DNB Supervisory Themes 2012: DNB supervision zooms in on recovery of financial buffers and business model sustainability

Date 3 February 2012

Dutch prudential supervisor De Nederlandsche Bank (DNB) is to pay particularly close attention to  the recovery of financial institutions’ financial buffers and the sustainability of their business models. These are two of the spearheads discussed in the brochure published today on DNB Supervisory Themes 2012. The brochure informs the industry and the public on the thematic focal points selected this year for DNB’s supervisory efforts.

The crisis has shown that banks must strengthen their solvency and liquidity positions. To that end, Basel III will be phased in, starting in 2013. Especially relevant to the Netherlands is the European implementation of Basel III, which is to be encased in the Capital Requirements Directive IV (CRD IV). The year 2012 will be dominated by banks’ migration to the new, more stringent requirements. Meanwhile, preparations by insurers for the tougher capital standards laid down by the Solvency II regime also continue apace in 2012. DNB monitors the progress of both prospective regimes, directing firms where necessary towards compliance with the new requirements. The requirement aim to strengthen financial institutions’ resilience, thereby enhancing the safety of the public’s financial claims and entitlements. As regards pensions, DNB is involved in the design of a supervisory framework for the new pension contract.

A continuing point for attention, in DNB’s view, are the business models of financial institutions: the ways in which they earn their income. Current market conditions raise questions about the sustainability of many such business models. In the case of banks, this relates mainly to the size of mortgage loan portfolios and to banks’ funding sources. For insurers, profitability of firms’ life business will receive extra focus, as it did in 2011. Also in 2012, DNB will conduct a further investigation into the risks that commercial real estate investments carry for banks, insurers and pension funds.

As a supervisor DNB takes an elevated point of view where it can see financial institutions not in isolation but in their interrelationships and can compare them to each other, identify outliers, recognise and promote best practices, and assess the sector-wide impact of macroeconomic developments. Therefore DNB deploys a substantial part of its supervisory capacity towards this thematic approach, as a complement to its supervision of individual institutions.