DNB announced the supervisory approach for Less Significant Institutions, or LSIs, in light of the COVID-19 crisis. These institutions will be allowed to temporarily operate below the level of capital defined by the Pillar 2 Guidance and the capital conservation buffer and below the required liquidity coverage ratio (LCR). Also, DNB is leaving the Countercyclical Capital Buffer (CCyB) at 0%. However, DNB communicated that eventually the CCyB will be built up to 2%. Furthermore, DNB supports the ECB recommendation for significant credit institutions not to pay out dividends for 2019 and 2020 until at least October 01, 2020. DNB also considers this recommendation to be applicable to the Less Significant Institutions that are under the direct supervision of DNB.
In line with the measures taken by ECB, DNB has announced the following measures for Less Significant Institutions:
- DNB may consider providing operational relief to the Less Significant Institutions. DNB may also 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 that DNB is required to request under law on this.
- Pillar 2 requirements can partially be met by capital instruments that do not qualify as common equity tier 1 (CET1) capital. The Pillar 2 requirements no longer need to be composed entirely of CET1 capital, but can be a reflection of the minimal capital composition under Pillar 1 requirements—that is, at least 56.25% CET1, 18.75% Additional Tier 1 instruments (AT1), and 25% Tier 2 instruments. This change in capital composition under Pillar 2 requirements was initially scheduled to come into effect in January 2021, in line with the revised approach under the revised Capital Requirements Directive (CRD V), but is instead being brought forward now. However, DNB can still request banks to hold a different Pillar 2 requirements composition, depending on bank-specific circumstances.
- DNB decided to lower the systemic buffers for the three largest Dutch banks (ING, Rabobank, and ABN Amro). This measure will remain in force as long as necessary. Once the situation is back to normal, DNB will compensate the systemic buffer reduction by gradually increasing CCyB to 2% of the Dutch risk-weighted exposures. This compensatory arrangement will work out to be more or less capital-neutral for the three large banks involved and the same effect is envisaged for the other banks, including the Less Significant Institutions.
- DNB 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.
- As part of the Pillar 2 supervisory requirements, DNB has, on a case-by-case basis, imposed limits on asset encumbrance. Given the current circumstances, DNB may allow (on a case-by-case basis) for some temporary relaxation of these asset encumbrance limits.
These measures provide capital and liquidity relief to the Less Significant Institutions for use in support of the economy. Also, the Less Significant Institutions 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. DNB urges all Less Significant Institutions 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 the Less Significant Institutions, in line with the most recent Supervisory Review and Evaluation Process (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 the situation unfolds.
- Press Release on Capital Measures (in Dutch)
- Press Release on Buffer Requirements
- Press Release on Dividend Payouts (in Dutch)
- Press Release on CCyB Requirement
Keywords: Europe, Netherlands, Banking, COVID-19, CCyB, Systemic Risk, Basel III, Dividend Distribution, Asset Encumbrance, Pillar 1, Pillar 2, Regulatory Capital, Less Significant Institutions, CRD, DNB
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