At the end of 2016, the Dutch Central Bank (De Nederlandsche Bank, “DNB“) published its Supervision Outlook 2017. This document presents DNB’s priorities related to their supervision of financial industries. Furthermore, the document identifies DNB’s view on the principal risks and challenges for the Dutch financial industry. This article summarizes the contents of DNB’s Supervision Outlook 2017.
DNB identifies the following industry-wide risks and challenges:
- low interest rates;
- technological innovations;
- capacity for change;
- legislative complexity;
- terrorist financing, money laundering and sanctions;
- climate risks; and
- financial economic risks and political risks.
The financial institution related supervision priorities of DNB are based on the abovementioned risks and challenges. This contribution includes DNB´s priorities for banks, insurers, investment firms, investment funds and payment institutions, which are subsequently discussed below.
The ongoing low interest rates and more stringent legislation may exert pressure on the profitability of banks. In that context, the following priorities apply to banks:
Low interest rates
DNB aims to create better awareness on the impact of the ongoing low interest rates and will identify whether banks adapt their risk profiles accordingly.
Ongoing amendment of legislation
The revisions of the Basel Committee are heading towards their end. In this regard DNB will assist in declining unfunded differences in risk weightings for capital requirements performed by banks.
Phase-out of non-performing loans (“NPLs“)
DNB will be involved in the Single Supervisory Mechanism (“SSM“) harmonized process to phase-out NPLs by banks with too high levels of NPLs.
Reassessment of the internal models
DNB will play a role in the SSM initiative to reassess internal models of significant banks on market risk, counterparty risk and credit risk. The reassessment will continue for two years.
DNB will investigate the level of controlling credit risks of certain portfolios held by banks. The portfolios of focus for 2017 are loans granted to small and medium sized companies, commercial real estate, and commodities and trade financing.
DNB recognizes that the insurance sector is facing big challenges. According to DNB, limited technical innovation (“FinTech“), low interest rates and changing client behavior lead to structural changes in the insurance sector with the effect that insurers are compelled to re-invent themselves. In that context, the following priorities apply to insurers:
DNB recognizes that FinTech has great potential in the insurance sector. In this light, DNB aims to investigate the potential impact of FinTech on insurers’ revenue models.
Stress test general insurers
To gain better insight in the risk exposure of general insurers, DNB will conduct stress tests in 2017.
Product Approval and Review Process (also known as ‘PARP’)
According to DNB, several general investors have sold loss-making products, due to amongst others, high competition and pressure on profit margins. To gain better insight into this development, DNB will investigate the extent to which loss making products are sold.
Risk management function
DNB will investigate whether the implementation of the risk management function complies with the obligations for key functions addressed in Solvency II.
Investment firms and managers of investment funds
Expressing its concern on non-adequate capital buffers, the following priorities for investment firms and managers of investment funds apply:
DNB will investigate revenue models. In light of the importance of ongoing legislative compliance, DNB will particularly focus on how adjustments in revenue models affect compliance and risk within the institution. Furthermore, DNB will investigate revenue models of asset managers that are part of a group of financial institutions.
Liquidity-risk open-end investment funds
DNB will perform stress tests to identify investment funds with serious liquidity risks. If so, DNB will approach the fund to mitigate these risks.
DNB intends to perform on-sight investigations at large investment firms and investment fund managers. DNB will inter alia investigate risks in the revenue models, outsourcing risks, IT-risks and the internal models for the calculation of capital of these firms.
DNB recognizes that the market for payment services is changing rapidly and that competition is strong. The following priorities apply for payment institutions:
Vulnerable payment institutions
Vulnerable payment institutions will be asked to take measures in order to make their profit-models future proof or to choose for a controlled exit.
Recovery and exit plans
In order to be aware of the recovery options in an early stage, DNB will ask payment institutions to draft recovery and exit plans.
DNB believes that payment institutions give too little priority to integrity risks. The integrity supervision of DNB will focus, amongst others, on systematic integrity risk analysis (also known as ‘SIRA’), the prevention of terrorism financing and the compliance with the Dutch Law on sanctions (de Sanctiewet).
Medium sized and large payment institutions
In 2017, DNB will increase its supervision capacity to intensify supervision on medium sized and large payment institutions.
– Juliet de Graaf and Anka Langedijk