Financial Stability Report: National Bank again urges banks to be cautious in granting and setting conditions for mortgage loans
The Belgian financial sector continued to perform robustly in 2018, but there is growing concern due to the developments observed in credit markets, in particular the mortgage market, where the NBB calls for more sound and prudent practices and economically sound pricing. The number of risky mortgage loans should be reduced.
Voor het achttiende jaar op rij publiceert de Nationale Bank van België haar Financial Stability Report. Deze publicatie bestaat uit drie grote delen: het Macroprudentieel verslag, dat betrekking heeft op de bevoegdheden en het beleid van de Bank op het vlak van macroprudentieel toezicht, de overview, die een overzicht verschaft van de belangrijkste determinanten van de stabiliteit van het Belgische financiële stelsel, en drie artikels over specifieke macrofinanciële en macroprudentiële onderwerpen, waaronder een artikel betreffende klimaatgerelateerde risico’s.
Het macroprudentieel verslag dat vandaag wordt gepubliceerd, is het vijfde verslag van de Bank in haar hoedanigheid van macroprudentiële autoriteit. Het Macroprudentieel verslag behandelt de belangrijkste risico’s voor de financiële stabiliteit die tijdens het verslagjaar werden geïdentificeerd, evenals hun impact op de Belgische financiële sector. De door de Bank genomen (macro)prudentiële maatregelen komen er eveneens in aan bod.
The Belgian financial sector still has a robust profile but the low interest rate environment is a major challenge. 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 a potential risk to financial stability.
The credit cycle has accelerated sharply in Belgium, 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 countercyclical buffer is activated in a proactive and preventive manner in order to build up sufficient additional capital buffers 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.
On the real estate market, 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 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. 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.
Structural change in the operating environment
Apart from these primarily cyclical risks, more structural or permanent points for attention also require macroprudential policy monitoring.
The importance of climate-related 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. The financial sector should pay particular attention to the structural integration of these risks into its risk policy and risk analysis. In a thematic article in the Financial Stability Report, the Bank makes recommendations to the sector to this effect.
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.
Even though they are not a direct priority for macroprudential supervision, as they are covered primarily by the authorities in charge of oversight at microprudential level, the risks associated with Brexit and uncertainty in the area of money-laundering and terrorist financing remain a focus of attention. In some extreme cases, risks of this kind could actually have a systemic impact and pose a threat to financial stability.
These various aspects, both cyclical and more structural, are closely monitored by the Bank in its capacity as the macroprudential authority for Belgium.