## EXECUTIVE SUMMARY

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**Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2017/cr17256.pdf)

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---

### Background
- Luxembourg has a large financial system that contributes a significant share of GDP and is globally interconnected.
- The investment fund industry is the second largest in the world after the United States (U.S.).
- The banking system is large relative to GDP with activities including private banking and wealth management, depositary and custodian activities, treasury operations for large and systemic banking groups, and traditional retail and commercial banking.
- A Comité de Risque Systémique (CRS) was set up on April 1, 2015 to ensure macroprudential oversight of Luxembourg’s financial system.
- The CRS brings together: (i) the government (the Finance Minister, who chairs the CRS); (ii) the Banque Centrale du Luxembourg (BCL), represented by its Director General; (iii) the Commission de Surveillance du Secteur Financier (CSSF), represented by its Director General; and (iv) the Commissariat aux Assurances (CAA), represented by its Director.
- The law establishing the CRS attributes the secretariat of the CRS to the BCL. The Director General of the BCL chairs the CRS in the absence of the government member in charge of the financial sector.
- According to Article 1(1) of the law of April 1, 2015, the mandate of the CRS is to coordinate the implementation of macroprudential policy to safeguard the stability of Luxembourg’s financial system by strengthening resilience and decreasing the buildup of systemic risks.
- Since it was set up, the CRS has met [seven] times and has issued eight recommendations, mostly related to capital buffers, including the counter-cyclical capital buffer (CCB).
- The CRS framework operationalizes ESRB Recommendations ESRB/2011/3 and ESRB/2013/1 and is articulated with the EU-level macroprudential institutional framework.
- Interaction occurs at the ESRB and at the ECB under the Single Supervisory Mechanism (SSM), and the BCL and CSSF participate in the Macroprudential Forum (MPF) and the Financial Stability Committee (FSC).

### Institutional framework — assessment and key institutional findings
- Assessment principles: (i) willingness to act; (ii) ability to act; (iii) cooperation domestically and internationally.
- Current institutional features and concerns:
  - Article 5: CRS decisions require unanimity (each member has a right of veto).
  - Unanimity voting could create an inaction bias because each member can block decisions (no evidence of paralysis so far).
  - Simple or qualified majority arrangements can better balance the need to avoid delay with ensuring full consideration of trade-offs and perspectives.
  - Preparatory CRS draft law recognizes the central bank should play a leading role in macroprudential policy; the BCL’s role is currently de facto leading in analysis.
  - The practice of awarding a lead role to the central bank in the analysis of systemic risks should be enshrined in law.
  - To advance public transparency and accountability, the CRS should periodically publish the risk dashboard and surveillance notes assessing systemic risks.
  - Ensuring the independence of the members of the CRS as recommended in the Technical Note on Banking Supervision would be important to effectiveness.

### Institutional framework — recommended actions
- Replace the unanimity voting requirement of the CRS by majority voting to counter potential inaction bias.
- Formally strengthen the leading role of the BCL by assigning legal responsibility for periodic analysis and identification of systemic risks and by giving the BCL the power to formally recommend macroprudential policies to the CRS.
- Periodically publish the BCL risk dashboard and risk assessment notes (which could include policy recommendations).
- Ensure independence of CRS members consistent with Technical Note on Banking Supervision.
- Consider including external academic members to foster independence and willingness to act.

### Operational capacity and data
- BCL monitoring and analysis:
  - BCL prepares a risk dashboard updated regularly and produces a surveillance note of systemic risks for CRS meetings.
  - BCL relies on sophisticated analytical techniques and has access to various data sources.
  - BCL produces quarterly risk dashboard and surveillance notes and uses early warning indicators and defined thresholds to map risk assessments into policy actions.
- CSSF monitoring:
  - CSSF has a dedicated macroprudential division preparing risk indicators and has stepped up surveillance as internal resources have increased.
- Data strengths and gaps:
  - BCL collects monthly data on investment funds’ flows, portfolios and bilateral exposures (security by security).
  - CSSF reporting includes: monthly reports on total net assets, subscriptions/redemptions for all funds; a semiannual risk report for UCITS; the AIFM reporting for AIFMs/AIFs; monthly reports on largest MMF; a targeted report on large funds’ use of synthetic leverage.
  - Data gaps remain—particularly on linkages between investment funds and banks, and on the real estate market (rental market data, loan-to-value ratios (LTVs) distributions, and commercial market data).
  - Authorities note ESRB Recommendation 2016/14 (October 31, 2016) on closing real estate data gaps is expected to improve harmonisation.

### Risk monitoring — investment funds and bank linkages
- Macroprudential surveillance priorities:
  - Closer monitoring of potentially destabilizing liquidity mismatches; market risk where synthetic leverage is used; and counterparty risk.
  - Survey industry experience with liquidity management tools (LMTs) and assess their macroprudential usefulness.
  - Provide industry guidance on scope (fund coverage), frequency and modalities of liquidity-based stress tests.
  - Develop capacity for stress tests from a systemic/financial stability perspective, including interlinkages among funds and banks and stress tests in higher risk areas (such as bond funds).
- Fund–bank transmission channels and vulnerabilities:
  - High concentration of fund deposits in Luxembourg depository banks; excess deposits are typically upstreamed to parent banks or invested in cash-equivalent marketable instruments.
  - Shocks from the fund industry could transmit to the banking system domestically and abroad despite past stability of operational deposits.
  - Banking services to funds include custodian, oversight, administration, origination; reputational links exist with large banking groups.
  - A shock would also impact the real economy through a decline in the Luxembourg financial system’s value-added (around one quarter of GDP).

