The NBB Board held its 5th regular meeting as macroprudential authority
During its 5th meeting in its capacity as macroprudential authority, the NBB Board discussed the evolution of risks and vulnerabilities in the Belgian financial system and adopted two decisions regarding the operationalisation of macroprudential instruments.
The macroeconomic and financial environment remains challenging for the financial sector. The economic environment has continued to improve moderately over the recent months. However, there are still some obstacles to self-sustained growth, in particular the increasing leverage ratio in the economy and subdued level of investment. Against the backdrop of lower potential growth prospects both in advanced and emerging economies, the risk of a protracted period of low nominal growth with low interest rates remains the main important challenge ahead. In addition, global financial markets are facing greater volatility, in a context of uncertainty surrounding the expected monetary policy stance in the US and vulnerabilities in key emerging markets, among other factors. This entails additional downside risks for economic growth and the financial sector.
Close monitoring of the risks in the Belgian financial sector is thus still warranted. While the profitability of Belgian banks has continued to improve in recent quarters on the back of increasing fees and commissions, (unrealised) gains on their financial assets and historically low funding costs, several of these supporting factors are likely to come to an end in the near future and this raises the question of long-term profit sustainability. The prolonged period of low interest rates will start weighing on net interest income, especially in the context of intense competition in core markets and activities which could be further exacerbated by the rapid emergence of new financial technology firms (Fintech). This could in turn have an unfavourable impact on banks’ solvency positions just as new prudential requirements are introduced. In this context, the NBB will closely monitor the expected trend in profit generation, paying particular attention to changes in net interest income in the current environment. The NBB recommends that banks ensure adequate solvency positions to comply with all the future requirements with a sufficient margin to sustain long-term viability and, wherever necessary, to limit dividend to shareholders accordingly.
The current macroeconomic environment of low interest rates is even more challenging for (life) insurance companies. The profitability of Belgian life insurance undertakings is under strong pressure in view of low interest rates and declining premium payments. Whereas mixed insurance groups have been able to partly compensate for the impact of these unfavourable financial conditions on the life insurance business by their good results in the non-life segment, achieved through their efforts to improve cost management, pure life insurance undertakings are particularly vulnerable. Alongside the challenging macro environment, the entry into force of the Solvency II Directive could weigh on insurance companies’ solvency positions due to the move to market-consistent balance sheet values.
In this context, the NBB expects insurance companies to continue strengthening their solvency positions 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 facing the new challenges resulting from the economic environment and the increasingly heavy regulatory requirements. The NBB also expects insurance companies to carefully ponder the realisation of capital gains in view of these challenges and to enhance their asset-liability matching. Following observations made in the framework of the Solvency II preparatory measures, the NBB furthermore recommends that insurance undertakings significantly improve data quality and reporting procedures. In line with the recommendations made at previous macroprudential meetings, the NBB welcomes the proposal to review the legal framework of maximum interest rates on long-term life insurance contracts in order to better reflect the current market conditions with the entry into force of the Solvency II regime. The NBB likewise welcomes the agreement among the social partners to review the system of minimum guaranteed interest rates on group insurance and pension contracts foreseen in the Law of 28 April 2003 governing supplementary pensions.
The NBB is continuing to monitor the possibility of search for yield by financial institutions in reaction to the low interest rate environment and to pressures on profitability in order to ensure that their capital position remains in line with their risk profile. While the “search for yield” phenomenon remains moderate, some developments deserve particular attention. First, exposures to real estate continued to rise in 2014 and in the first half of 2015, leading to a further rise in households’ indebtedness. The NBB strongly recommends that banks maintain sound lending practices, notably in view of some initial signs of relaxation of certain credit standards for households in recent months. The NBB considers that the share of new loans with a high risk profile remains high at the current juncture. With due regard to the remaining vulnerabilities in the real estate market, the NBB has decided to extend in 2016 the add-on to the risk-weight it introduced at the end of 2013 for banks using internal ratings-based models (IRB) and is closely assessing the situation on the real estate market. Second, some portfolio re-balancing towards higher-yield assets has been observed for some insurance companies.
Another important and growing challenge for both financial institutions, especially financial market infrastructures (FMIs), and the supervisory authorities relates to IT and cyber risks. These institutions are increasingly connected to the internet and to each other. The financial sector is becoming a target for organised cybercrime. As cyber-attacks are expected to become more frequent, sophisticated, targeted and persistent and might seriously affect the stability of financial markets, cyber risks warrant close monitoring by all relevant stakeholders. In the coming weeks, the NBB will issue a circular specifying its additional prudential expectations regarding operational business continuity and security of systemically important financial institutions.
Finally, the NBB has adopted two important macroprudential decisions:
- First, the NBB has decided to extend for one year the application of a 5-percentage-point add-on to the risk weight applied to Belgian mortgage loan exposures by banks using the IRB approach. This extension is conditional upon the agreement of the European Commission, in line with the requirements foreseen in Article 458 of the CRR.
- Second, the NBB has designated the domestic systemically important banks (referred to in EU legislation as “other systemically important institutions”, or O-SIIs), in accordance with the methodology specified in the EBA guidelines on the identification of O-SIIs. The NBB has also decided upon capital surcharges to be applied to the Belgian O-SIIs. Given that systemically important banks are defined as institutions whose failure would have a significant impact on the financial system or the real economy, additional capital requirements for such institutions have two principal motivations: (1) to reduce the probability of default of the institution, given the high economic and social costs of such a default; (2) to impose surcharges on the institution that reflect the negative externalities that its failure would generate.
The EBA identification methodology for systemically important banks involves calculation of a score for each bank based on quantitative indicators of size, complexity, interconnectedness and substitutability. The application of this methodology has resulted in eight Belgian banks being designated as O-SIIs: BNP Paribas Fortis, KBC Group, ING Belgium, Belfius Bank, Axa Bank Europe, Argenta, Euroclear and The Bank of New York Mellon. As foreseen by the CRD IV and the Belgian Banking Law the NBB Board has also decided to apply capital surcharges to each of the eight banks. The levels of the surcharges will be as follows: 1.5% for BNP Paribas Fortis, KBC Group, ING Belgium, and Belfius Bank; 0.75% for Axa Bank Europe, Argenta, Euroclear and BNYM. These surcharges will be phased in over a three-year period, beginning on 1 January 2016. In line with CRD IV, the designation of O-SIIs and the capital surcharge percentages will be reviewed annually.
 i.e. Minimum requirement for own funds and eligible liabilities (MREL) and leverage ratio.
 EBA guidelines on the criteria to determine the conditions of application of Article 131(3) of Directive 2013/36/EU (CRD) in relation to the assessment of other systemically important institutions (O-SIIs).
 Being subject to the specific requirements of an EU restructuring plan, Dexia has not been included in the list of institutions covered by this D-SIFI surcharge.
 Art. 131 of Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC.
Art. 14 of Annex IV to the Belgian Banking Law.