CREFS

Committee for Systemic Risks and Systemically Important Financial Institutions

---

CREFS Circular CREFS_2010_01 of 26 October 2010

Circular to Systemically Important Financial Institutions

Scope:

Systemically important financial institutions as referred to in Article 2, paragraph 1, point 40 of the Act of 2 August 2002 on the supervision of the financial sector and financial services and included on the list established by the CREFS.

Summary/Objectives:

This circular intends to provide systemically important financial institutions with explanations regarding the missions of the Committee for Systemic Risks and Systemically Important Financial Institutions (CREFS) and their obligations towards it.

---

Madam,
Sir,

1. Introduction

On 28 September, the Act of 2 July 2010, known as the "Twin Peaks" law¹, was published in the Belgian Monitor.

This law establishes a new administrative authority, the "Committee for Systemic Risks and Systemically Important Financial Institutions", abbreviated as "CREFS", whose missions consist of contributing to the preservation of financial system stability and, in particular, ensuring the supervision of "systemically important financial institutions" and taking, with regard to these institutions, all individual administrative decisions of a prudential nature as provided for in the laws governing the supervision of these institutions.

The CREFS is an autonomous body with legal personality. It is composed of the members of the management committees of the National Bank of Belgium (hereinafter the Bank) and the CBFA, as well as a member of the Federal Public Service Finance designated by the Minister of Finance, this member sitting in an observer capacity. The CREFS is chaired by the Governor of the Bank.

The powers conferred on the CREFS are transitional, namely pending the implementation of the provisions of Article 26 of the aforementioned Act of 2 July 2010, which provides that the Bank becomes the prudential supervisor, notably for systemically important financial institutions, while the CBFA ensures, with regard to these same institutions, the cross-sectoral supervision of conduct rules, market surveillance, as well as information and consumer protection².

---

¹ Act of 2 July 2010 amending the Act of 2 August 2002 on the supervision of the financial sector and financial services, as well as the Act of 22 February 1998 laying down the organic statute of the National Bank of Belgium, and containing various provisions. A coordination of this law with, among others, the Act of 2 August 2002 is available on the CBFA website (www.cbfa.be).

² Cf. in this regard, the explanatory memorandum preceding the draft bill amending the Act of 2 August 2002 on the supervision of the financial sector and financial services, as well as the Act of 22 February 1998 laying down the organic statute of the National Bank of Belgium, and containing various provisions, Doc. Parl., Chamber, 4th session, 52nd legislature, 2408/001, p. 27.

---

In respect of its powers relating to systemically important financial institutions, the CREFS has essentially the following missions:

1° The primary competence of the CREFS consists of taking, with regard to systemically important financial institutions, all individual administrative decisions of a prudential nature provided for in the laws governing the supervision of these institutions³.

Examples include favorable opinions on the appointment of managers, decisions relating to the assimilation to own funds, authorizations for mergers or portfolio transfers, recovery measures, ...⁴.

This competence concerns only the systemically important financial institutions themselves and not the regulated entities that are members of their group. Indeed, the CBFA remains provisionally responsible for the prudential supervision of non-systemically important financial institutions.

The prudential supervision of systemically important financial institutions includes — to the extent provided for by the supervisory laws — both supervision on a solo basis and supervision on a consolidated basis.

2° The law also confers upon the CREFS the competence to examine draft strategic decisions, other than those falling under point 1°, of systemically important financial institutions and the right to oppose them if the projected decisions go against sound and prudent management of the institution or if they are likely to have a significant negative impact on the stability of the financial system⁵.

The law specifies⁶ what is meant by "strategic decisions", namely those "which concern any investment, participation or strategic cooperation relationship of the systemically important financial institution; decisions to acquire or establish another institution, to establish a joint venture, to establish itself in another State, to conclude cooperation agreements, to contribute or acquire a business unit, to merge or split, are deemed in particular to be strategic investments, participations or cooperation relationships, provided that these decisions are likely to modify by more than 10% the total balance sheet or consolidated revenues of the institution, or represent an investment of at least 5% of its capital and reserves". It is further specified in this same provision that the King may, on the proposal of the CREFS, extend or clarify the list of decisions to be considered as strategic for the application of this article.

