DNB's supervision of bank stability

Improvements at DNB in response to the credit crisis
Since 2009, DNB has taken measures to improve the organisation of its supervision of banks. It has incorporated the lessons learned from the credit crisis in its supervision strategy. It will in future pay more attention to the conduct and culture of financial institutions and to their business models and strategies. In tandem with this new approach, DNB has modified the way in which it analyses risks. The analysis is now based on potential threats in the external environment of a financial institution (or group of financial institutions). Unfortunately, we were unable to determine whether DNB had fully implemented this new approach to risk analysis or whether it was effective or not. Such an insight would require access to confidential supervision information.
In response to the credit crisis, DNB has also taken a critical look at its own culture and procedures. It has prepared an action plan containing several organisational and personnel measures to bring about cultural change.

Uncertain scope of DNB's supervision of banks
Although necessary changes have been made, there is still room for improvement. The main improvement relates to the uncertainty about DNB's ability to take measures at individual banks in response to the risks it identifies at macroeconomic level. Can DNB, for example, demand that an individual bank hold a higher capital buffer in the light of international economic conditions? Since the Financial Supervision (Banks) Act 1998 does not provide a clear answer, the decision is in effect left to DNB. We have the impression that DNB acts hesitantly and cautiously and opts for a 'safe' interpretation of the Act in the exercise of its supervision. Although it has been clear since the beginning of the credit crisis that macroeconomic risks can have a great influence on the stability of individual banks, DNB and the Minister of Finance have taken no steps yet to clarify the legal scope of DNB's supervisory tasks.

Supervision of DNB by the Minister of Finance still inadequate
The Minister of Finance's supervision of DNB is not yet adequate. It is uncertain, for example, what assurances for good supervision the minister checks at DNB and when the minister thinks DNB is performing adequately. A further problem is that the Ministry of Finance has little expertise in supervision. It does not have sufficient supervision capacity in-house. We also identified a risk to the independence of DNB's supervision of banks. The minister wishes to set his own policy rules in which he can ask DNB to give greater priority to certain aspects of supervision.

We recommend that the minister and DNB clarify the legal scope of DNB's supervisory tasks as soon as possible so that DNB can respond to all significant risks. We recommend that DNB evaluate its new approach to risk analysis within two years. We recommend that the Minister of Finance further elaborate upon his strategy for the supervision of DNB. In our opinion, the minister should report on his supervision of DNB to the House of Representatives every year. The report should be accompanied by a substantiated opinion on the performance of DNB.

Both the Minister of Finance and DNB are of the opinion that we do not have legal grounds to access individual supervision files. 

The minister said he would explain in his autumn 2011 'policy and legislation letter' how DNB's mandate will be further worked out. The minister's supervision relies to a large extent on the Supervisory Board in its capacity as internal supervisor of DNB. He has submitted a Bill to strengthen the role of the Supervisory Board.

DNB agrees with our conclusion that there is uncertainty regarding its ability to make macroeconomic risks known. It does not agree, however, with our conclusion that this uncertainty prevents the inclusion of macroeconomic risks in its supervision of individual institutions. DNB accepts our recommendation to provide more insight into the performance and effects of its own supervision.

In our afterword, we note that the minister did not consider DNB's mandate in his 'policy and legislation letter'. We repeat our recommendation that DNB's mandate and powers should be clarified as soon as possible. Regarding the division of accountability between the Supervisory Board and the Minister of Finance, we think it is particularly important that the minister is able to report to the House of Representatives on his own responsibilities.