts of the acceptable collateral will remain the same as those imposed on collateral for monetary transactions.
Limited impact on banks in the Netherlands
Banks in the Netherlands hold ample quantities of good quality collateral with DNB. Owing to both the quality and quantity of the collateral provided, the impact of the tightened framework will be limited for the majority of banks. Some banks have felt a slight impact and have meanwhile replaced the collateral they deposited with DNB with collateral that meets the stricter requirements, allowing them to continue to use DNB's facilities.