NETHERLANDS Law and Practice Contributed by: Johannes de Jong and Juliet de Graaf, Osborne Clarke N.V.
Qualitative requirements The CRR addresses the quality of capital by the extent to which the capital can absorb losses and classifies the capital into different tiers. Tier 1 capital, comprised of Common Tier 1 (CET1) capital and Additional Tier 1 (AT1) capital: • CET1 capital: As the highest quality of capital, CET1 capital represents the core equity capi - tal of a bank and enables it to absorb losses immediately without significantly impact - ing its operations or stability. It consists of capital instruments, share premium accounts related to these capital instruments, retained earnings, accumulated other comprehensive income, other reserves and funds for general banking risks. • AT1 capital: AT1 capital is Tier 1 capital that is not CET1 capital and consists of capital instruments and the share premium accounts related to these capital instruments. AT1 capi - tal has certain characteristics; eg, the provi - sions governing the instruments must require that, when the CET1 capital ratio falls below 5.125%, the principal amount of the instru - ments will be written down on a permanent or temporary basis or the instruments will be converted into CET1 instruments. • Tier 2 capital: Tier 2 capital is considered to be of lower quality. This tier includes instru - ments such as subordinated debt instru - ments, which hold a subordinate position to other debts in the event of liquidation or bankruptcy. While Tier 1 capital forms the pri - mary layer of a bank’s capital structure, Tier 2 capital provides an additional cushion. Quantitative requirements In order to ensure that banks maintain sufficient financial cushion to absorb potential losses, the CRR addresses the quantity of capital by stipu -
lating that banks must maintain specific capital ratios, expressed as percentages of the total risk exposure amount. This exposure amount is calculated using risk-weighted assets (RWA). In principle, banks must maintain (i) a Common Equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; and (iii) a total capital ratio of 8%. CRR3 changes the way banks calculate their RWA, requiring a more standardised calculation approach. Additionally, CRR3 introduces an out - put floor, setting a minimum limit on the own funds requirements of banks calculating their RWA by using internal models. In addition to the above three capital ratios, banks are required to maintain a minimum of 3% leverage ratio. The leverage ratio is calculated by dividing a bank’s Tier 1 capital by its total exposure. Unlike the capital ratios above, the leverage ratio takes into account the unweighted total exposure rather than the total risk-weighted exposure. In addition to the capital ratios mentioned above, banks must uphold a capital buffer, comprising the following elements: (i) the capital conserva - tion buffer, set at 2.5%, which consists of CET1 capital; and (ii) the institution-specific counter - cyclical capital buffer, confirmed by the DNB in September 2024 to remain at 2%. Systemically important banks may be subject to additional buffer requirements, including a Global Systemically Important Institution buffer (G-SII) or an Other Systemically Important Insti - tution (O-SII) buffer, as well as a systemic risk buffer.
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