National Bank publishes its annual Financial Stability Report, confirms a robust Belgian financial sector able to meet present-day challenges
The National Bank of Belgium has today released its Macroprudential Report and Financial Stability Report. With these annual publications, the Belgian macroprudential authority explains, as required by law, how it has fulfilled its task as guardian of the stability of the financial system. Systemic stability is important to enable banking and insurance institutions to carry out their financial intermediation tasks properly at all times.
The reports not only look at the macroprudential policy followed over the last year, but they also devote considerable attention to recent developments observed in the banking and insurance sectors, as well as in the markets that are important for financial stability, such as the residential and commercial real estate markets. The consequences of the war in Ukraine and the rise in energy and commodity prices for businesses, households and the financial sector are of course also at the centre of the analysis.
Potentially significant risks for financial stability
Even though the Belgian financial sector has very limited direct exposure to counterparties in the conflict region or with direct links to this region, second-round effects such as market corrections and a rise in volatility on financial markets, a reduction in economic growth and a rise in (energy) inflation could have a significant impact on financial stability. That in turn may lead to a deterioration in Belgian banks’ credit portfolio quality, for instance. Although the extent of this impact – like the final impact on economic growth and inflation – cannot be measured precisely at this stage, it is expected to affect some economic agents more than others, and particularly more energy-intensive companies or households whose property has a low energy performance rating.
The potential increase in repayment difficulties and a possible fall in value of some real estate assets could heighten the vulnerabilities – already been observed in the past – on the Belgian residential property market, against a backdrop of a rapid and marked rise in interest rates. Up until now, the mortgage market has remained dynamic, with record volumes of loans granted to young borrowers. The margins set by the Bank’s recommendations for granting loans with a high loan-to-value ratio have not been completely used up, which means that there is sufficient room for manoeuvre for the mortgage market to remain accessible for solvent first-time buyers.
A solid sector, in a good position to support the real economy
The Belgian financial sector has not come out weaker from the COVID-19 pandemic and still has a solid solvency position. It is therefore able to withstand potentially significant shocks. Although the real impact of the current context on the credit risk for the financial sector cannot yet be precisely measured, it must be ready, if necessary, to conservatively book loan loss provisions to account for potentially substantial second-round effects, but also to proactively and bilaterally offer tailor-made solutions to borrowers faced with liquidity or repayment problems on existing loans. Such action was observed during the COVID-19 crisis and this should be repeated, if need be, even in the absence of a harmonised framework governing, for example, moratoria on loan repayments.
Macroprudential policy at a crossroads
At the beginning of 2022, macroprudential policy was preparing to shift from the crisis mode it entered at the start of the pandemic to go back to a more conventional mode, notably characterised by the gradual build-up of capital buffers. At the end of February 2022, Russia’s invasion of Ukraine disrupted the return to normality, especially in view of the potentially significant second-round effects that could have an impact on financial stability.
The Bank’s recommendations on new mortgage credit continued to be well followed in 2021. That helped to reduce the risk profile of loan portfolios while maintaining access to home loans for borrowers. In addition, the Bank stands ready to release the macroprudential capital buffer built up specifically to cover real estate risks should any signs emerge of a substantial increase in repayment difficulties for mortgage borrowers. This buffer should then help find solutions for customers facing repayment difficulties.
In early 2022, it looked as though conditions might be ripe for the reactivation of another buffer – the countercyclical buffer. This temporary capital buffer, which is built up during the upward phase of the credit cycle in order to generate sufficient absorption capacity to enable banks to cover (potential) credit losses in the downward phase of the cycle, was released at the beginning of the pandemic. The Bank is taking a cautious approach whilst it gains a clearer picture of the impact of macroeconomic developments both as regards the lending dynamics and credit quality.
Energy performance, rising interest rates and resurgence of cyber risks
The recent and current context underlines the importance of taking into account the risks for the financial sector associated with the energy performance of buildings, especially in terms of collateral for new loans granted. Extra efforts are needed from lenders to collect EPC data.
In view of the strong rise in interest rates, it is also important for Belgian financial institutions to take different potential interest rate scenarios closely into consideration in the future, not least as regards depositor behaviour, in the banking sector, and potential early surrender of insurance contracts in the insurance companies’ case.
Last but not least, even though no major cyber security incidents were reported in the first few months of 2022, the Belgian financial sector needs to remain very vigilant about cyber threats.