FRSGlobal : Risk Analysis and Regulatory Reporting

Regulators in the Netherlands

The Netherlands has two regulatory bodies for the financial industry:

• The Dutch National Bank, De Nederlandsche Bank (DNB)
• The Authority for the Financial Markets, Autoriteit Financiële Markten (AFM)

FRSGlobal in the Netherlands

After 26 years of uninterrupted economic growth, the Netherlands’ economy was hit hard by the global economic crisis. This was mainly due to the open economy which is dependent upon foreign trade and financial services.

The Dutch financial sector also suffered, partly due to the high exposure of some Dutch banks with US mortgage-backed securities.

In response to the turmoil within the financial markets, the Dutch government nationalised two banks and injected millions of Euros into a third, to prevent further systemic risk. This in turn has meant the need for more stringent regulation and changes in its supervision.

In its publication “Visie DNB toezicht 2010 – 2014”, the Dutch National Bank identified two important changes for its supervision.

• More cross-institutional supervision.
• More attention to strategic and qualitative elements in supervision in addition to the traditional criteria such as solvability and liquidity.

Regulatory Environment — Netherlands

Statutory

FINREP

The European Banking Authority (EBA) has officially taken over all the ongoing tasks of the Committee of European Banking and Supervision (CEBS). Along with financial reporting, the EBA aims to play a major role in promoting supervisory convergence and advising institutions within the European Union (EU) in the areas of banking. A subset of these reports is required by the De Nederlandsche Bank (DNB) and some national discretion has been applied. FINREP comprises among others reports like Consolidated Balance Sheets for assets, liabilities, and equities, financial liabilities, information on credit risk and impairment, analysis of equity, financial guarantees for loans and other commitments etc. Beside financial institutions with IFRS based reporting, all banks that need to report COREP are also required to file FINREP for consistency reasons. These banks are referred to as T9 Banks, for which the scope of FINREP reporting is slightly more limited than for IFRS reporting banks.

Monthly Statutory Returns /Maandstaten (MND)

Some financial institutions are not required to report under IFRS accounting and are not required to file capital adequacy reporting (COREP). This group is supported by our MND solution that comprises: balance report, solvency, liquidity (general) and liquidity (detailed) reports, large exposure and country risk reports.

Insurance balance sheet reporting (Solvency II)

Insurance companies underwent changes when their supervision moved to the De Nederlandsche Bank. A much greater change for the insurance market is foreseen with the introduction of Solvency II. The major difference between Solvency II and the current reporting is that the current reporting is primarily general ledger based, whereas Solvency II requires reporting on individual contract basis. For statutory reporting the Solvency II framework includes reports like C1 and C2. Our solution meets the statutory reporting requirements for Solvency II.

Prudential

COREP

Our COREP application is integrated into the solution for the Netherlands - finely tuned to meet local discretions. The COREP application comprises report templates, data processes and calculations. It includes the common reporting requirements with standardised approaches for credit risk, market risk, operational risk, and solvency details. Currently reporting on liquidity and large exposures is covered by MND (Maandstaten). However the EBA has included reporting standards in the COREP framework for this, which means that the current reporting will be replaced latest by 2012.

NL PILLAR 2

An integral part of our reporting solution includes the NL version of the Pillar 2 reports on Interest Rate Risk and concentration risk both sector and country wise.

Insurance prudential reporting (Solvency II)

Prudential reporting for insurance companies will change drastically with Solvency II. Far more calculations and stressing of positions is included in the new reporting. Historically these areas were perceived to be the exclusive domain of the risk management department and rather internal to the financial institution. Our solution is fully compliant with reporting requirements of Solvency II. Reporting includes market risk, concentration risk, underwriting risk, etc. Also included is functionality in areas like stress testing, valuation of contracts and of course capital requirements calculation.

Statistical

Socio-economic reports (SE)

The depth of statistical reporting for a financial institution depends on the size of the entity. The aim of the DNB is to limit the reporting burden and focus only on statistically significant institutions. There are three categories of reporting referred to as ‘hoofdkenmerk’ (HK):

• HK1: Full statistical reporting is required for this category, including a statistical balance sheet per country of counterparties with which the institution has positions
• HK2: Limited statistical reporting
• HK3: No monthly statistical reporting, however a yearly benchmark form to be supplied to DNB to determine whether the financial institution remains in HK3 or has become statistically significant

This type of reporting includes monthly reports on SE (Social Economical) Positions, MFI (Monetary Financial Institutions) Interest Rates, SE balance of payments with additional reports on MFI Securitizations and SPV (Special Purpose Vehicles) position and statistics. Also included are statistical netting rules.