### Macroprudential toolkit
- Toolkit coverage:
  - Luxembourg’s toolkit contains all macroprudential instruments provided for in the Capital Requirements Regulation (CRR) and the Capital Requirements Directive IV (CRDIV).
  - Authorities have introduced: Pillar II measures; the CCB; the systemic risk buffer; higher risk weights or loss given default calibrations; additional capital buffers for global and other systematically important institutions; various sectoral measures.
  - CSSF sets the CCB in close cooperation with the central bank and on the basis of a recommendation from the CRS.
- Legal clarity needed:
  - Legal clarity should be provided on the availability of borrower-based macroprudential tools (limits on LTV, DTI, and DSTI).
  - Note from authorities’ response: it is currently not possible legally to set limits to LTVs, DTIs or DSTIs.
- Investment fund LMTs:
  - Asset managers can use a wide range of LMTs (e.g., swing pricing, suspension of redemption, gating, fees).
  - Macroprudential effectiveness of LMTs has not been formally assessed; a commission survey to study effectiveness is recommended.
  - Some LMTs (such as suspension of redemptions) could be used for macroprudential purposes, but evidence on effectiveness is limited.

### Residential real estate — key findings and policy implications
- Evolution and valuations:
  - Prices are 18 percent above their level at the end of 2008.
  - Luxembourg is among the 10 OECD countries which have experienced the most rapid growth of housing prices since the global financial crisis.
  - Price-to-rent and price-to-income ratios are between one and two standard deviations above their historical mean.
  - Econometric models suggest prices are slightly above their equilibrium value; population growth is a major driver.
- Household balance sheet vulnerabilities:
  - Household debt stands now at 120 percent (of disposable income).
  - Households, on average, hold only 40 percent of their financial assets as liquid financial assets; 50 percent of these financial assets are accounted for by bank deposits.
  - About 50 percent of mortgages are adjustable rate.
  - Average LTV ratio is below 50 percent on the stock of existing mortgages.
  - About 25 percent of mortgages have a LTV ratio equal to or above 80 percent.
  - In 2015, about 40 percent of new residential mortgage loans had an LTV ratio about 80 percent, relative to 25 percent among the outstanding stock.
- Macroprudential measures in place since 2012:
  - Adjusted risk-weights of 75 percent under the standardized approach for the part of new mortgage loans that exceed a LTV of 80 percent instead of the standard 35 percent risk-weight.
  - Stricter stress test requirements for IRB banks mortgage books and pillar II capital add-ons for banks with main exposures to real estate due to “concentration risk.”
  - Three credit institutions with major mortgage books identified as systemically important with additional capital requirements of 0.5 percent of RWAs.
  - On August 31, 2016, following a CRS recommendation, IRB banks required to apply a risk weight floor of 15 percent for exposures to Luxembourg residential real estate.
  - Since 2014, all credit institutions in Luxembourg are subject to a (fully-loaded) capital conservation buffer of 2.5 percent.
  - There is no measured impact of these measures on the housing market to date.
- Policy recommendation:
  - Continue to carefully monitor the real estate market.
  - Consider borrower-based measures (such as limits on LTVs, or DSTIs) should house prices continue to rise faster than incomes and rents.
  - Measures to expand housing supply would help relieve price pressures.

### Macroprudential risks in the investment fund industry — empirical findings
- Fund-level trends and metrics:
  - Increasing correlation of individual investment fund returns with global shocks and market returns.
  - Sample evidence (74 Luxembourg bond funds, monthly returns January 2000–July 2016):
    - Mean betas: Pre-crisis (pre Sept 2008): 0.43; Crisis (Sept–Dec 2008): 0.64; Post-crisis (Jan 2009 - July 2016): 0.58.
    - Variance decomposition shows returns increasingly explained by common shocks since the global financial crisis.
  - Exposures shift:
    - End-2008 to Q3 2015: exposures of investment funds to (nonbank) corporates and other institutions’ bonds rose from €141 billion (or 29 percent of total bond investments) to €648 billion (or 45 percent of total bond investments) in October 2015.
  - Synthetic leverage:
    - Average (synthetic) leverage of UCITS funds typically exceeds 100 percent of net asset value for a subset of bond funds, and is around 60 percent for all UCITS funds.
    - A group of large bond funds has much higher leverage.
    - Gross notional derivative figures do not allow inference of purpose (hedging vs return enhancement) or exact risk exposure.
- Systemic transmission channels:
  - Liquidity mismatches (asset-side market depth vs liability-side investor characteristics) can create run and fire-sale risks that transmit to markets and banks.
  - Herding and “first mover” advantages can amplify run dynamics and correlated exposures.
  - Fund deposits in Luxembourg banks fluctuate around €100 billion; funds’ holdings of cross-border deposits and debt securities issued by euro area financial institutions of about €250 billion account for only 7 percent of funds’ TNAs.
- Policy implications:
  - Risks from liquidity mismatches, leverage, and correlated exposures warrant increasing macroprudential attention.
  - Oversight, risk monitoring, and regulatory frameworks should evolve to address liquidity, leverage, and bank–fund linkage risks.

### Monitoring, stress testing, and data recommendations for investment funds
- Strengthen reporting and monitoring:
  - Intensify regular data collection related to liquidity and concentration of funds’ assets, use of synthetic leverage, use of securities financing transactions, investor concentration and categorization, and bilateral linkages between banks and investment funds.
  - CSSF should further refine data collection given current reporting by BCL and CSSF.
  - BCL and CSSF should have an MOU for exchange of complementary data on investment funds.
- Stress-testing and LMTs:
  - CSSF should develop capacity to undertake liquidity and systemic stress tests of investment funds, including interlinkages with banks and stressed scenarios for bond funds.
  - Undertake a survey among asset managers to assess LMTs effectiveness and consider regulatory guidance on LMTs and their inclusion in fund prospectuses where appropriate.
  - Require asset managers to report results and parameters of stress tests to the regulator (going beyond FSB recommendation).
  - CSSF should provide guidance on scope, frequency and modalities of liquidity-based stress tests and require reporting of stress-test outcomes.
- EU and international engagement:
  - Advocate actions at the EU level to strengthen macroprudential surveillance and regulation of the investment fund industry (ESRB, ESMA, FSB, IOSCO alignment).

