IFLRinternational financial law review

BANK CAPITAL REPORT 2015: BELGIUM

1. Bank supervision

The Belgian National Bank (NBB/BNB) and the Financial Services andMarkets Authority (FSMA) supervise Belgium’s credit institutions. TheBNB is responsible for the microprudential and macroprudential supervi-sion. The FSMA supervises financial markets and consumer protection. OnNovember 4 2014, the European Central Bank (ECB) in collaboration withthe BNB, took over direct supervision of leading Belgian credit institutionsin line with the Single Supervisory Mechanism (SSM).

The Banking Recovery and Resolution Directive (BRRD) came intoforce on January 1 2015. As part of the implementation of the BelgianBRRD, a resolution committee will be established within the BNB.

2. Bank recovery/bail-in

The BRRD and related articles have already been implemented in BelgianLaw. A new Royal Decree came into force on March 3 2015. The articlesrelating to the BRRD are now in force. A draft Royal Decree regarding theresolution committee has been initiated and was submitted to the ECB,which in turn issued its advice on January 21 2015. The Royal Decree isexpected to come into force very soon.

Under the Belgian BRRD implementation, the resolution committee willbe competent to apply the BNB resolution tools and exercise the powers ofresolution.

Belgian law provides for a bail-in tool. A Royal Decree can be adoptedto allow the resolution committee to decide a depreciation of all or part ofthe eligible liabilities of a credit institution or the conversion of its debtsinto shares or other equity securities. To this end, this Royal Decree may re-quire that a credit institution maintains a minimum requirement for ownfunds and eligible liabilities to ensure feasibility of a bail-in. This Royal De-cree can be adopted only until December 31 2015 and can enter into forceonly from January 1 2016.

3. Buffers

The BNB is the supervision authority with regard to the rules on the variouscapital buffers.

Capital conservation buffer The capital conservation buffer has been implemented in accordance withthe CRD IV framework.

Phase-in begins May 17 2014 to December 31 2015 – 0%January 1 2016 – 0.625% January 1 2017 – 1.25% January 1 2018 – 1.875% January 1 2019 – 2.5%

Countercyclical buffer The countercyclical buffer has been implemented in accordance with theCRD IV framework.

The BNB publishes the rate used to calculate the countercyclical bufferon a quarterly basis on its website. The BNB has not yet published the coun-

tercyclical buffer rate.

G-SII buffer The G-SII buffer has been implemented in accordance with the CRD IVframework. This rule will come into force on January 1 2016.

The buffer will be set between 1% and 3.5% on an individual basis.

The BNB has not yet published which banks have been identified as G-SIIs.

O-SII bufferThe O-SII buffer has been implemented in accordance with the CRD IVframework.

The buffer is capped at 2% and will be set on an individual, consolidatedor sub-consolidated basis.

The O-SII buffer applies from January 1 2016.

The BNB has not yet published which banks have been identified asOSIIs.

Systemic risk buffer The systemic risk buffer has been implemented in accordance with the CRDIV framework. The BNB may require a buffer of at least 1%. The bufferwill be reviewed every two years.

The BNB has not yet published the systemic risk buffer.

The buffer is not capped, although the EU must be involved in the de-cision-making process if the BNB intends to raise the buffer above 3%.

4. Call options

Belgium has not issued any additional national rules with regard to regula-tory or tax calls in addition to Article 78 of the CRR.

5. Coupon payment

The rules on the maximum distributable amount (MDA) calculation in thecase of buffer breaches follows CRD IV and the rules are implemented inthe act of April 25 2014 regarding the status and control of credit institu-tions.

A credit institution may not make a distribution in cases of bufferbreaches. Furthermore, the rule prohibits distribution to any institution thatmeets the combined buffer requirement through making a distribution inconnection with Common Equity Tier 1 (CET1) capital to an extent thatits CET1 capital would decrease to a level where the combined buffer re-quirement was no longer met.