Transactional

Balance of Payments (Direct Reporting – DRA)

DRA reporting has been introduced initially to replace cross border reporting, in particular ‘A and B forms’ for each significant transaction. All companies appointed as statistically significant are required to do direct reporting to the DNB. As cross border activity does not consider the nature of the company, the DNB has assigned profiles to companies. Depending on their profile companies need to provide information relevant to their type of activity using different forms. Our solution covers most of DRA profile reporting, like: BFI, BWB, CLM, CSD, Diensten, MFI, NFV, OFI, SLB, and SLN on monthly and annual basis. It also covers reports for pensions and insurance such as PNM, PNK, VRM and VRK.

What’s Coming Up — Netherlands

DNB strategy for supervision for 2011-2014: Higher liquidity and solvency requirements for banks, more stringent capital requirements – notably for securitised credit products, off-balance sheet vehicles and trading book positions.

CRD III amendments

On 28 April 2011, the European Banking Authority (EBA) published revision of its framework on Common Reporting (COREP). The changes to the COREP templates take account of the CRD III amendments (Directive 2010/76/EU) mainly related to higher risk weights for re-securitisation exposures (SA & IRB). The changes affecting Netherlands COREP reporting will be applicable from 31 December 2011.

FINREP

On 15 December 2009, the EBA (formerly CEBS) published its revised guidelines on financial reporting (FINREP rev2). These changes will be implemented from 1 January 2012. A new revised framework (FINREP rev3) will be published by the new European banking Authority (EBA) at the end of 2011 with an application date of 1 January 2013. This revision will potentially take into account all relevant IFRS amendments with the same application date, provided they are endorsed at EU level.

Liquidity reporting

As an intermediate step until standardised liquidity guidelines are introduced at the European level (CRD IV), the DNB on 1 April 2011 introduced new liquidity reporting format (sheets 8028 and 8029). The liquidity calculations in this new report format are subject to a number of revised weighting percentages and classification requirements. The first monitoring round was scheduled for May-June 2011 in a trail environment. Full implementation of this new report is foreseen in 2012 end on a standard basis for observation purposes until internationally harmonised liquidity requirements will formally be applied.

DNB Migration to Basel III Monitoring:

As the introduction of Basel III will have significant implications for the Dutch banking industry, the DNB will be closely monitoring a bank’s solvency, leverage and liquidity position. Thus for banks to prepare themselves thoroughly for the new Basel III requirements the DNB has launched three projects – migration plan, regular monitoring and introduction of ILAAP.

The Basel III Accord specified a phased implementation track. The implementation has already started in 2011 with regular monitoring of banks' capital ratios, leverage ratio, liquidity coverage ratio (LCR) and net stable funding ratio (NSFR). During 2013–2018, the new minimum solvency requirements will be phased in, and the leverage ratio will be subject to parallel reporting. Next, in 2018 the leverage ratio will be brought under Pillar 1. The LCR will be a requirement from 2015, the NSFR from 2018. During this period, the European Commission will be implementing Basel III in the European Capital Requirements Directive (CRD IV).

Solvency II

Regarding the supervision of insurance, the DNB has high expectations of the introduction of the new solvency framework, known as Solvency II. Ahead of the introduction of Solvency II, which is now planned for October 2012, the DNB is encouraging maximum participation by insurers in the preparations for Solvency II. To be ready for the launch of Solvency II on 1 January 2013, the DNB has created an internal Solvency II Project Group.

Country risk report (form 8023)

Proposed tentative changes in Country risk reports (Landenrisicorapportage), scheduled for March 2013 are:

• Split up the column consolidated cross border claims in all currencies and local claims in foreign currencies (on basis of direct debtor)
• Change sector breakdown to (i) banks, (ii) banks within own concern, (iii) public sector, (iv) not-banking financial institutions, (v) non-financial institutions, (vi) householders, (vii) other (on basis of direct and final debtor)
• Report domestic claims (on basis of direct and final debtor)
• Add equity and/or tier 1 capital (on basis of direct debtor)
• Add liability side of the balance: (i) equity, (ii) deposit’s, (iii) debt securities, (iv) derivatives, (v) other liabilities (on basis of direct debtor)

CEBS change over to EBA

The European Banking Authority (EBA) came into effect from 1 January 2011 and took over the responsibilities of Committee of European Banking Supervisors (CEBS). EBA is responsible for safeguarding public values such as stability of the financial system, transparency of markets and financial products, protection of depositors and investors wealth.

