New European rules and regulations make it possible for DNB to require systemic banks to hold additional capital buffers to enhance their resilience. For the Netherlands this is very important. That is because the Dutch banking sector – equivalent to over four times the size of annual Dutch gross domestic product (GDP) – is much larger than the European average of approximately three times GDP. In addition, the level of concentration is high: to a large extent, the sector is dominated by the largest banks, which only adds to the impact of any problems on the financial system and the economy.
How does DNB define which banks are systemically important?
DNB uses a number of criteria to determine whether banks are systemically important. First, DNB assesses the size of a bank relative to Dutch gross domestic product and to other banks (size). Problems at large banks have the greatest potential impact on the economy. Second, DNB analyses to what extent banks are intertwined with the financial system (interconnectedness). If the level of interconnectedness is high, problems at one institution may spread quickly to other financial institutions. Banks may be connected with each other or with other financial institutions through loans or derivatives. Beyond that, Dutch banks are closely interconnected through the Dutch deposit guarantee scheme: should one of the banks fail, the others must contribute to the secured deposits. Third, DNB assesses whether banks perform crucial functions that are difficult for other parties to carry out (substitutability). Such functions include financial infrastructure management and lending to households and small and medium-sized enterprises. Fourth, DNB assesses whether there are any impediments to the resolution of banks that are no longer viable (resolvability). Fifth, DNB analyses to what extent the way a bank operates may result in undesirable behavioural effects on the financial markets. The failure of one bank with a particular business model may result in a loss of trust in banks with comparable business models.
Which banks are currently systemically important?
Assessed against all these criteria, DNB has determined that ING Bank, Rabobank and ABN AMRO (the major banks) are the most systemically important banks. The size of each individual major bank is in excess of 50% of Dutch GDP; for ING and Rabobank, size even exceeds 100% of GDP. The three major banks are also strongly interconnected and they are interwoven with other Dutch and international financial institutions. Finally, taken together, they are responsible for the majority of lending to Dutch households (85%) and companies (60%). On the whole, the three banks are about equally systemically important. While ING is the largest bank, the activities of Rabobank and ABN AMRO arerelatively difficult to substitute. That is because these banks are relatively large lenders to Dutch companies.
Beyond the three large banks, SNS Banks is also systemically important, in particular in terms of interconnectedness. This bank holds relatively large amounts of savings of Dutch consumers and part of these savings are guaranteed under the deposit guarantee scheme. In addition, SNS Bank is an important player in the mortgage loan market. However, SNS Bank is less systemically important than the three large banks as it is much smaller and has a smaller share in the services provided to the real economy.
How high is the additional buffer requirement?
Because the three large banks are so systemically important, DNB has decided to impose an additional buffer of 3% of their risk-weighted assets. In view of the above reasons, SNS Bank is less systemically important than the large banks, which is why an additional buffer of 1% will apply. Banks are able to phase in these buffers between 2016 and 2019. The buffer requirements come on top of the other European capital requirements intended to make banks more resilient. This will raise future core capital levels (i.e. the highest-quality capital) to at least 10% of risk-weighted assets for the three major banks and to 8% for SNS Bank. These percentages may turn out even higher in practice in the event of excessive credit growth or Pillar 2 capital add-ons imposed on banks. If the coming years will see banks' profits grow in line with the macroeconomic outlook, banks are expected to be able to meet all requirements without compromising lending growth. [Note 1]
How do the systemic buffers relate to other measures?
While the systemic risk buffers are aimed mainly at preventing the failure of systemically important banks, DNB is also contributing both nationally and internationally to complementary measures aimed at limiting the impact of bank failures. The Dutch Ministry of Finance and DNB are co-drafting resolution plans to ensure a better resolution of banks that fail. And there is the introduction of a bail-in regime, which implements the European Bank Recovery and Resolution Directive. During the crisis, creditors of banks that got into trouble escaped largely scot-free. Under the bail-in regime, shareholders and creditors will be first in line to absorb bank losses, thereby sparing the taxpayer. This also marks the removal of the implicit state guarantee from which large systemically important banks are still profiting.
[Note 1] See DNB’s Occasional Study on lending and banking capital on DNB’s website. (in Dutch)