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Bill Implementation Capital Requirements

  • Netherlands
  • Banking and finance

15-04-2014

Since January 22, the bill on the implementation of the capital requirements regulation and directive is being debated in the House of Representatives (the “Bill”). The Bill implements, in addition to the Basel III Capital Accords, additional requirements for the harmonisation of the prudential supervision on banks and investment institutions.

The Bill implements the more strict capital requirements as set out in the Basel II Capital Accords, which do not only apply to banks but also to certain investment institutions. The capital requirements are tightened both quantitatively and qualitatively.

In addition, four capital buffers are introduced: (i) contracyclical capital buffer, which is meant to address fluctuations in the credit cycle, (ii) the capital preservation buffer of 2,5% of the risk weighed assets, (iii) the system relevance buffer with which all banks that are considered to be relevant to the system should comply and (iv) the system risk buffer which is used to address long term, non-cyclical system ratio’s or macroprudential risks. These last two buffers may be implemented by the member states at their discretion, which the Netherlands has opted to do.

Also, additional requirements are imposed to the liquidity of banks, by the introduction of the liquidity cover ratio and the net stable finance ratio. The liquidity cover ratio indicates to what extent a bank can satisfy a possible outflow of repayable deposits on a 30 day term by selling very liquid assets. The net finance ratio determines the proportion of short term financing compared to the long term loans.

A four year observation period is introduced for the creation of a lever ratio. The goal of the introduction of the lever ratio (expected to take place in 2018) is to normalize the proportion of equity compared to borrowed capital. The Dutch government’s aim is to have a lever ratio of at least 4% for all system relevant banks within the EU.

Finally, the Bill puts a limit on variable remunerations for employees whose activities may have a substantial influence on the institutions’ risk profile, an extension of the powers of the Dutch Central Bank for any violation of rules prudential supervision and a limitation of the mandatory declaration of no objection which must be obtained in relation to any distributions to be financed by equity. The declaration of no objection will be limited to distributions to be financed by tier-1 equity assets.

The Bill is expected to enter into force mid 2014. 

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