CORONA - DNB measures in reaction to coronavirus
The coronavirus (COVID-19) is having a significant impact on the global economy. This is also being felt by the banking sector. In response to this, the European Central Bank (ECB) has announced measures providing temporary capital and operational relief to Significant Institutions (SIs). In this letter we wish to inform you about the approach De Nederlandsche Bank N.V. (DNB) intends to follow with respect to the Less Significant Institutions (LSIs) under its supervision.
DNB welcomes and fully supports the measures taken by the ECB. These measures help banks to continue servicing the economy by financing households and corporates which are experiencing temporary difficulties. The capital and liquidity buffers which have been built up in recent years are intended to be used in stressed situations like the current one. DNB is open to discuss how institutions can make use of this flexibility. Therefore, in line with the measures taken by the ECB, DNB announces the following:
- LSIs will be allowed to temporarily operate below the level of capital as defined by the Pillar 2 Guidance (P2G) and the capital conservation buffer (CCB). For liquidity purposes LSIs will be allowed to operate below the liquidity coverage ratio (LCR).
- Pillar 2 Requirements (P2R) can partially be met by capital instruments that do not qualify as Common Equity Tier 1 (CET1) capital. The P2R does no longer need to be composed entirely out of CET1 capital, but can be a reflection of the minimal capital composition under Pillar 1 requirements, being at least 56.25% CET1, 18.75% Additional Tier 1 instruments (AT1) and 25% Tier 2 instruments. This change in capital composition under P2R was initially scheduled to come into effect in January 2021, in line with the revised approach under the Capital Requirements Directive (CRD V), but is being brought forward. It should however be noted that DNB can still request banks to hold a different P2R composition, depending on bank-specific circumstances.
In addition, DNB has decided to lower the systemic buffers for the three largest Dutch banks (ING, Rabobank and ABN Amro). As the systemic risk buffers do not apply to LSIs, this measure will not impact your institution. This measure will remain in force as long as necessary. Once the situation is back to normal, DNB will compensate the systemic buffers reduction by gradually increasing the countercyclical capital buffer to 2% of Dutch risk-weighted exposures. This compensatory arrangement will work out more or less capital-neutral for the three large banks involved, and the same effect is envisaged for the other banks, including the LSIs. The details of this measure are yet to be worked out, taking into account the consequences for LSIs.
Furthermore, DNB has decided to temporarily postpone the introduction of a floor for mortgage loan risk weighting. This forthcoming Regulation would have obliged banks using internal models to apply a minimum floor to their risk weighting of domestic mortgage loan portfolios. Implementation will be postponed for as long as necessary.
Finally, as part of Pillar 2 supervisory requirements DNB has on a case-by-case basis imposed limits on asset encumbrance. Given current circumstances DNB may, allow, on a case-by-case basis for some temporary relaxation of these asset encumbrance limits, provided that this is well substantiated by the institution.
The above measures provide capital and liquidity relief to LSIs which should be used in support of the economy. As also expressed by the ECB, banks are not to use these measures to increase dividend distributions or variable remuneration. Also, LSIs should continue to apply sound underwriting standards, pursue adequate policies regarding the recognition and coverage of non-performing exposures, and conduct solid capital and liquidity planning and robust risk management.
Besides the above measures with respect to capital and liquidity buffers, DNB may also consider providing operational relief to LSIs. DNB is aware of the operational challenges institutions are facing and we are looking to take this into account in our supervisory activities. Therefore, DNB may adjust prudential timetables, processes and deadlines on a case-by-case basis, depending on individual circumstances. DNB is however not planning to adjust essential data requests to monitor current developments, such as the daily liquidity monitoring requests, or any data DNB is required to request under law on this.
Finally, we have seen that banks have been able to swiftly operationalise their business continuity plans, something which is important to continue focusing on in the period ahead. DNB urges all LSIs to stay in close contact with their account supervisor and swiftly raise any concerns or issues that may come up. As part of this, DNB still expects LSIs, in line with most recent SREP decisions, to immediately notify DNB of early warning signals, including if it is expected that the institution will fail to meet the Pillar 2 guidance.
DNB will continue to monitor developments, also in close contact with the ECB. DNB may take further measures as necessary, depending on how developments unfold.
1 In case an institution does not meet its Combined Buffer Requirement, the amount of dividends, coupon payments on AT1 instruments and variable remuneration which can be distributed by institutions will be limited to the maximum distributable amount as defined in Article 3:62b Wft jo. Article 105g Bpr jo. Article 141 CRD.