However, an institution that fails to meet the combined buffer require-ment must calculate the MDA and notify the BNB of that MDA. That in-stitution may not distribute more than the MDA for the following actions:(a) making a distribution in connection with CET1 capital; (b) creating anobligation to pay variable remuneration or discretionary pension benefitsor pay variable remuneration if the obligation to pay was created at a time

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Belgium

Benoît Feron and Morgane Collignon, Laga

http://www.laga.be

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when the institution failed to meet the combined buffer requirements; or,(c) making payments on Additional Tier 1 (AT1) instruments.

This requirements section only applies in so far as a resulting suspensionof the payments does not cause conditions for initiating winding-up pro-ceedings in accordance with the act of August 8 1997 on bankruptcy.

The BNB also has intervention powers when it is likely that, within 12months, a credit institution will no longer be able to fulfil its obligationsunder the relevant act or other statutory instruments which govern the in-stitution’s operations.

6. Credit default swap contracts

Belgium has not issued any additional rules with regard to the use of creditswaps or other tools to mitigate credit risk in addition to CRR regulation.

7. Disclosure

CRR disclosure and reporting rules apply. The credit institutions are re-quired to disclose information on their capital ratio and capital buffers.

The BNB has not yet published the frequency and the form of the dis-closure.

8. Leverage ratio and liquidity coverage ratio

The leverage ratio will only be introduced in 2018, depending on a 2016proposal from the European Commission. Pending a mandatory ratio forleverage effect at European level, the BNB has decided to maintain its solv-ability ratio requirement. Specific reporting requirements were issued to ver-ify that obligation. Quarterly reporting is to be transmitted on aconsolidated basis. The reporting period is set as the first working day ofthe second civil month, depending on the report date. This reporting willenter into force for accounts settled on December 31 2014.

9. Loss absorption features

Loss absorbency features of AT1 and tier 2 follow the CRR. Only AT1 pro-vides for going-concern loss absorption while tier 2 provides for gone-con-cern loss absorption.

According to the BRRD implementing regulation, shareholders andother instruments of ownership (including preference shares, which are anational deviation from the BRRD) will bear the first losses and will be thefirst stakeholders to contribute to the resolution by means of a mandatorywrite-down/cancellation/conversion of their instruments, taking account ofthe ranking of these instruments in insolvency proceedings. Creditors willbear losses after the shareholders.

The ‘no creditor worse-off than under normal insolvency proceedings’principle will apply.

10. Minimal Capital

Belgium complies with CRR requirements. The levels of CET1 and tier 1capital ratios are at the highest level within the explicit ranges set out in Ar-ticle 465(1) CRR. Belgium has chosen to adopt any phase-in regulationsregarding own funds requirements.

Min CET1 ratioJanuary 1 2014 – 4% January 1 2015 – 4.5%

Min tier 1 ratioJanuary 1 2014 – 5.5% January 1 2015 – 6%

Min total capital Ongoing 8%

11. Pillar 2

The main rules on pillar 2 are set out in Book II of the act of April 25 2014regarding the status and control of credit institutions.

Belgian law provides for guidance on pillar 2 requirements. It focuses onthe joint responsibility of the management board, general risk managementrequirements, organisational duties, documentation, resources, and out-sourcing.

Belgian law also provides for an asset encumbrance ratio, which allows apermanent monitoring of the balance structure. This ratio is laid down foreach credit institution in a BNB regulation and will require a bi-annual eval-uation that particularly takes into account the evolution of the balance struc-ture of the credit institutions as well as the influence of the ratio on theirexternal funding costs.

Pillar 2 requirements are subject to the disclosure rules on publishingquarterly reports on own funds and the institution’s internal capital ade-quacy assessment.

12. Qualifying capital

The BNB has no authority to issue local rules on what instruments qualifyas CET1, AT1 or tier 2. In this respect, standard CRR rules apply.

In Belgium the following are considered as CET1:• ordinary shares (ordinary financial instruments representing the share

capital of a Belgian company)• yield enhanced securities• preferential shares with voting rights

Deferred tax assetsBelgium has not issued any rules with regard to the treatment of the deferredtax assets in addition to CRR regulation.