### Explicit FSAP recommendations on macroprudential policies (textual highlights)
- Strengthen willingness to act:
  - Replace unanimity voting by majority voting — Authority: Legislator — Priority / Time frame: High / medium term
  - Enshrine BCL’s leading role into law — Authority: Legislator — Priority / Time frame: High / medium term
  - Give BCL power to make formal policy recommendations to the CRS — Authority: Legislator — Priority / Time frame: High / medium term
- Transparency and accountability:
  - Publish the risk dashboard and a note assessing systemic risks — Authority: CRS — Priority / Time frame: Medium / medium term
- Address data gaps:
  - Address real estate market data gaps — Authority: CRS and members — Priority / Time frame: Medium / medium term
  - Address investment fund data gaps — Authority: CRS and members — Priority / Time frame: High / near term
- Strengthen monitoring and pre-emptive measures for investment fund industry:
  - Strengthen monitoring of systemic risks and develop pre-emptive instruments — Authority: CSSF, BCL — Priority / Time frame: High / near term
  - Thematic study on fund–bank linkages and nonbank corporate balance sheets — Authority: CRS, BCL, CSSF — Priority / Time frame: Medium / near term
  - Involve BCL in regular macroprudential risk analysis of investment funds — Authority: BCL, CRS — Priority / Time frame: Medium/near term
  - Commission survey on effectiveness of LMTs — Authority: CSSF — Priority / Time frame: High/ near-term
  - Provide guidance to asset managers on stress tests and LMTs — Authority: CSSF — Priority / Time frame: High / medium term
  - Continue to monitor real estate market and take policy actions if needed — Authority: CRS and members — Priority / Time frame: High / near term
  - Develop capacity for financial stability stress tests of investment funds — Authority: CSSF — Priority / Time frame: High / medium term
  - Recommend legislative action to add limits on LTV, DTI, and DSTI to macroprudential toolkit — Authority: CRS — Priority / Time frame: Medium/near term

*Source: EXECUTIVE SUMMARY (cr17256) — IMF Country Report*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Background
- Luxembourg has a large financial system that contributes a significant share of GDP and is globally interconnected.
- The investment fund industry is the second largest in the world after the United States (U.S.).
- The banking system is large relative to GDP with activities including private banking and wealth management, depositary and custodian activities, treasury operations for large and systemic banking groups, and traditional retail and commercial banking.
- A Comité de Risque Systémique (CRS) was set up on April 1, 2015 to ensure macroprudential oversight of Luxembourg’s financial system.
- The CRS brings together: (i) the government (the Finance Minister, who chairs the CRS); (ii) the Banque Centrale du Luxembourg (BCL), represented by its Director General; (iii) the Commission de Surveillance du Secteur Financier (CSSF), represented by its Director General; and (iv) the Commissariat aux Assurances (CAA), represented by its Director.
- The law establishing the CRS attributes the secretariat of the CRS to the BCL. The Director General of the BCL chairs the CRS in the absence of the government member in charge of the financial sector.
- According to Article 1(1) of the law of April 1, 2015, the mandate of the CRS is to coordinate the implementation of macroprudential policy to safeguard the stability of Luxembourg’s financial system by strengthening resilience and decreasing the buildup of systemic risks.
- Since it was set up, the CRS has met [seven] times and has issued eight recommendations, mostly related to capital buffers, including the counter-cyclical capital buffer (CCB).
- The CRS framework operationalizes ESRB Recommendations ESRB/2011/3 and ESRB/2013/1 and is articulated with the EU-level macroprudential institutional framework.
- Interaction occurs at the ESRB and at the ECB under the Single Supervisory Mechanism (SSM), and the BCL and CSSF participate in the Macroprudential Forum (MPF) and the Financial Stability Committee (FSC).

### Institutional framework — assessment and key institutional findings
- The macroprudential institutional arrangement is assessed against three principles: (i) willingness to act; (ii) ability to act; and (iii) cooperation domestically and internationally.
- Current institutional features and concerns:
  - The CRS makes decisions based on unanimity voting.
  - Unanimity voting could create an inaction bias because each member has an effective veto right and can block decisions (no evidence of this having emerged so far).
  - Simple or qualified majority arrangements can better balance the need to avoid delay with ensuring full consideration of trade-offs and perspectives.
  - The preparatory work of the CRS draft law recognizes the central bank should play a leading role in macroprudential policy; the BCL’s role is currently de facto leading in analysis.
  - The practice of awarding a lead role to the central bank in the analysis of systemic risks should be enshrined in law.
  - To advance public transparency and accountability, the CRS should periodically publish the risk dashboard and surveillance notes assessing systemic risks.
  - Ensuring the independence of the members of the CRS as recommended in the Technical Note on Banking Supervision would be important to effectiveness.

### Institutional framework — recommended actions (from Summary and Principle sections)
- Replace the unanimity voting requirement of the CRS by majority voting to counter potential inaction bias.
- Formally strengthen the leading role of the BCL by assigning legal responsibility for periodic analysis and identification of systemic risks and by giving the BCL the power to formally recommend macroprudential policies to the CRS.
- Periodically publish the BCL risk dashboard and risk assessment notes (which could include policy recommendations).
- Ensure independence of CRS members consistent with Technical Note on Banking Supervision.

### Operational capacity and data
- The BCL’s monitoring and analysis of systemic risks is appropriate and timely.
  - The BCL prepares a risk dashboard which is updated on a regular basis and produces a surveillance note of systemic risks for CRS meetings.
  - The BCL relies on sophisticated analytical techniques and has access to various data sources.
  - In some areas, data gaps remain—particularly on linkages between investment funds and banks.
- The BCL has analyzed key vulnerabilities in Luxembourg, notably related to the real estate market, household debt, and the investment fund industry (including bank–fund linkages), as demonstrated in the annual Financial Stability Review.
- Legal clarity is needed on borrower-based macroprudential tools for the real estate market (limits to loan-to-value, debt-to-income, or debt-service-to-income).
- Asset managers can use a wide range of liquidity management tools (LMTs); however, the macroprudential effectiveness of LMTs has not been formally assessed.
  - The authorities are advised to survey industry experience with LMTs and assess their macroprudential usefulness.
  - The assessment could provide the basis for additional regulatory guidance on the use of LMTs, including their inclusion in fund prospectuses.
  - The regulator would need to be careful so as not to interfere with current private contracts.

