IMF published its staff report under the 2019 Article IV consultation with Belgium. Directors recognized the improved resilience of the financial sector, welcomed the new macro-prudential measures by the central bank (aimed at the housing market), and encouraged the authorities to stand ready to activate the countercyclical buffer to build up further resilience, should cyclical risks intensify. Directors also encouraged the authorities to continue to enhance risk monitoring and ensure the feasibility and effectiveness of bank resolution strategies.
The report shows that the financial sector has become more resilient since the crisis, although challenges remain. Banks have down-sized their balance sheets and adopted more conservative business models, with greater emphasis on domestic lending and deposit funding. Stricter regulations have been introduced and financial sector supervision has been upgraded, including macro-prudential supervision. Consequently, banks have relatively healthy loan portfolios and limited exposure to market and liquidity risks, while insurance companies have sound solvency levels and reduced exposures to guaranteed rates. Stress tests indicate that banks and insurance companies can withstand a severe deterioration in macro-financial conditions. However, the persistent low interest rate environment, along with the increased competition from digitalization, have been weighing on the profitability of financial institutions. Furthermore, a strong growth in mortgage lending (9% in 2018) has contributed to a sizable increase in the household debt and housing prices.
The IMF staff welcomed the recent macro-prudential measures by the authorities to address risks in the housing market and encouraged the authorities to remain proactive. To guard against a correction in housing prices and discourage banks from taking excessive credit risk, the National Bank of Belgium (NBB) introduced, in May 2018, an add-on to the risk-weights on bank mortgage exposures as a new macro-prudential measure. In view of the robust overall level of credit growth and credit gap, the staff recommended that NBB continue to closely monitor the build-up of cyclical risks in both the household and corporate sectors and stand ready to tighten macro-prudential policy further, including through the use of countercyclical capital buffer (CCyB). The authorities could also consider revising the framework for macro-prudential decision-making to ensure the ability to deploy a broader range of macro-prudential policies in a timely manner, as recommended by the 2017 Financial Sector Assessment Program (FSAP) mission.
The report highlights that the authorities made progress in implementing the 2018 FSAP recommendations and are initiating an exercise to test and enhance the preparedness of banks to deal with cyber threats. Staff welcomed these efforts and encouraged the supervisory and resolution authorities to continue implementing their plans to:
- Enhance the risk analytical framework for both banks and non-banks
- Strengthen supervision and oversight by ensuring consistency of bank internal models and prudent provisioning practices
- Ensure the feasibility and effectiveness of bank resolution strategies by maintaining a sufficient and consistent allocation of Minimum Requirement for own funds and Eligible Liabilities (MREL), as needed
Additionally, the staff report recommends that authorities should encourage banks to continue to adapt their business models to address the challenges from the growing digitalization of finance. In view of the risks related to Brexit, the staff called for vigilance and for the preparedness of the financial and non-financial sector to deal with a no-deal Brexit scenario.
Related Link: Staff Report
Keywords: Europe, Belgium, Banking, Insurance, Macro-Prudential Measures, Credit Risk, CCyB, FSAP, Article IV, Brexit, NBB, IMF
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