Deferred tax assets that rely on future profitability and existed before Jan-uary 1 2014 need to be deducted in full from CET1 from January 1 2014.

A phase-out begins on January 1 2015, after which 10% of those deferredtax assets that rely on future profitability need to be deducted. This increasesby 10% annually and reaches 90% in 2023.

With regard to deferred tax assets created in 2014 or later, 20% needs tobe deducted in 2014, 40% from January 1 2015, 60% in 2016, 80% in2017, and 100% from January 1 2018.

Available-for-sale In Articles 18 and 19 of the annex of the Royal Decree of April 10 2014,which relates to the approval of the regulation of the BNB of March 4 2014on the implementation of Regulation 575/2013, the BNB has issued sup-plemental rules in line with Article 467(3) CRR.

Article 35 CRR applies from January 1 2014 to December 31 2017.

There is an exception for unrealised losses on fixed interest securities andcredits. The percentages of inclusion in original own funds of category 1year institutions are the following:

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January 1 2014 – 20%January 1 2015 – 40% January 1 2016 – 60% January 1 2017 – 80%

The BNB has accepted that banks can include a filter on unrealised gainsand losses relating to exposure to central governments, and this will continueuntil the European fair value accounting rule IAS 39 has been replaced.

This special rule does not apply for the part of the total amount of netlosses relating to exposure on central administrations classified in the cate-gory available-for-sale that exceeds 5% of the account value of the relevantportfolio. The part exceeding 5% is treated as set out in Article 35 CRR.

Grandfathering Article 34 of the Royal Decree of April 25 2014 deals with supplementalrules as required under Article 486(6) CRR on grandfathering and phase-in provisions in relation to CRR rules on own funds requirements.

The following percentages have been determined: January 1 2014 – 80% January 1 2015 – 70% January 1 2016 – 60% January 1 2017 – 50% January 1 2018 – 40% January 1 2019 – 30% January 1 2020 – 20% January 1 2021 – 10% January 1 2022 – 0%

13. Regulatory intervention

Regulatory intervention powers were introduced in 2008 under the Belgianact relating to the measures aimed at promoting financial stability, and inparticular establishing a public guarantee. The public guarantee representsa protection reserve of the deposits and of the financial instruments for in-vestors in case of failure of a bank. The intervention tools under this act arefairly limited.

In October 2011, the Belgian government nationalised Dexia BanqueBelgique (now Belfius). Dexia was almost on the brink of bankruptcy afterthe aggravation of the crisis due to European sovereign debts.

14. Stress tests

The five Belgian banks are participating in the 2014 EBA stress test. Dexiaand Axa Bank Europe did not pass the European stress test.

The BNB also executes annual national stress tests of the major bankswithin the framework of its supervisory measures. The results of these stresstests are normally published on the website of the BNB.

15. Sifis

The BNB has not yet taken a position on the implementation of the bufferfor global systemically important institutions (G-SIIs). However, the BNBwill decide which firms will be required to hold a capital buffer for G-SIIsor other systemically important institutions (O-SIIs) respectively before theprovisions on those buffers come into effect on January 1 2016. No otheradditional rules in relation to sifis have been issued.

About the authorBenoît is a partner of Laga, working in the business law department. Hefocuses on M&A, corporate law and capital markets, including financialregulatory and litigation work. He was previously a partner atNautaDutilh in Brussels and has been a member of the Brussels Barsince 1987. He graduated from the universities of Louvain, GhentBrussels (Belgium) and Duke University (US). He has been extensivelypublished and has lectured on his specialist subjects mentioned above.

Benoît FeronPartner, Laga

Brussels, BelgiumT: + 32 2 800 71 66E: bferon@laga.beW: http://laga.be

About the authorMorgane joined the business law department at Laga in 2014. Her areasof practice include M&A, corporate law and capital markets. Morganeholds law degrees from the University of Louvain and the FacultésUniversitaires Saint Louis, Brussels.

Morgane CollignonAssociate, Laga

Brussels, BelgiumT: +32 2 800 71 65E: mocollignon@laga.beW: http://laga.be