### Risk monitoring — investment funds and bank linkages
- The CSSF has stepped up surveillance of the investment fund industry as internal resources have increased and the industry has expanded.
- Further macroprudential-based surveillance should include closer monitoring of:
  - potentially destabilizing liquidity mismatches;
  - market risk where synthetic leverage is used;
  - counterparty risk.
- The CSSF should provide industry guidance on the scope (i.e., fund coverage), frequency and modalities of liquidity-based stress tests.
- The CSSF should develop capacity to undertake stress tests from a systemic/financial stability perspective, including:
  - interlinkages among funds and banks;
  - stress tests in higher risk areas (such as bond funds);
  - understanding collective behavior dynamics, linkages with banks and impact on markets.
- These steps align with Financial Stability Board preliminary guidance on addressing structural vulnerabilities in the global asset management industry and similar efforts at the EU and ESRB level.
- The authorities should advocate actions at the EU level to strengthen macroprudential surveillance and regulation of the investment fund industry.

### Macroprudential toolkit
- Luxembourg’s toolkit contains all the macroprudential instruments provided for in the Capital Requirements Regulation (CRR) and the Capital Requirements Directive IV (CRDIV).
- Legal clarity should be provided on the availability of borrower-based macroprudential tools (limits on LTV, DTI, and DSTI).
- The macroprudential usefulness of liquidity management tools (LMTs) in the investment fund industry should be assessed; a commission survey to study the effectiveness of LMTs is recommended.

### Table 1 — FSAP Recommendations on Macroprudential Policies (textual listing of table entries)
- To strengthen the willingness to act:
  - Replace the unanimity voting requirement of the CRS by majority voting — Authority responsible for implementation: Legislator — Priority / Time frame: High / medium term
  - Enshrine into law the de facto leading role of the BCL — Authority responsible for implementation: Legislator — Priority / Time frame: High / medium term
  - Give the BCL the power to make formal policy recommendations to the CRS — Authority responsible for implementation: Legislator — Priority / Time frame: High / medium term
- To further transparency and accountability:
  - Publish the risk dashboard and a note assessing systemic risks — Authority responsible for implementation: CRS — Priority / Time frame: Medium / medium term
- To address data gaps:
  - Address data gaps related to the real estate market — Authority responsible for implementation: CRS and members — Priority / Time frame: Medium / medium term
  - Address data gaps related to the investment fund industry — Authority responsible for implementation: CRS and members — Priority / Time frame: High / near term
- To strengthen monitoring and pre-emptive measures for the investment fund industry:
  - Strengthen monitoring of systemic risks in the investment fund industry and, in alignment with international and European efforts, develop instruments to take pre-emptive measures to mitigate these as appropriate — Authority responsible for implementation: CSSF, BCL — Priority / Time frame: High / near term
  - Prepare thematic study on the linkages between the investment funds and the banks and on the balance sheets of nonbank corporate sector — Authority responsible for implementation: CRS, BCL, CSSF — Priority / Time frame: Medium/ near term
  - Involve the BCL in the regular risk analysis of investment funds from a macroprudential perspective and in the related policy recommendations — Authority responsible for implementation: BCL, CRS — Priority / Time frame: Medium/near term
  - Commission survey to study the effectiveness of LMTs — Authority responsible for implementation: CSSF — Priority / Time frame: High/ near-term
  - Provide guidance to asset managers on the modalities of stress tests and use of LMTs — Authority responsible for implementation: CSSF — Priority / Time frame: High / medium term
  - Continue to carefully monitor developments in the real estate market, and take further policy actions if needed — Authority responsible for implementation: CRS and members — Priority / Time frame: High / near term
  - Develop capacity for financial stability stress tests of investment funds, including from a systemic perspective — Authority responsible for implementation: CSSF — Priority / Time frame: High / medium term
  - Recommend legislative action to complete the macroprudential toolkit with limits on LTV, DTI, and DSTI — Authority responsible for implementation: CRS — Priority / Time frame: Medium/near term

### Analytical and legal context references (as cited in the source)
- IMF-FSB-BIS, 2016, Elements of Effective Macroprudential Policies.
- International Monetary Fund, 2013, Key Aspects of Macroprudential Policies.
- Law of December 23, 1998 (organic law of the BCL) provides a financial stability mandate to the BCL.
- Preparatory CRS draft law references Projet de Loi N. 6653 portant création d’un comité du risque systémique.
- ECB opinion noted unanimity voting arrangement of the CRS could in practice cause a risk of paralysis.

*Source: EXECUTIVE SUMMARY (cr17256) — IMF Country Report*

### 6.      The model of a committee chaired by the government member in charge of the

### 6.      The model of a committee chaired by the government member in charge of the 

### Committee model and role of central bank and Ministry of Finance
- The model often gives a leading role to the central bank.12
- The presence of the Ministry of Finance on the committee can be useful when changes in legislation or coordination with fiscal or other policies is needed, but can also delay or impair decision making because of interference by political considerations.
- In other euro area countries (e.g., France and Germany) the Ministry of Finance chairs similar committees, but:
  - In France, the leading role of the Banque de France results from its task to identify and monitor systemic risks, its power to make proposals to the Haut Conseil de Stabilité Financière (HCSF) on the use of specific instruments, its contribution to the implementation of the decisions and its role in their evaluation.
  - In Germany, the Bundesbank has a veto power, and its leading role also derives from its tasks in identifying and analyzing risks and providing analytical support to the committee (Appendix 1).13

### Objectives of the CRS (as set in the law)
- The CRS is tasked to:
  - (i) identify, monitor and assess risks to financial stability and implement policies to achieve its objective by preventing and mitigating those risks;
  - (ii) determine, based on analyses produced by the members of the CRS, which activities, infrastructures and participants in the financial system pose—or may pose—a systemic risk to the Luxembourg financial system;
  - (iii) issue any opinion useful or necessary to realize the intermediate and ultimate objectives of macroprudential policy;
  - (iv) issue risk warnings when risks to financial stability are considered important, and can make these warnings public;
  - (v) issue recommendations about corrective policy measures, and can make these recommendations public;
  - (vii) evaluate and follow up on the responses provided by the addressees to any opinion, alert or recommendation issued by the CRS;
  - (viii) contribute to reinforce cooperation and information exchange—both during normal times and in crisis situations—between its members;
  - (ix) cooperate and exchange information with the ESRB and with other macroprudential authorities; and
  - (x) ensure a follow-up of the recommendations issued by the ESRB.
- The CSSF makes use of macroprudential instruments available under the CRD IV/CRR package; when acting in such capacity, the CSSF takes decisions after consulting with the BCL and, where applicable, after requesting the opinion of the CRS or taking the latter’s recommendations into account.11