Financial Reporting (FINREP)

The aim of FINREP has always been to harmonise the financial reporting within the member states to improve comparability. However after implementation it has become apparent that the large number of national discretions has prevented to reach this goal. With the announced adjusted guidelines, the member states are obliged to apply at least the balance sheet and P&L statement and can choose out of 23 additional templates to apply. However CEBS insists that on all templates that the national regulator adopts, no changes should be made to its meaning or appearance.

Further it asks the member states for a firm commitment that the FINREP reporting will be the only consolidated financial reporting that an individual banking group has to provide to the regulator. Also the scope of consolidation will need to be aligned with the CRD.

Common Reporting (COREP)

In general the adoption of the COREP templates has been more straightforward between the member states than FINREP. However there have been still numerous differences. Here CEBS intends to align this further medium term with clearer definitions and tuning of the COREP templates.

Large Exposures is included in the COREP framework with the revised guidelines. It will be applicable as of 1st of January 2011, but only move into a binding core reporting framework as of 31st December 2012.

Read our data sheet for more information on the Large Exposure Reporting requirements

Concentration risk

Draft guidelines have been published on a revision of the concentration risk reporting. The most notable change is that reporting on concentration risk within an individual risk type (intra-risk) is considered to be insufficient. It pleas for reporting based on risk interaction (inter-risk) and would be related to credit, market, operational and liquidity risks.

Read the comment piece “CEBS pushes forward with reporting harmonisation agenda” for more information on the new requirements and their impact on financial institutions »

CEBS stress testing

Read the comment piece "CEBS stress testing" which looks at the results of the CEBS EU-wide stress testing exercise of July 2010, compares them with the previous US and UK FSA stress testing results, and looks at what the market can glean from them »

Managing and Monitoring Liquidity

To strengthen financial supervision, the Basel Committee on Banking Supervision (BCBS) has proposed two regulatory standards for liquidity risk for achieving two separate but complementary objectives.

The first objective is to promote short-term resiliency of the liquidity risk profile of institutions by ensuring that they have sufficient high quality liquid resources to survive an acute stress scenario lasting for one month. The Committee developed a Liquidity Coverage Ratio to achieve this objective. The Liquidity Coverage Ratio identifies the amount of unencumbered, high quality liquid assets an institution holds that can be used to offset net cash outflows it would encounter under an acute short-term stress scenario specified by supervisors.

The second objective is to promote resiliency over longer-term time horizons by creating additional incentives for banks to fund their activities with more stable sources of funding on an ongoing structural basis. A Net Stable Funding ratio has been developed to capture structural issues related to funding choices. The Net Stable Funding ratio (NSF) measures the amount of longer-term, stable sources of funding employed by an institution relative to the liquidity profiles of the assets funded, and the potential for contingent calls on funding liquidity arising from off-balance sheet commitments and obligations.

These two standards comprise mainly of specific parameters which are internationally “harmonised” using specific and concrete values. Certain parameters, however, will need to be set by national supervisors to take account of jurisdiction-specific conditions. For example, the percentage of potential run-off of retail deposits is partially dependent on the structure of a jurisdiction’s deposit insurance scheme. In these cases, the parameters should be transparent and clearly outlined in the regulations of each jurisdiction.

The EBA is taking several measures and working on a common framework for liquidity reporting within the European region. It will initiate a separate thematic review of liquidity funding risks across the EU banking sector. The EBA will then use this internal review to inform supervisory authorities about the areas of vulnerability in relation to liquidity risk.

The EBA is expected to publish guidelines and consultation papers on the new liquidity reporting requirements soon. The De Nederlandsche Bank’s strategy for supervision is to follow the principle based approach and be flexible toward the harmonisation efforts of the EBA.

