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    DNB Extends Certain COVID Requirements to Less Significant Entities

    May 27, 2020

    DNB announced that it is extending, to less significant institutions, the ECB relief measure on temporary reduction in capital requirements for internal model capital requirements for market risk. DNB also published the guidance that DNB needs to be notified when a Dutch credit institution seeks recognition of its loan moratorium as a general moratorium. In another statement, DNB highlighted the importance of more frequent value monitoring or real estate appraisals in light of the uncertainties arising from COVID-19 pandemic, as the appraised market value is the starting point for determining the capital requirements.

    Recently, ECB has announced a temporary reduction in capital requirements for significant institutions using internal models for market risk, by allowing these banks to adjust the supervisory component of these requirements. DNB announced that it is extending this relief measure to all Dutch less significant institutions. DNB agrees with the ECB statement to temporarily reduce the qualitative market risk multiplier to compensate for the currently observed increases of another factor, the quantitative multiplier, which can increase when market volatility has been higher than predicted by the internal model of a bank. This decision will be reviewed after six months on the basis of observed volatility.

    DNB issued guidance and template for the notification of non-legislative general payment moratoria. On April 02, 2020, EBA published guidelines on legislative and non-legislative moratoria on loan repayments applied in the light of the COVID-19 crisis. The guidelines clarify the requirements for the recognition of private moratoria as general moratoria. Such recognition can prevent that banks need to classify loans falling within the scope of the moratorium as forborne or non-performing exposures due to distressed restructuring. The guidelines require institutions to notify their national competent authority. This means that DNB needs to be notified when a Dutch credit institution seeks recognition of its moratorium as a general moratorium. This applies to both the "less significant institutions" that are directly supervised by DNB as well as the "significant institutions" that are supervised by ECB. Credit institutions that have already publicly communicated their moratorium are requested to send in their notification by May 29, 2020. Credit institutions that are preparing new moratoria are asked to send in their notification no later than 5 working days after the public announcement of a moratorium.

    With respect to real estate appraisals, the published DNB statement highlights that, despite the COVID-19-related uncertainties in the valuation of real estate, the appraised market value is the starting point for determining the capital requirements. In accordance with the EU Capital Requirements Regulation or CRR, the market value, determined by an independent, qualified appraiser, is the basis for determining capital requirements. COVID-19, due to the social distancing and related restrictions, can hinder the performance of valuations and cause uncertainties in the valuation. This applies to loans secured by mortgages on commercial or residential real estate. Despite the current uncertainties, no haircut needs to be applied to the market value. This applies to banks that apply the standard or the internal models approach. However, institutions are free to apply measures that are more stringent than those prescribed in the regulations (Article 3 of CRR). Banks are, therefore, allowed to apply haircuts to the valuation of real estate if they consider this appropriate for risk management reasons, given the uncertainties in the valuation. Additionally,valuers should conduct valuation in accordance with relevant valuation standards. With the strongly changing market conditions due to COVID-19, a more frequent audit of the valuation of real estate is appropriate.

     

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    Keywords: Europe, Netherlands, Banking, Loan Moratorium, Regulatory Capital, Market Risk, Basel, Real Estate Appraisals, CRR, COVID-19, DNB

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