### Voting arrangements and risk of paralysis
- Article 5 of the law of April 1, 2015: decisions made by the CRS require unanimity among its members (each member has a right of veto).
- Identified risks:
  - Unanimity can cause delay or inaction in decision making.
  - Important policy proposals may never reach the CRS in anticipation of potential paralysis.
  - The unanimity requirement could pose a real test under rising systemic risks.
- International best practice cited:
  - 2016 IMF-FSB-BIS paper: “voting on policy measures tends to be based on simple or qualified majority, rather than unanimity, to avoid the potential for paralysis, even if the authorities may often in practice strive for consensus.”
  - 2013 IMF paper “Key Aspects of Macroprudential Policy”: "a formal requirement for unanimity assigns a veto to each of the members of the committee and risks paralyzing macroprudential policy. Simple or qualified majority arrangements can strike a better balance..."
- ECB noted in its opinion on the draft law that the unanimity voting arrangement could in practice cause a risk of paralysis in macroprudential policy.15
- Recommendation in governance: introduce governance structure for the CSSF to remove any potential for future interference from the government or industry (no evidence of interference noted), as recommended in the Technical Note on Banking Supervision.

### Legal clarity and strengthening BCL role
- Parliamentary process comments argue BCL’s leading role results from BCL acting as secretariat of the CRS and the Director General of the BCL acting as chair in the absence of the Minister of Finance.16
- Legal shortcomings:
  - Allocation of secretariat to BCL alone is unlikely to amount to a fully defined leading role.17
  - Law does not clarify which member institution is tasked with the analysis of systemic risks.
  - Article 3: each member institution contributes one staff member to the secretariat, which include the possibility to draft analysis on systemic risks.
- Practice:
  - Financial stability and supervision department of the BCL takes the lead in monitoring and analysis of systemic risks, preparing a risk dashboard and a surveillance note for CRS meetings.
  - Règlement intérieur (internal rules) of the CRS adopted November 15, 2015, defines modalities and functioning rules of the CRS and its secretariat.
- Recommended legal changes:
  - Provide clarity in the law about the leading role of the BCL, including its role in periodic preparation of systemic risk analysis as stated in internal rules and in formally recommending macroprudential policies to the CRS.
  - Allow these policy recommendations to be included in a risk analysis paper that would be made public on the website of the BCL or the website of the Secretariat.
  - Clarify that other member institutions are empowered to contribute to the analysis as deemed appropriate by the CRS.
  - Consider including external academic members to foster independence and willingness to act.18

### Transparency and accountability
- CRS accountability:
  - The CRS submits its annual report to the parliament and to the government.
  - Upon request by the parliament, the CRS presents its annual report to the internal parliamentary commission in charge of financial affairs.
  - The CRS publishes a shortened version of the annual report (Article 9 of the law of April 1, 2015).19
- The report describes assessment of systemic risks and lists opinions, alerts and recommendations issued by the CRS and follow-up actions taken by recipients.
- Transparency requirements regarding publication of opinions, risk warnings, recommendations and reports (Article 5 (2) and Article 7 (2)) are consistent with ESRB Recommendation D of ESRB/2011/3.
- Gap: the law does not require any publication of risk assessments.
- Recommendation: CRS should periodically publish an analysis of systemic risks, including:
  - The risk dashboard (as the ESRB does);
  - A note evaluating systemic risks with policy recommendations;
  - A summary of thematic studies undertaken by members and, as appropriate, publish the related papers.

### Principle 2: Ability to Act
- Powers of the CRS:
  - Endowed with powers to identify systemic risks, issue opinions or risk warnings, and address recommendations to other agencies or any financial institution, coupled with a “comply or explain” mechanism (a “semi-hard” power).
  - CRS has no binding powers; binding powers rest with CRS members (the CSSF and the CAA).
  - CRS can obtain any information deemed relevant from represented institutions and any national agency; recipients must provide requested information within the delays requested, given competencies and obligations defined in EU and national legal framework.
  - Calibration power: ability to formulate recommendations.
- Practical advantage of Ministry of Finance presence: could facilitate legislative action to add new instruments and expand macroprudential perimeter, and coordinate macroprudential with other policies.

### Principle 3: Effective coordination and cooperation
- Legal framework explicitly states CRS should reinforce cooperation and information exchange during normal times and in crises, and cooperate with the ESRB and other macroprudential authorities.
- Each institution in the CRS must designate a staff member to contribute to Secretariat analysis; internal rules clarify modalities of contributions for regular monitoring and thematic studies.
- International and European cooperation:
  - BCL and CSSF contribute to JSTs of significant institutions directly supervised by the SSM and contribute to groups under the Financial Stability Committee of the ECB.
  - Both institutions participate in macroprudential risk analysis and policy decision meetings at quarterly meetings of the ESRB and quarterly meetings of the ECB (joint macroprudential forum, financial stability committee, and sub-groups).
  - Contributions to sub-committees: AWG, MPAG, IWG, MPPG.
  - Luxembourg contributed to FSB analysis of structural vulnerabilities from asset management activities (FSB - Workstream 3), but is not part of the FSB steering committee.
- Committee framework fosters coordination with other policies:
  - Chairing by the government member responsible for the financial sector should, in principle, allow internalizing systemic impact of tax policies and coordinating tax and structural policies with macroprudential objectives.
  - Crisis management coordination: CSSF is resolution authority; Finance Ministry would play an important role if public funds are required.

