The system of supervision of financial markets

In the Netherlands, DNB supervises both the robustness of financial institutions and the stability of the financial system as a whole. Its supervision of robustness is designed to ensure that individual banks act prudently with the funds entrusted to them (such as savings) and are able to fulfil their obligations on a timely basis. Supervision of the financial system as a whole is concerned with the proper operation of payment transactions and prevention of the risk of instability in the financial system.

A number of supervisory problems need to be resolved. One of the critical themes is the growing internationalisation of financial institutions. Supervision is not keeping pace with this development; although banking standards are set largely at global and European level, supervision of individual institutions remains a national responsibility. 

Two other critical themes we draw attention to relate to regulation. Firstly, until 2008, supervision of the stability of the financial system as a whole did not receive the attention it deserved in terms of regulation. Supervision was founded on an assumption that proved to be false: the stability of the financial system as a whole is sufficiently assured by the stability of individual financial institutions. A second shortcoming in the regulations relates to the capital buffers that institutions must hold to fulfil their obligations. The capital requirements for products held for trading purposes, for example, are too low. The attendant risks were not recognised, or at best were underestimated, by internal risk management systems and credit rating agencies.

A fourth critical theme we identified in our study is the quality of the management of the financial institutions themselves. Neither banks nor supervisors paid much attention before the crisis to the risks of remuneration systems, the expertise of managers and the short-term focus of shareholders.

Our exploratory study also found areas of tension relevant to the operation of DNB. DNB's public pronouncements on financial institutions can jeopardise the stability of those institutions, for example, but if DNB fails to issue warnings it does not bolster confidence in its supervision. In the final analysis, the supervisor must strike a fine balance between the various interests at play.

In this first exploratory study we do not make any recommendations for improvement but highlight a number of areas in which there are opportunities for improvement. Firstly, the size and complexity of the financial system has increased significantly and this has created challenges for its supervision. Secondly, as both central bank and bank supervisor, DNB is in a good position to oversee the further development of its supervision of the stability of the financial system as a whole. For it to carry out and account for this task, however, legislation must define more clearly precisely what supervision of the financial system as a whole entails. Thirdly, it is essential to have a proactive regulator and an alert supervisor that actually makes use of the statutory opportunities available to it to make its own decisions and assessments.

The Minister of Finance, the Governing Board of DNB and the Management Board of the Netherlands Authority for the Financial Markets (AFM) responded favourably to our exploratory study. They had specific comments on the areas of tension we identified. The Minister of Finance said certain areas of tension could have been considered in more detail. DNB's Governing Board wrote that in many cases built-in assurances mitigated conflicts of interest and that we sometimes thought there was more friction than there actually was.