On this aspect, the law⁷ provides in particular that strategic decisions must be communicated, as the case may be, to the Bank or to the CBFA, which transmit them to the CREFS at the latest within 24 hours. The CREFS rules within a period of two months from the receipt by the CBFA or the NBB of a complete file supporting the strategic decision.

3° The law confers upon the CREFS the competence to examine the risk profile and policy of each institution and the faculty, where appropriate, to impose enhanced requirements in terms of solvency, liquidity, risk concentration, and risk positions⁸.

4° Finally, a new reporting⁹ requirement is established to allow the CREFS to exercise its powers. The content and frequency of this reporting are specified below (see point 2).

---

³ Article 90, § 1, of the Act of 2 August 2002.
⁴ When the CREFS identifies facts likely to give rise to the imposition of an administrative sanction, it may instruct the CBFA to open an investigation. The investigation report is submitted to the CREFS, which decides on the follow-up. In the event of notification of grievances, the CREFS transmits the file for decision to the CBFA Sanctions Commission. ⁵ Article 90, § 2, paragraph 1, of the Act of 2 August 2002. ⁶ Article 90, § 2, paragraph 3, of the Act of 2 August 2002. ⁷ Article 90, § 2, paragraph 2, of the Act of 2 August 2002. ⁸ Articles 89, § 1, 4°, and 90, § 3, of the Act of 2 August 2002. ⁹ Article 91 of the Act of 2 August 2002.

---

CREFS_2010_01 of 26 October 2010
3 / 5

The powers of the CREFS will be transferred to the Bank upon the implementation of Article 26 of the Act of 2 August 2010. These powers (whether the prudential powers previously conferred on the CBFA or the new prudential powers referred to above in points 2° and 3°) will therefore persist after the dissolution of the CREFS.

Regarding information channels, institutions must continue to address their usual contacts at the CBFA or the Bank as they do today.

Concretely, this means that contacts between institutions and the CBFA and the Bank continue according to current modalities (correspondence, contacts with services, etc.). Regarding the submission of files for the taking of decisions by the CREFS referred to in points 1° and 2°, the existing procedures and contacts are also maintained. Upon the dissolution of the CREFS and the takeover of its powers by the Bank, these procedures and contacts will be reviewed.

Furthermore, the law also provides that the CBFA and the Bank remain responsible for the implementation and execution of the concerned decisions¹⁰.

The CREFS may take regulations within its areas of competence. These regulations are subject to approval by the King.

Definition of Systemically Important Financial Institutions

Article 2, paragraph 1, point 40°, of the Act of 2 August 2002 sets out the various criteria for defining systemically important financial institutions.

The list of systemically important financial institutions will be published on the CREFS website¹¹ and updated regularly. This list is as follows, as of the date of adoption of this circular:

1) Credit Institutions:

• BNP Paribas Fortis SA
• Dexia Banque Belgique SA
• ING Belgique SA
• KBC Bank SA

2) Financial Companies:

• Dexia SA
• KBC Groupe SA

3) Insurance Undertakings:

• AG Insurance SA
• Axa Belgium SA
• Ethias SA
• KBC Assurances SA

4) Insurance Holding Companies:

• Ageas SA

5) Entities playing a predominant role in the territory of Belgium in custody operations or clearing or settlement operations:

• The Bank of New York Mellon SA
• Euroclear Bank SA
• Euroclear SA
• C.I.K. SA (Euroclear Belgium)

---

¹⁰ Article 90, § 1, of the Act of 2 August 2002.
¹¹ Article 104 of the Act of 2 August 2002.