### Operational capacity: analytical capacity and processes
- BCL and CSSF resources:
  - BCL has a dedicated financial stability and supervision department producing a quarterly risk dashboard and surveillance note for the CRS; uses adequate data, analytical models, early warning indicators, and defined thresholds to map risk assessments into policy actions.
  - CSSF has a dedicated macroprudential division preparing risk indicators to assess potential build-up of systemic risks.
  - For CCB proposals: CSSF provides CRS with a risk dashboard with indicators used to assess potential build-up of systemic risks associated with periods of excessive credit growth.
  - For identification of O-SIIs: CSSF maintains a scoring system communicated to the CRS for decision purposes.

### Data and information gaps
- Several data and information gaps remain and need addressing to enhance risk monitoring:
  - BCL collects monthly data on investment funds’ flows, portfolios and bilateral exposures (security by security) for statistical purposes.
  - CSSF reporting includes: monthly reports on total net assets, subscriptions/redemptions for all funds; a semiannual risk report for UCITS; the AIFM reporting for AIFMs/AIFs; monthly reports on largest MMF; a targeted report on large funds’ use of synthetic leverage.21
  - Real estate market data gaps:
    - Residential market: rental market data, loan-to-value ratios (LTVs) and their distribution among borrowers, and non-standardized definitions across banks.
    - Commercial market: no official data.
  - Authorities noted ESRB Recommendation 2016/14 of October 31, 2016 on closing real estate data gaps is expected to improve the situation by harmonising definitions in the EU.
  - Investment funds: CSSF should further refine data collection for risk monitoring given current reporting by BCL and CSSF.
- Structural risks from international integration:
  - Luxembourg’s financial system is highly internationally integrated, hosts the second largest investment fund industry after the U.S., and has a large presence of foreign banks specialized in cash management and treasury operations, private wealth management, and depository activities.
  - High premium on quality of international cooperation, supervision of cross-border exposures, reciprocity arrangements for macroprudential instruments and home-host considerations.
  - CRS demonstrated proactive stance in reciprocating macroprudential measures (example: Recommendation dated July 25, 2016, regarding reciprocity of an increase of risk weights on exposures guaranteed by real estate exposures in Belgium).22

### Recommendations (explicit)
- i. The BCL and the CSSF should undertake thematic studies in areas of relevance for the financial system of Luxembourg (e.g., defining the perimeter of the nonbank finance, and further analyzing links between investment funds and banks);
- ii. The CSSF and the BCL should have in place an MOU for the exchange of complementary data on investment funds;
- iii. The CSSF and the BCL should intensify and further elaborate, on the basis of the current and recently introduced UCITS risk reporting, regular data collection related to liquidity and concentration of investment funds’ assets, the use of synthetic leverage and the resulting exposures, the use of securities financing transactions, the concentration and categorization of investors, and bilateral linkages between banks and investment funds;23
- iv. The CRS and its member institutions should also address additional data gaps related to:
  - (i) the residential real estate market (including data on the rental market, and the lack of standard definition of LTVs across banks, and the absence of data on the distribution of LTVs among borrowers and across banks),
  - (ii) the commercial real estate market (for which there is no data besides a survey undertaken by a commercial firm every five years), and
  - (iii) balance sheets of the nonbank corporate sector.

*Source: cr17256 - 6.      The model of a committee chaired by the government member in charge of the financial sector (cr17256).*

### 20.      Residential real estate prices have grown substantially since the global financial crisis.

### 20.      Residential real estate prices have grown substantially since the global financial crisis.

### Evolution of house prices
- Price are 18 percent above their level at the end of 2008.
- Luxembourg is among the 10 OECD countries which have experienced the most rapid growth of housing prices since the global financial crisis.
- Prices increased significantly after the introduction of the euro and in the run-up to the global financial crisis.

### Drivers and valuation
- Growing supply constraints are likely contributing to price growth:
  - Population and overall employment have continued to rise substantially.
  - Construction of new residential housing has increased moderately relative to its historical average.
  - About 40 percent of employment is accounted for by nonresident workers, some of whom look for housing locally.
- Valuation indicators:
  - The price-to-rent ratio and the price-to-income ratio are at historically high levels in Luxembourg.
  - These ratios are between one and two standard deviations above their historical mean, suggesting some overvaluation of real estate prices.
  - Econometric models relating real residential real estate prices to fundamentals (disposable income, interest rates, population, and mortgage credit) suggest that prices are slightly above their equilibrium value.
  - Given supply constraints and continued population growth, the current trend of rising prices is likely to continue, unless a severe negative shock impacts demand for housing.

### Econometric model (Box 1) — key points
- Model estimated at quarterly frequency during 1981Q1–2015Q4, following Igan and Loungani (2012) specification.
- Dependent variable: t y is real house price year-on-year growth.
- Explanatory variables include: real disposable income growth (t-1 inc), log price-to-income ratio (t-4 pti), real mortgage rate (t-1 r), year-on-year population growth (t-1 pop), and year-on-year growth of mortgage credit (t-1 creditmort).
- Newey-West estimator used with up to four lags for residual autocorrelation correction.
- Predicted real house price index computed assuming predicted index equals actual index during 1982–2015; overvaluation/undervaluation is percent difference between predicted index and actual index.
- Findings from the model:
  - Real house prices were overvalued before the global financial crisis; post-crisis rise is more aligned with trend and population growth despite flat disposable income, aided by low interest rates.
  - Population growth is a major driver: trend growth of house prices becomes insignificant once population growth is accounted for; population growth becomes strongly significant once the constant is removed.

### Construction activity and population pressures (Figure 2)
- Construction activity (residential housing built, th. of square meters) and population (in thousands) plotted over 1995–2015 show construction increasing moderately while population rises substantially.

### Rental value and affordability indicators (Figure 3)
- Price to Rent Ratio: Percent deviation from the average over 1990Q1 - 2016Q1 (2016Q1 value shown relative to historical max/min).
- Price to Income Ratio: Percent deviation from the average over 1990Q1 - 2016Q1 (2016Q1 value shown relative to historical max/min).

