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Financial Stability Report 2019

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Financial Stability Report 2019 2019 Report Financial Stability National Bank of Belgium FINANCIAL STABILITY REPORT 2019 Financial Stability Report 2019 © National Bank of Belgium All rights reserved. Reproduction of all or part of this publication for educational and non‑commercial purposes is permitted provided that the source is acknowledged. Contents Executive summary 7 Macroprudential Report 9 A. Introduction 9 B. Main risks and points for attention and prudential measures adopted 10 Financial Stability Overview 43 Banking sector 43 Insurance sector 68 Additional charts and tables for the banking and insurance sector 80 Thematic articles 89 Transaction-level data sets and monitoring of systemic risk : an illustration with Securities Holding Statistics 91 Climate-related risks and sustainable finance. Results and conclusions from a sector survey 107 A risk dashboard for detecting and monitoring systemic risk in Belgium 129 Statistical Annex 149 5 Executive summary 1. In the current macro-financial context, monitoring financial stability risks continues to be of great importance. In addition to the growing relevance for financial stability of a range of structural trends and risks – such as the intensive digitisation of the financial sector or risks related to climate change – the macro-financial impact of a persistent low interest rate environment is becoming increasingly apparent. Although a highly accommodative monetary policy on the part of the ECB is justified, given the current macroeconomic situation, the acceleration of the credit cycle in many EU countries, including Belgium, is an important warning that such a policy can also have adverse spillover effects and present potential risks to financial stability. The build‑up of vulnerabilities in Belgium in the form of an increasing debt ratio of households and companies or rising exposure of the financial sector to undervalued or under-priced financial risks may, in the long term, affect the resilience and absorption capacity of the Belgian economy in the event of major shocks. 2. In this context, and in view of the high level of economic uncertainty and persistent (geo)political tensions, it is important to ensure that the financial sector, and in particular Belgian banks, remain resilient. It is therefore recommended to maintain large liquidity and capital buffers, and to ensure appropriate buffers for bail-in. These buffers provide banks with the necessary flexibility to absorb negative shocks, preserve continuity in the provision of financial services, and thus limit the impact on the real economy of phenomena such as forced deleveraging. The creation (or maintenance) of buffers by Belgian banks is also becoming increasingly important in the light of the persistent low interest rates, the continued need for an accommodative monetary policy and the limited scope for fiscal policy. 3. In this context, the National Bank of Belgium, in its capacity as macroprudential authority, introduced a new macroprudential measure in May 2018 that increases the risk weights of exposures to the Belgian housing market. This measure ensures the creation of significant, specific capital buffers that should enable the banks concerned to absorb significant negative shocks on the Belgian property market as well as credit losses, and to limit the impact of such a scenario on the real economy. 4. Although this macroprudential measure is crucial for maintaining resilience in the banks concerned and ensuring that the necessary buffers are created, it is so far not (or only insufficiently) reflected in mortgage lending rates and / or lending criteria. Belgian banks – driven inter alia by low interest rates and strong competition on their core markets – continue to grant mortgage loans on very flexible credit terms, and often at interest rates and margins that are not in line with the inherent risks and cost of equity. These developments could lead to the build-up of large portfolios of low-yield loans which, in the long run, may jeopardise such structural profitability in the banking sector as is in line with market requirements, thereby weakening the sector’s intermediation capacity and resilience. In this context, the Bank calls for correct pricing in line with the risks inherent in the (mortgage) loans, i.e. determining a sufficient price for the inherent risks and guaranteeing returns that are in line with market requirements. In addition, the Bank is of the opinion that a substantial decrease in the share of risky mortgages and, in particular, a reduction in high LTV ratio loans (more than 90 %) remains necessary. 2019 ¡ Executive summary 7 5. Moreover, the build-up of systemic risks is not limited to the Belgian real estate market. In Belgium, as in a number of other euro area countries, the credit cycle is accelerating sharply, among others as a result of an increase in non-financial corporate loan growth. The acceleration in the credit cycle is also reflected in the credit gap – a key indicator for monitoring the credit cycle – which now exceeds the 2 % of GDP threshold. This threshold is recommended by the ESRB for the activation of the countercyclical buffer. The counter‑ cyclical buffer is activated in a proactive and preventive manner in order to build up sufficient additional capital buffers (resilience) that can be used in the event of a financial recession to absorb possible credit losses and hence ensure the continuity of financial bank intermediation. The Bank is closely monitoring developments and stands ready to activate the countercyclical buffer should the acceleration of the credit cycle be confirmed in the most recent data. Due account should, however, be taken of current economic uncertainties and risks, and any pro-cyclical impact of such a measure should be avoided. A possible activation of the countercyclical buffer therefore requires rigorous risk monitoring and the possibility of immediately revoking such a measure in the event of a significant negative shock. 6. A series of structural economic trends deserve particular attention on the grounds that they may ultimately also have an impact on financial stability. In addition to a number of risks related to concrete political processes (such as Brexit), developments in the digitisation of the economy, climate change and related policies, as well as specific risks related to money laundering or terrorist financing, deserve due attention. 7. The risks associated with Brexit remain at the centre of attention. The extensive preparatory work carried out by both the financial sector and the relevant supervisory authorities has undoubtedly provided the necessary measures and contingency plans to protect the sector in many possible exit scenarios. It cannot be ruled out that Brexit could ultimately lead to a disorderly outcome that could have an impact on the Belgian financial sector. 8. Due to the intensive digitisation and increasing (digital) interconnection of the different sectors of the economy, the importance of IT risks and cyber risks is increasing considerably. Although these risks primarily affect the companies concerned, they are becoming more systemic in the financial sector (due to concentration on specific counterparties or as a result of correlated incidents) and their impact on financial stability is increasing. 9. In addition, the importance of climate change risks – whether due to direct exposure to climate change or due to the transition to a low-carbon economy or related economic policies – is also increasing. An integrated implementation of the required measures, starting with the Paris Climate Agreement, requires substantial additional investment and far‑reaching technological innovations to effectively support this transition. Its financing will be a major challenge for the financial sector. But this transition also involves financial risks that the financial sector must duly take into account in a timely manner. In this context, rigorous monitoring of the potential risks associated with a profound transformation of the economy becomes essential to monitor the risk exposures of institutions and the sector as a whole. The financial sector should pay particular attention to the structural integration of these risks into its risk policy and risk analysis. 10. Finally, the financial sector must comply with the highest standards and best practices in money laundering and terrorist financing. Indeed this is also in the interest of the sector. Infringements of the relevant legislation, as has been uncovered in some European systemically important banks, may have significant prudential consequences due to the extent of possible sanctions or the risks of loss of confidence and reputation for the institution. In extreme cases, an impact on the financial stability of the sector cannot be ruled out. Comprehensive, risk-based supervision, in close consultation with microprudential authorities, as well as sustained attention by the financial sector to these risks, is therefore more recommended and necessary than ever. 8 Executive summary ¡ NBB Financial Stability Report Macroprudential Report A. Introduction The Law of 25 April 2014 1 officially designated the Bank as the Belgian macroprudential authority. On the basis of that mandate, the Bank keeps a close watch on developments in the financial sector and focuses in particular on detecting any risks that could endanger the stability of the financial sector – and of Belgian banks especially. When such systemic risks arise, the Bank is authorised to take the necessary macroprudential measures
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