CREFS_2010_01 of 26 October 2010

2. Reporting provided for by Article 91 of the Act of 2 August 2002

Pursuant to Article 91 of the Act of 2 August 2002, each systemically important financial institution transmits to the CREFS a statement of developments concerning its activities, its risk position, and its financial situation.

It is important not only that institutions describe these developments but also that they emphasize the assessment they make of them from the perspective of their financial situation and risk position.

The CREFS views this reporting obligation in the context of the implementation of Article 26 of the aforementioned Act of 2 July 2010, which makes the Bank the prudential supervisor of systemically important financial institutions. This implementation is planned for during the year 2011.

In accordance with the provisions of the law, the reporting will emphasize the developments observed in the activities, risk position, and financial situation of the institution. This means that in subsequent reports, the institution may limit itself to describing and evaluating significant changes. Any information that would be likely to modify the analysis and conclusions of the CREFS if it were aware of it must here be considered significant.

To allow the CREFS, and subsequently the Bank, to exercise their powers, the first report (the "base report") will provide an overview of the various aspects of the activities, risk position, and financial situation of the institution. The annex to this circular presents a scheme that institutions are invited to use as a guide for the preparation of the base report. The elements cited in this scheme should obviously only be treated in the report to the extent that the mentioned risks are relevant to the institution. The report must not only contain the required qualitative and descriptive information and their assessment but must also be supported by relevant quantitative information.

The notions and concepts used in the attached scheme have mostly been borrowed from existing regulations and circulars of the CBFA. Therefore, these notions and concepts should be understood by reference to these regulations and circulars. If notions or concepts do not rely on CBFA regulations or circulars, they should be understood by reference to market practices or, failing that, to the approach and method implemented internally by the institution.

The CREFS expects that reports drafted in application of Article 91 of the Act of 2 August 2002 will be submitted to the board of directors of the systemically important financial institution, which will examine and approve them.

The base report will be submitted no later than 1 January 2011 and prepared based on the situation as of 30 September 2010. It will be transmitted to the CBFA.

To draft their base report, institutions may rely on reports produced within the framework of prudential supervision (governance memorandum, management report on internal control, ICAAP results for banking institutions, etc.).

In principle, the reports referred to in Article 91 must be prepared on a consolidated basis. The starting point for the description or assessment relating to aspects of the report linked to the legal entity or company is the systemically important financial institution.

If several systemically important financial institutions are part of the same financial group, a single report, prepared on a consolidated basis, may be transmitted, provided that

• the aspects of the report concerning the legal entity or company are subject to a separate description and assessment for each of the different systemically important financial institutions of the group;
• the relevant aspects concerning the systemically important financial institutions of the group are presented in an identifiable manner in the report.

---

CREFS_2010_01 of 26 October 2010

Prior to the submission of their base report, systemically important financial institutions will inform the CREFS without delay of any significant development or event that occurs or has occurred, which they have not yet informed the CBFA as the prudential supervisor in the context of periodic reporting (management report on internal control, ICAAP results for banking institutions) or ad hoc reporting. As stated above and in accordance with Article 90, § 2, of the Act of 2 August 2002, these institutions will also communicate the strategic decisions covered by this article.

A copy of this is sent to the statutory auditor of the institution.

Please accept, Madam, Sir, our distinguished salutations.

Guy Quaden,
President of the CREFS

Annex: - CREFS_2010_01-1 / Scheme for the statement by systemically important financial institutions of developments concerning their activities, their risk position, and their financial situation

---

Committee for Systemic Risks and Systemically Important Financial Institutions

Annex to Circular CREFS_2010_01-1 of 26 October 2010

Scheme for the statement by systemically important financial institutions of developments concerning their activities, their risk position, and their financial situation

Article 91 of the Act of 2 August 2002 on financial supervision and financial services

Scope:
Systemically important financial institutions as referred to in Article 2, paragraph 1, point 40 of the Act of 2 August 2002 on financial supervision and financial services.