### Household balance sheets and vulnerabilities
- Household debt:
  - Stands now at 120 percent (of disposable income).
  - On average only 40 percent of households’ financial assets; 50 percent of these financial assets are accounted for by bank deposits.
- Interest-rate exposure:
  - About 50 percent of mortgages are adjustable rate, implying exposure to interest rate risks for some households.
- Loan-to-value (LTV):
  - Average LTV ratio is below 50 percent on the stock of existing mortgages.
  - About 25 percent of mortgages have a LTV ratio equal to or above 80 percent.
  - In 2015, about 40 percent of new residential mortgage loans had an LTV ratio about 80 percent, well above the 25 percent of such loans among the outstanding stock of mortgages, indicating banks have increasingly advanced loans with LTV ratios over 80 percent in the past decade.
  - Where such high-LTV loans are granted, additional collateral is generally required.

### Macroprudential measures in place
- Since 2012 measures include:
  - Adjusted risk-weights of 75 percent under the standardized approach for the part of new mortgage loans that exceed a LTV of 80 percent instead of the standard 35 percent risk-weight.
  - Stricter stress test requirements for IRB banks mortgage books and pillar II capital add-ons for banks with main exposures to real estate due to “concentration risk” in the real estate.
  - Three credit institutions operating in the residential real estate sector and maintaining major mortgage books identified as systemically important with additional capital requirements of 0.5 percent of RWAs.
  - On August 31, 2016, following a recommendation of the CRS, IRB banks required to apply a risk weight floor of 15 percent for exposures to Luxembourg residential real estate.
- Since 2014, all credit institutions in Luxembourg are subject to a (fully-loaded) capital conservation buffer of 2.5 percent.
- There is no measured impact of these measures on the housing market to date.

### Policy recommendation (housing)
- Authorities should continue to carefully monitor developments in the real estate market.
- The measures in place might need to be complemented by borrower-based measures (such as limits on LTVs, or DSTIs) to address demand-related pressures, should house prices continue to rise faster than incomes and rents.
- Measures to expand the supply of housing would contribute to relieving price pressures.

---

### Macroprudential risks in the investment fund industry and bank-fund linkages

### System-wide context and risk types
- Luxembourg hosts the second largest investment fund industry in the world after the U.S.
- Potential risks arising from investment funds and their interlinkages include:
  - Counterparty and operational risks (e.g., securities lending activities, safeguarding of investment fund assets).
  - Market risk (sensitivity to market movements, exacerbated by leverage).
  - Liquidity and redemption risks that can culminate in destabilizing investor runs and asset fire sales (mismatch between asset liquidity and redemption terms) which could spread to entire asset classes and possibly countries.

### Why macroprudential attention is warranted
- Rapid growth of the fund industry, search for yield, and significant inflows into relatively less liquid bond funds increase risks.
- Main macroprudential risk: mismatch between asset liquidity and redemption terms; microprudential liquidity mismatches can become macroprudential risks via price externalities and market imperfections.
- Market imperfections reinforcing risk:
  - Herding behaviors leading to correlated exposures to specific segments or illiquid assets, or “run for the exit.”
  - “First mover” advantages that create run risks and fire sales, transmitting shocks elsewhere.
- Liquidity mismatch risk depends on both:
  - Asset side: market depth and trading volumes.
  - Liability side: investor characteristics, retail/institutional mix, concentration within funds.

### Fund–bank linkages and transmission channels
- High concentration of fund deposits in Luxembourg depository banks due to the depositary banking model; these deposits account for a high share of banks’ liabilities.
- Excess deposits at custodian banks are typically upstreamed to parent banks, other banks, or invested in cash-equivalent marketable instruments.
- Exposures indicate that shocks from the fund industry could be transmitted to the banking system domestically and abroad, despite previous stability of operational deposits.
- Banking system provides custodian, oversight, administration, or origination services to the investment fund industry; reputational links exist as several important asset managers present in Luxembourg belong to large banking groups.
- A shock would also impact the real economy through a decline in value-added of the Luxembourg financial system (which accounts for around one quarter of GDP).
- Oversight of investment funds and asset managers should continue to evolve with international standards; risk monitoring and regulatory frameworks should address residual risks from bank–fund linkages.

### Recent trends and metrics (fund-side)
- Individual investment fund returns are increasingly correlated with global shocks and global market returns:
  - Statistical analysis of monthly returns of 74 Luxembourg bond funds since 2000 shows returns are increasingly correlated with the market portfolio (beta), and volatility is increasingly explained by common shocks.
- Search for yield and asset allocation shifts:
  - Between the end of 2008 and the third quarter of 2015, exposures of investment funds to (nonbank) corporates and other institutions’ bonds rose from €141 billion (or 29 percent of total bond investments) to €648 billion (or 45 percent of total bond investments) in October 2015.
- Synthetic leverage and derivatives:
  - Growing use of synthetic leverage (measured as notional values without netting) could reflect hedging or return enhancement.
  - Data suggests average (synthetic) leverage of UCITS funds typically exceeds 100 percent of net asset value for a subset of bond funds, and is around 60 percent for all UCITS funds.
  - A group of large bond funds has much higher leverage.
  - Gross notional derivative figures do not allow inference of purpose (hedging vs return enhancement) or exact risk exposure.

### Empirical analysis of bond funds (Box 2)
- Sample: 74 Luxembourg bond funds, monthly returns January 2000–July 2016.
- Variance decomposition via rolling two-year windows shows:
  - Since the global financial crisis, the variance of monthly bond funds’ returns has become increasingly explained by common shocks.
- World CAPM analysis with rolling 24-month windows using Dow Jones global index as proxy for the market portfolio:
  - Correlation of individual funds’ returns with the market return increased during the global financial crisis and has remained higher than pre-crisis levels since then.
  - Mean betas:
    - Pre-crisis (pre Sept 2008): 0.43
    - Crisis (Sept–Dec 2008): 0.64
    - Post-crisis (Jan 2009 - July 2016): 0.58
  - Variation of beta across funds has become more stable since the global financial crisis, implying fewer idiosyncratic deviations from the market portfolio.

