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August 28, 2017

IMF published, under the Financial Sector Assessment Program (FSAP), six technical notes and a report on the detailed assessment of observance of the CPSS-IOSCO Principles for Financial Market Infrastructures (PFMIs) in Luxembourg.

Report on Observance of CPSS-IOSCO PFMIs. The report assesses risk management practices of Clearstream Banking Luxembourg (CBL), against the CPSS-IOSCO PFMIs. CBL is a large securities settlement system that is highly interconnected with global securities markets and is considered to be systemically important. The assessment reveals that 8 out of 21 principles are found to be in broad observance. The key priorities include reducing the dependencies of CBL on commercial banks in its daily operations and fully collateralizing all credit exposures. Despite effective supervision at the national level, there is a strong case that CBL be designated as a significant institution under the Single Supervisory Mechanism (SSM) supervision.

 

Technical Note on Risk Analysis. This technical note examines the resilience of the country’s financial system to solvency, liquidity, and contagion risks. It covers the three key sectors of the country’s financial system—namely banks, insurance companies, and investment funds. The note reveals that the banking sector, where a relatively large share of liquidity and revenues originate from private banking and fund management activities, has maintained high levels of profitability, capital, liquidity, and asset quality. Additionally, the insurance industry, which is relatively less exposed to guaranteed products than regional peers, has adjusted well to the new regulatory regime, maintaining high profitability and capitalization levels.

 

Technical Note on Fund Management. This note covers regulation, supervision, and systemic risk monitoring of the fund management sector in Luxembourg. Fund management sector of Luxembourg is the largest in Europe by domiciled assets and the second largest in the world, with funds that take the form of Undertakings for Collective Investment in Transferable Securities dominating the sector. The note highlights that the country’s framework for liquidity management tools compares favorably to its peers at both the EU and the international levels. While the Commission de Surveillance du Secteur Financier (CSSF) has a sound supervisory approach, enhancements to its inspection program and better data access would further improve supervisory effectiveness.

 

Technical Note on Macro-Prudential Framework and Policies. The note highlights that a new macro-prudential policy framework has recently been put into place in the country, with Comité de Risque Systémique (CRS) being tasked with the macro-prudential oversight of Luxembourg’s financial system. The note recommends that a macro-prudential toolkit is in place, but legal clarity should be provided for borrower-based tools as they relate to the real estate market, while the macro-prudential usefulness of liquidity management tools in the investment fund industry should be assessed. The authorities are encouraged to continue to increase efforts to monitor risks related to the investment fund industry.

 

Technical Note on AML/CFT. This technical note sets out the findings and recommendations made in the 2017 FSAP Update for Luxembourg in a few selected areas of anti-money laundering and combating the financing of terrorism (AML/CFT). Since the last FSAP update, important steps have been taken to strengthen the AML/CFT regime. Progress is evident in the exchange of financial intelligence with foreign counterparts, but the authorities need to ensure that the Financial Intelligence Unit resources remain adequate.

 

Technical Note on Resolution and Recovery Planning. The note explains that resolution planning in Luxembourg is at an early stage and there are many challenges ahead. The note recommends that powers to transfer the assets and liabilities of a bank during winding-up procedure should be made explicitly available. It also highlights that arrangements for the management of a system-wide financial crisis in Luxembourg have yet to be fully developed.

 

Technical Note on Selected Issues in Banking Supervision. The note examines aspects of the banking supervision regime in Luxembourg having due regard to the establishment of the SSM. Although significant progress has been made in relation to the recommendations made in the 2011 FSAP, certain weaknesses and vulnerabilities remain, which the note highlights.

 

Related Links

Detailed Assessment of Observance (PDF)

Note on Risk Analysis (PDF)

Note on Fund Management (PDF)

Note on Macro-Prudential Framework (PDF)

Note on AML/CFT (PDF)

Note on Resolution and Recovery Planning (PDF)

Note on Banking Supervision Issues (PDF)

Keywords: Europe, Luxembourg, Banking, Insurance, Securities, Technical Notes, FSAP, PFMI, IMF

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