---

Institution:

Period Covered:

Reference Quantitative Data: [nature, e.g., annual accounts, FINREP, COREP, Life statistics, Non-Life statistics] and [date]

---

1. ACTIVITIES, STRUCTURES AND GOVERNANCE

1.1. Developments concerning

1.1.1. Environmental factors (social, macro- and micro-economic, legal and regulatory) specifically influencing the institution
1.1.2. Activities of the institution (credits, receipt of deposits, insurance branches, accepted reinsurance operations, clearing and settlement, custody and administration of financial instruments, advice, ...): modification of the relative importance of various activities previously exercised; new activities undertaken or projected and activities discontinued
1.1.3. Markets on which the institution is active, with sectoral and geographical subdivisions
1.1.4. Strategy concerning the activities and markets of the institution and the objectives pursued (including product and service pricing policy)
1.1.5. Group structure
1.1.6. Operational and commercial organization (number of employees, sales networks ...)

1.2. Developments concerning governance

1.2.1. Shareholding
1.2.2. Management structure
1.2.3. Administrative and accounting organization
1.2.4. Internal control
1.2.5. Internal audit
1.2.6. Compliance
1.2.7. Risk management

CREFS_2010_01-1 of 26 October 2010

1.2.8. Actuarial function
1.2.9. Support functions (IT, Legal, HRM ...) and outsourcing
1.2.10. Developments in remuneration and planned modifications
1.2.11. Other organizational aspects (if significant developments)
1.2.12. BCP/DRP (Business Continuity Plan / Disaster Recovery Plan)

---

2. RISK POSITION

2.1. Credit Risk

2.1.1. Institution's policy
2.1.2. Organization of credit risk management
2.1.3. Methodologies followed for risk assessment
2.1.4. Intrinsic risk (exposures after accounting netting and before credit risk mitigation)
2.1.5. Risk mitigation techniques
2.1.6. Residual risk
2.1.7. Specific aspects
2.1.7.1 Evolution of credit quality with indications of past due and overall value adjustments by relevant sectoral and geographical segments
2.1.7.2 Developments relating to concentration risk (counterparties; sectoral and geographical and/or by maturity, including on reinsurers)
2.1.7.3 Securitization operations (developments concerning ongoing operations and new operations initiated or projected)
2.1.7.4 Counterparty risk (including on reinsurers)
2.1.7.5 Other

2.2. Market Risk

2.2.1. Institution's policy
2.2.2. Organization of market risk management (including the organization of market activities: trading floor, back office, risk monitoring ...)
2.2.3. Methodologies followed for risk assessment (including the use of internal models)
2.2.4. Intrinsic risk (including activity volume and the ratio between the amount of trading operations and the total balance sheet)
2.2.5. Risk mitigation techniques
2.2.6. Residual risk
2.2.7. Specific aspects (detail by type of risk: Interest rate risk, Equity risk, Forex risk, Commodity risk, Inflation risk, Real estate risk, etc.)

2.3. Operational Risk

2.3.1. Institution's policy
2.3.2. Organization of operational risk management
2.3.3. Methodologies followed for risk assessment
2.3.4. Intrinsic risk (by main specific operational risks)
2.3.5. Risk mitigation techniques
2.3.6. Residual risk
2.3.7. Specific aspects

2.4. Interest Rate Risk for Credit Institutions (including ALM policy¹)

2.4.1. Institution's policy
2.4.2. Organization of interest rate risk management
2.4.3. Methodologies followed for risk assessment
2.4.4. Intrinsic risk (including description of the nature of the different sources of risk)
2.4.5. Risk mitigation techniques
2.4.6. Residual risk
2.4.7. Specific aspects

---

¹ Including Interest rate risk, equity risk, Forex risk, Commodity risk, Inflation risk, Real estate risk, etc.

