The NBB Board held its 2nd meeting as macroprudential authority on 7 October 2014
The NBB Board discussed during its 2nd meeting as macroprudential authority the evolution of risks and vulnerabilities in the Belgian financial system.
Financial market conditions have continued to improve during the last months further lowering the level of volatility and spreads. Nonetheless the NBB considers that risks remain important for the financial sector. The economic recovery is weaker than expected, putting downwards pressures on inflation and nominal yields. These sluggish macroeconomic conditions create significant difficulties for the private sector, including the financial sector, whereas the public sector has to reduce its indebtedness.
While in the short term some improvement in the profitability seems to emerge in view of a.o. some efficiency gains, the NBB expects the underlying profitability of the Belgian banking sector to remain under pressure despite the restructuring process undertaken in the aftermath of the financial crisis. The low interest rate environment and the unfavorable business climate are weighing on net interest income, and on the volume of activity and asset quality. Insurance companies also face major challenges in view of the high interest rates still guaranteed on a significant portion of their liabilities and the renewal of their bond portfolios at lower interest rates, which has, in some case, been speeded up by the realization of capital gains in 2013 and 2014. The progressive implementation of Solvency II constitutes an additional important challenge for insurance companies.
As a result, the NBB encourages financial institutions to pursue their restructuring process and efficiency gains. NBB expects that banks and insurance companies will continue enhancing their solvency position and consequently to limit pay-outs to policy-holders and distributions to shareholders if necessary to sustain their activities in the long term. Improvement of the solvency position by the financial institutions through retained earnings and/or capital issuance will be key to face new challenges resulting from the economic environment and the increasing solvency requirements. The NBB also expects insurance companies to carefully ponder the realization of capital gains in view of this challenge. In addition, the NBB recommends reducing the guaranteed interest rate on new individual and group insurance contracts to better reflect the current market conditions.
The low level of nominal returns could create incentives for banks and insurance companies to take excessive risks. Although there is so far limited evidence of search for yield, the NBB remains vigilant to the emergence of such risks. In particular, the NBB Board continues to closely monitor the Belgian housing market and to assess the impact of the prudential measures which have been taken at the end of 2013 for Belgian residential mortgage loans. In recent months, signs of a levelling-off has been observed, although the NBB expects increased volatility and perhaps temporary upwards price pressures in the second semester following the recent decisions of Regional authorities to adapt the fiscal treatment of owner occupied housing. The NBB will closely monitor the possible impact of the new tax regime on financial stability.
While the recent evolution in the commercial real estate market seems to show some signs of moderation, vigilance is warranted in view of the increasing exposures of financial institutions to this sector. In this context, the NBB Board recommends banks and insurance companies to improve the completeness and accuracy of data related to commercial real estate and to regularly assess the quality of their loans and the value of their collateral by third parties to ensure the correct and prudent valuation of these assets in their balance sheet.