The policy rule addresses the second pillar concentration risk in more detail. Banks that have significant exposure concentrations in countries with a non-negligible risk of repayment and transformation problems as well as heightened collective default risk should adequately control these risks. The policy rule states which risk controls DNB recommends that financial institutions implement and, if they prove to be inadequate, which capital surcharges they must take into account. The institutions report this in the ICAAP, which we will assess by means of the SREP.
We apply the policy rule to concentrations (>5 % of the balance sheet total and total off-balance-sheet items) in countries with a high probability of a country risk event as defined in the policy rule. We also use a table containing weighting factors and absolute limits to counter incentives to diversify to worse risks. If, at any point in the past three years, an institution's country exposure has exceeded the 5% threshold, the policy must be applied.
A financial institution is initially responsible for assessing the country risk itself. The first indicator that can be used is the sovereign foreign currency rating (long term). Other factors can also be considered in the estimate, e.g. views expressed by the IMF and OECD and an assessment of the sustainability of the country's economic growth and its balance of payments, and the stability of its financial sector. In certain cases we will also prepare a risk assessment for the countries we deem relevant in view of the characteristics of the institution concerned and inform the institution accordingly.
The policy rule assumes a country risk event for the largest exposure concentration in the portfolio, with regional contagion being reflected in a three-notch downgrade. Risk controls are taken into account in a weighting we have set. In particular, we are of the view that collateral, credit risk insurance, trade finance and short-maturity assets reduce a financial institution’s risk profile. If we consider the controls inadequate to mitigate the risks involved, additional capital must be held.
We have established that in many cases the quality of prudential reporting has room for improvement. Therefore, we have published good practices on data quality.
Read more Good Practices on data quality put up for consultation
There are two new regulatory developments of relevance to banks regarding their crypto asset exposures. Firstly, the Capital Requirements Regulation 3 (CRR3) includes a transitional regime on banks’ direct crypto asset exposures.
Read more New rules for the crypto exposures of banks
The final texts of the Capital Requirements Regulation 3 (CRR3) and the Capital Requirements Delegation 6 (CRD6) were published on 19 June 2024. With this new banking package, the final Basel 3 reforms are implemented in the European Union.
Read more Publication new banking package CRR3/CRD6
On June 6th, DNB started the public consultation of the 2024 amendment round of the Deposit Guarantee Scheme (DGS) Policy Rules for banks. Parties are requested to submit responses to the consultation to DNB by 19 July at the latest.
Read more Start consultation amendments DGS Policy Rules 2024
