Macroprudential policy: The NBB Board held its 3rd regular meeting in its macroprudential competences on 26 February 2015
During its 3rd meeting as macro-prudential authority the NBB Board discussed the evolution of risks and vulnerabilities in the Belgian financial system.
The macroeconomic, financial and political environment remains challenging for the financial sector. While the completion of the comprehensive assessment contributed to foster confidence in the euro area banking sector, the current sluggish economic growth and very low nominal yields continue to put pressure on the profitability of banks and insurance companies. Moreover, some further financial stability concerns remain in view of the situation in Greece. Although the direct exposures of Belgian financial companies on Greece are very limited, most of the risks stemming from Greece could arise from possible second round effects.
Close monitoring of the risks in the financial sector is therefore warranted. The results of the comprehensive assessment underlined the good resilience of the Belgian banking system and the adequate level of provisioning, but also highlighted the remaining burden of legacy assets or activities which is still denting some banks’ profitability. This confirms the need to accelerate the restructuring process and to strengthen efficiency gains, without creating operational risks. In view of the recent developments, this last risk needs to be closely monitored in the current environment, including for market infrastructures. The results of the stress test for insurance companies underline their vulnerabilities and the major challenges they are facing in a context of persistently very low interest rates combined with the entry into force of Solvency II on the January 1st 2016.
In this context, the NBB expects that banks and insurance companies will continue enhancing their solvency position and consequently limiting pay-outs to policy-holders and shareholders when deemed necessary to sustain their long term resilience. Improvements in the solvency position of financial institutions through retained earnings and/or capital issuance will be key to face the new challenges resulting from the economic environment and the increasing regulatory requirements. The NBB also expects insurance companies to carefully ponder the realisation of capital gains in view of this challenge. Moreover, the NBB intends to introduce a formal proposal to the competent Minister in line with the framework foreseen in the Insurance law to adjust the mechanism of maximum interest rate on individual long term life contracts in order to better reflect the current market conditions. In the same vein and in that context, the NBB recommends the Government to review the system of guaranteed interest rate on group insurance and pension contracts foreseen in the law of 28 April 2003 governing supplementary pensions to better align the conditions with the life insurance contracts.
The low yield environment coupled with the easing of liquidity conditions following the recent unconventional monetary policy decisions might lead to a “search for yield” phenomenon, which calls for a continued monitoring at the national as well at the European level to ensure that the level of capital is in line with the risk profile. In this context, exposures to real estate continue to increase in 2014. Banks need to ensure that the recent increase in mortgage loan refinancing does not further affect their profitability in the longer term. The NBB will continue to closely monitor the situation on the real estate market in Belgium and ensure that the transition to the new tax regime does not create additional risks for financial stability. The NBB will closely assess the impact of the macro and micro prudential measures taken in 2013 for Belgian residential mortgage loans.