NBB published the financial stability report, with macro-prudential policy being one of the key focus areas in the context of the wide set of economic and financial policies adopted amid the COVID-19 crisis. The report highlights that COVID-19 pandemic posed challenges to the financial sector and financial stability; however, the Belgian financial system has solid capital and liquidity buffers and can, thus, play a key role in cushioning the impact of the crisis on households and businesses. NBB, as a supervisor, calls on financial institutions to continue to support the real economy, if necessary, by using the built-up capital and liquidity buffers.
The report discusses the macro-prudential policy in Belgium, examines the financial stability of banking and insurance sectors, and contains a couple of thematic articles on the residential and commercial real estate market and the climate-change-related transition risks associated with real estate exposures in the Belgian financial sector. In terms of the forward-looking guidance on macro-prudential aspects, NBB emphasizes that, taking into account the latest scenarios and prospects, the deactivation of the countercyclical capital buffer, which was announced in March 2020, is likely to be extended until at least mid-2021. NBB is closely monitoring developments on the Belgian real estate and credit markets and it stands ready to release the macro-prudential capital buffers for real estate risks if, for example, those risks should materialist and lead to a substantial increase in non-performing loans. Supervisory expectations on mortgage credit also remain applicable. Although the macro-prudential buffers for systemically important institutions (the so-called O-SII buffers) are primarily structural, a release of such buffers is in principle possible.
NBB highlights the importance of financial sector continuing to play its role as a financial intermediary and actively contributing to cushioning the impact of the crisis and supporting the real economy. In this context, NBB makes a number of recommendations to the financial sector, particularly the credit institutions:
- The first recommendation aims to encourage maximum responsible use of micro- and macro-prudential buffers to support the real economy. The use of such buffers by individual banks is justified from a macro-prudential point of view and supports the real economy by avoiding pro-cyclical credit crunches. Individual banks’ reluctance to use these buffers—for example, on the grounds of stigma effects or as a precaution for possible future solvency issues—may be counterproductive in the context of this crisis and may substantially increase the impact of the crisis on the real economy.
- Against the backdrop of unprecedented micro- and macro-prudential easing as well as significant uncertainty as to financial institutions’ future profitability, NBB, as the macro-prudential authority, also recommends that the financial sector should temporarily exercise the necessary restraint with regard to current and future dividend payout policies (and similar operations) or in the allocation of variable remuneration for senior staff; the sector should refrain from making dividend payments or similar operations at least until the beginning of October 2020. Regarding credit institutions, this recommendation applies to all banks active in Belgium and to dividend payments and/or transfers or similar transactions within international banking groups by systemically important subsidiaries active in Belgium.
- In addition to the necessary focus on the short-term implications of the COVID-19 crisis, the financial sector should continue to pay attention to major longer-term structural challenges. For example, the persisting low interest rate environment remains a major structural challenge for the profitability of banks and a reassessment of the viability of certain business models is needed. In addition, the transition to a more sustainable and digitized economy will gain more traction. It is very important not only to exploit the opportunities of such transitions but also to closely monitor and mitigate the inherent risks that such structural transitions necessarily entail, also in terms of financial stability.
Keywords: Europe, EU, Banking, Insurance, Financial Stability Report, Basel, COVID-19, Credit Risk, RRE, CRE, Climate Change Risk, Systemic Risk, Macro-Prudential Policy, NBB
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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