---

CREFS_2010_01-1 of 26 October 2010

2.4.7.1 Sensitivity of profits, economic value, or any other variable to interest rate fluctuation risk
2.4.7.2 Stress test ratios (CBFA)
2.4.7.3 Other

2.5. Liquidity Risk

2.5.1. Institution's policy
2.5.2. Organization of liquidity risk management
2.5.3. Methodologies followed for risk assessment
2.5.4. Intrinsic risk (including description of the nature of the different sources of risk)
2.5.5. Risk mitigation techniques
2.5.6. Residual risk
2.5.7. Specific aspects
2.5.7.1 Access to market funding and emergency plans
2.5.7.2 Stress test ratios (CBFA) and compliance with quantitative liquidity standards
2.5.7.3 Other

2.6. "Business" Risk

2.6.1. Institution's policy
2.6.2. Organization of "business" risk management
2.6.3. Methodologies followed for risk assessment
2.6.4. Intrinsic risk (including description of the nature of the different sources of risk)
2.6.5. Risk mitigation techniques
2.6.6. Residual risk
2.6.7. Specific aspects

2.7. Strategic Risk

2.7.1. Institution's policy
2.7.2. Organization of strategic risk management
2.7.3. Methodologies followed for risk assessment
2.7.4. Intrinsic risk (including description of the nature of the different sources of risk)
2.7.5. Risk mitigation techniques
2.7.6. Residual risk
2.7.7. Specific aspects

2.8. Insurance Risks

2.8.1. Institution's policy
2.8.2. Organization of insurance risk management
2.8.3. Methodologies followed for risk assessment
2.8.4. Intrinsic risk
2.8.5. Risk mitigation techniques (ALM², reinsurance³, mitigation, diversification, securitization, profit participation)
2.8.6. Residual risk
2.8.7. Specific aspects
2.8.7.1 Life: mortality, longevity, disability/invalidity, catastrophe, surrenders, renewals, expenses,
2.8.7.2 Non-Life: underwriting/pricing, provisions, catastrophe

2.9. Other Risks

2.9.1. Risks related to asset management
2.9.2. Pillar II type risks not addressed above (settlement risk, reputation risk, project risk, funding and capital risk, pension risk, model risk, etc.)
2.9.3. Other

---

² Asset-Liability Management (ALM): developments relating to management policy and risk assessment and monitoring models, exposure to risk arising from economic value variations, and adequacy (retrospective and prospective) of financial revenues to guaranteed yields; explanation of results by branches and significant risks, as well as presentation of resulting planned measures. ³ Reinsurance and other risk mitigation instruments: policy, operations carried out and impact of risk transfer on solvency margin and economic capital requirements; adequacy of the reinsurance plan with respect to underwritten contracts.

---

CREFS_2010_01-1 of 26 October 2010

3. FINANCIAL SITUATION

3.1. Financial structures and developments concerning the financial reporting process, and accounting valuation rules used

---

3.2. Financial Structure

3.2.1. Evolution of balance sheet aggregates
3.2.2. Solvency: regulatory capital requirements and coverage (where applicable subdivided by risk types)
3.2.3. Structure of own funds
3.2.4. Technical provisions: adequacy of provided amounts and coverage ratios
3.2.5. ICAAP: methodology, risk assessment, capital coverage requirements, and assessment of the economic adequacy of own funds
3.2.6. Transactions carried out and/or planned regarding own funds; risks related to future transactions (market, shareholding, etc.)
3.2.7. Distribution of own funds among different entities of the group
3.2.8. Latent losses (not recognized in accounting according to applicable standards and not taken into account for the calculation of own funds)
3.2.9. Investments carried out or planned

3.3. Profitability

3.3.1. Analysis of period results; comparison with the previous period and with planned objectives, and analysis of the contribution of the establishment's different activities (by branch and by significant risks for insurance; for insurance, this analysis includes the analysis of the evolution of the claim charge
3.3.2. Key ratios
3.3.3. Dividend policy
3.3.4. Relationship with related parties

3.4. Developments concerning the policy for publishing information