It is expected that until 2015, no internationally harmonised liquidity requirements will formally be applied. However prior to that time, from 2012 onward internationally agreed liquidity ratios; the Liquidity Coverage Ratio and possibly later the Net Stable Funding Ratio – will be reported on a standard basis for observation purposes.

Solvency II

Solvency II, a fundamental and wide-ranging review of the capital adequacy regime for the European insurance industry, aims to strengthen prudential regulation and improve policyholder protection.

January 1, 2013, is the expected global implementation date when all member states of the European Union (EU) will be obliged to implement Solvency II.

The project initiated by the European Commission as an advancement to Solvency I aims to enhance a revised set of EU-wide capital requirements and risk management standards.

The objective of the new system is to introduce more sophisticated solvency requirements for insurers, to guarantee that they have sufficient capital to withstand adverse events, such as floods, storms or big car accidents and offer some protection against systemic economic failures.

Currently, EU solvency requirements cover insurance risks, whereas in future insurers would be required to hold capital also against market risk (e.g. a fall in the value of an insurer's investments), credit risk (e.g. when debt obligations are not met) and operational risk (e.g. malpractice or system failure). This will help to increase their financial soundness with implementation of sound economic risk management practices in insurance industry.

With the demand for a more streamlined approach towards supervision, the Directive would enable insurance groups to be supervised more efficiently, through a College of Supervisors appointed among the supervisory authorities in the home country that would have specific responsibilities to be exercised in close cooperation with the relevant national supervisors.

The group supervisor would ensure that group-wide risks are not overlooked and would enable groups to operate more efficiently, while providing policyholders with a high level of protection. Groups that are sufficiently diversified may also be allowed to lower their capital requirements under certain conditions.

The Directive often referred as Basel II for insurers is based on a three pillar approach which is similar to the banking sector (Basel II) but adapted for insurance.

The three Pillars of this new regime are structured as below:

The new provisions of Solvency II will be adopted under the Lamfalussy process:

In January 2011 the Omnibus II Directive proposed changes aligning the level 1 text with the Lisbon Treaty and amending the text to reflect the EU’s new supervisory structure

Level 1 – The European Commission adopts formal proposal for the directive (regime’s main outline and high level standards) approved by the European Parliament and the European Council.

Level 2 – Includes introduction of delegated acts developed by the European Commission. The European Commission is advised by the European Insurance and Occupational Pensions Authority, EIOPA (formerly Committee of European Insurance and Occupational Pension Supervision)- representing all insurance supervisors throughout the EEA.

Level 3 – The EIOPA adopts guidelines and recommendations, carries out peer review, mediates and settles agreements, takes action in emergency situations, facilitates delegation of tasks and responsibilities, monitors and assesses market developments, undertakes economic analyses and fosters investor protection.

Level 4 – Enforcement of European Union law (EIOPA and European Commission). The Commission ensures all member states have implemented the legislation correctly.

The EIOPA has recommended Bermuda, Switzerland and Japan to be the first countries assessed for equivalence with EU insurance regulations under Solvency II. This will facilitate the preservation of a level playing field in Europe, with equal protection of all policyholders within Europe and equivalent jurisdictions.

The new Solvency II requirements with challenges and opportunities ahead will be more risk-sensitive and more sophisticated than in the past, thus enabling a better coverage of the real risks run by any particular insurer.

Insurance companies in Europe have already started their implementation processes and self assessments before the final directive comes into force. Through this exercise and by using the results of QIS 5 companies aim to analyse the factors driving the capital requirements, judge current arrangements and assess Solvency Capital Requirements (SCR).

As measures to launch solvency II on January 1, 2013, the De Nederlandsche Bank (DNB) has created an internal Solvency II Project Group and published a Solvency II implementation document in February 2010 explaining the expectations of the DNB from insurers.

Insurers too have initiated internal preparations for Solvency II. Within the Solvency II project, the subject of internal models is a major item. To enable insurers to use their internal models as soon as possible after January 1 2013, the DNB has launched pre-application of the Internal Model.

Maximum harmonization is assumed with the new Solvency II framework Directive. This means European rules will be implemented not only in Dutch legislative and regulatory provisions, but in all countries of the European Economic Area (i.e. the EU plus Iceland, Liechtenstein and Norway).

Our Solvency reporting solution is equipped with actual report formats that meet the data and compliance requirements of the EIOPA and the European Commission.