BNB Regulation of 15 November 2011 on Own Funds

NBB_2012_05 – 04 June 2012 Circular 1 Prudential Policy and Financial Stability 14 Berlaimont Boulevard – BE-1000 Brussels Tel. +32 2 221 38 12 – Fax + 32 2 221 39 96 xx Enterprise number: 0203.201.340 RPM Brussels www.bnb.be Circular Brussels, 4 June 2012 BNB Regulation of 15 November 2011 on Own Funds Reference: NBB_2012_05 Page(s): 3 Your contact: Marc Peters Tel. +32 2 221 39 96 – Fax +32 2 221 31 04 marc.peters@nbb.be Scope Credit institutions, investment firms authorized as stockbroking companies, liquidation bodies, and bodies assimilated to liquidation bodies, and financial companies. Summary/Objectives The new Regulation of the National Bank of Belgium (BNB) on the own funds of credit institutions and investment firms of 15 November 2011 repeals the Regulation of the Banking, Finance and Insurance Commission (CBFA) of 17 October 2006 (as amended by the CBFA Regulations of 2 March 2010 and 27 July 2010) and transposes the provisions of European Directive 2010/76/EU (known as "CRD III") of 24 November 2010. Madam, Sir, The new Regulation of the National Bank of Belgium (BNB) on the own funds of credit institutions and investment firms of 15 November 2011 follows the institutional changes in prudential supervision that were implemented on 1 April 2011. It repeals the Regulation of the Banking, Finance and Insurance Commission (CBFA) of 17 October 2006 as amended by the CBFA Regulations of 2 March 2010 and 27 July 2010. The BNB Regulation also incorporates the modifications required by the transposition of European Directive 2010/76/EU (known as "CRD III") of 24 November 2010, amending Directives 2006/48/EC and 2006/49/EC regarding own fund requirements for the trading book and for resecuritisations. These new requirements are applicable from 31 December 2011.

Circular NBB_2012_05 – 04 June 2012 2 For information, the main modifications brought by CRD III to the calculation of own fund requirements concern the following elements: • Own fund requirements related to securitization exposures: The directive introduces specific risk weights for resecuritization transactions. These are higher than those applicable to traditional securitization transactions in order to take into account the increased risk of such exposures. Furthermore, within the framework of Asset Backed Commercial Paper (or "ABCP") programs, the directive no longer allows institutions to use external ratings assigned to commercial paper when they also provide support to the ABCP program, for example by means of a liquidity line. • Own fund requirements for market risks of the trading book: The modifications introduced by the directive mainly affect the treatment of specific position risk as well as the qualitative and quantitative requirements applicable to internal models. In this context, the directive introduces an additional charge for default and migration risk determined on the basis of a time horizon of 1 year and a liquidity horizon of at least 3 months. The specific risk for equity positions is increased from 4% to 8%. In the context of using internal models for both specific and general risk, the directive also requires institutions to calculate an additional own fund requirement based on the risk value during periods of stress in financial markets (i.e. "Stressed VaR"). The directive also provides that the treatment of securitization and resecuritization transactions in the trading book be aligned with that of the non-trading book. The directive recognizes, however, a transitional period in this context, until 31 December 2013, during which institutions will calculate their own fund requirements based on the maximum of the requirements obtained on net long positions or on net short positions. Furthermore, the directive also introduces a specific treatment for so-called "correlation trading" activities. Furthermore, the directive has also extended to assets measured at fair value outside the trading book the obligation to make additional valuation adjustments to take into account uncertainties related to valuation, as was already provided for trading book positions. Finally, while CRD III provides for the maintenance of the general floor applicable to banks using internal models for credit risk, known as "IRB", or for operational risk, known as "AMA", and of the 10% floor applicable to the Loss Given Default (or "LGD") of residential mortgage loans until 31 December 2011, the European Commission invited Member States to take the necessary measures to anticipate the provisions of the current draft directive "CRD IV". In this context, the BNB maintains, for an indefinite period, the floor relating to the LGD of residential mortgage loans and extends the general floor applicable to IRB or AMA banks until 31 December 2015. This new regulation was adopted by the BNB in accordance with the provisions of Article 12bis § 2 of the Law of 22 February 1998 establishing the organic status of the National Bank of Belgium.

3 The Royal Decree approving the BNB Regulation was adopted on 19 March 2012 and published in the Belgian Monitor on 27 March 2012 1 . An electronic version of the regulation is available on the BNB website (www.nbb.be) under the following sections: • For financial companies and credit institutions: Supervision Areas > Credit Institutions > Legislation; • For stockbroking companies: Supervision Areas > Stockbroking Companies > Legislation; • For liquidation bodies and assimilated bodies: Supervision Areas > Liquidation and Clearing Bodies > Legislation. A copy of this is sent to the commissioner(s), approved auditor(s) of your institution. Please accept, Madam, Sir, the expression of our distinguished sentiments. Luc Coene Governor 1 An erratum was published in the Belgian Monitor dated 30 March 2012.