### Policy implications (funds)
- Risks from liquidity mismatches, leverage, and correlated exposures warrant increasing macroprudential attention.
- Oversight, risk monitoring, and regulatory frameworks should continue to evolve to address liquidity, leverage, and bank–fund linkage risks.

*Source: IMF staff analysis (Luxembourg country report excerpt).*

### 31.      In its financial stability reviews, the BCL has analyzed various potential risks to

### 31.      In its financial stability reviews, the BCL has analyzed various potential risks to

### Scope of financial stability reviews and thematic work streams
- Findings:
  - The financial stability review typically analyses the evolution of the nonfinancial sector balance sheet risks, risks and vulnerabilities related to banks, investment funds, and capital markets.
  - Recent issues have focused on financial stability risks and vulnerabilities in the housing market, the banking system, and the investment fund industry.
  - Interconnectedness analysis has been undertaken among banks, and between investment funds and banks.
  - The latest financial stability review highlights rising risks related to the high yield corporate bond market and the lack of liquidity and notes ongoing international work on macroprudential instruments related to non-bank finance.
- Ongoing thematic work streams pursued by the CRS:
  - “interconnectedness between banks and investment funds” (CSSF)
  - “credit intermediation by other financial institutions” (BCL)
- International participation:
  - Authorities participate actively in international workstreams on macroprudential instruments for the investment fund industry, and ESRB studies on liquidity, stress tests and leverage in the investment fund industry.

### Residential real estate market assessment
- Authorities’ view:
  - Developments in the residential real estate market warrant careful monitoring but there are no signs of a bubble.
  - The main risk: a sustained increase in real estate prices associated with further increase in household indebtedness.
  - Some analytical studies find some sign of overvaluation and show clear indications that affordability of housing has become a concern for some segments of the population.
  - Studies suggest the banking system is sufficiently well capitalized to be able to absorb shocks from the real estate market.
  - Authorities consider this a medium-term problem reflecting a growing imbalance between supply and demand for housing and that addressing it requires policy action on various fronts, including addressing supply constraints.

### Investment fund industry: structure, risks, and statistics
- Empirical statistics (as presented):
  - Investment policy table entries (preserve formatting and numbers):
    - 1 - Bond funds142.17%309479.59
    - 2 - Equity funds73.17%138184.31
    - 3 - Mixed funds192.97%230250.44
  - Note: All UCITS which calculate their global exposure using a VaR method with T NA (total net assets) over 500 m io EUR or average leverage during semester exceeding 250% of their NAV as at 31/03/16
  - Luxembourg-based investment funds holdings of cross-border deposits and debt securities issued by euro area financial institutions of about €250 billion account for only 7 percent of funds’ TNAs.
  - Total deposits of investment funds in Luxembourg’s banks fluctuate around €100 billion.
- Main risks identified:
  - Low interest rate environment increased search for yield and the sensitivity of bond funds to interest rate movements (including through lengthening of duration of portfolios and growing use of synthetic leverage).
  - Interest rate movements could result from diverging monetary policy developments or geopolitical developments.
  - Repricing of credit and liquidity risk in the case of an interest rate reversal is a significant source of risk and uncertainty.
- Resilience factors:
  - Sector’s diversification across a multitude of different asset classes.
  - Investors’ differences in terms of geographical origin and type (ranging from retail to institutional investors).
  - At the individual fund level, risks (credit risk, counterparty risk, market risk, redemption risk/liquidity risk) are mitigated by:
    - risk management process and liquidity management tools available to management companies;
    - liquidity risk management tool available to the supervisor (e.g., the power to suspend redemptions for extreme periods of stress);
    - diversification rules and requirements of the UCITS regime.
- Spillover assessment:
  - Authorities consider limited risks of spillovers from investment funds to the banking system.
  - Balance sheet linkages between Luxembourg’s investment fund industry and the rest of the domestic financial system are rather limited, while operational deposits in depository banks appear rather stable.
  - The liquidity ratio of banks (which have to hold HQLA locally including deposits at the BCL for subsidiaries of foreign institutions) ensures resilience of banks to liquidity shocks transmitted through volatility of investment funds’ deposits.

### Monitoring, data, and stress-testing recommendations for investment funds
- Recommendations summary:
  - The framework should allow the authorities to intensify monitoring of risks and provide instruments to take pre-emptive measures.
  - Continue evolving reporting requirements in line with European and global work programs (e.g., FSB, IOSCO, and ESRB) to obtain enhanced data from asset managers to assess:
    - (i) potential liquidity mismatches between assets and redemption terms;
    - (ii) the sensitivity of funds’ value to market movements, including arising from leveraged positions in derivative markets;
    - (iii) the reliance on securities lending.
  - Authorities should have a framework and capacity to undertake their own liquidity stress tests of investment funds, including from a financial stability perspective taking into account correlated exposures or behaviors.
- Specific capacity-building and reporting recommendations:
  - Undertake a survey among asset managers to strengthen understanding of LMTs effectiveness in different market environments.
  - Ensure monitoring identifies main sources of risks and that tools are available to mitigate buildup of financial stability risks.
  - Ensure reporting requirements are adequate and that meaningful information is available to monitor risks and assess liquidity profile of funds and their synthetic leverage on a regular basis.
  - Ensure disclosure requirements to investors are appropriate.
  - Provide regulator guidance on frequency, coverage, modalities of stress tests to support liquidity risk management (liquidity risks, market risks, counterparty risks).
  - Require asset managers to report results and parameters of stress tests to the regulator (going beyond FSB recommendation).
  - CSSF should develop capacity to undertake stress tests from a systemic perspective for risky segments of the investment fund industry, assessing resilience to liquidity risk, market risk or credit risk while taking into account interlinkages with banks.
  - CSSF should provide clear guidance governing the use of liquidity tools by asset managers and assess the effectiveness of these tools.
  - Strengthen CSSF systematic monitoring by incorporating more detailed data on investment fund synthetic leverage, concentration in specific asset classes, and use of securities’ financing transactions into their risk-based scoring system.
  - To implement steps, authorities may need to go beyond EU Directives regulating UCITS and AIFM and raise these topics at the European level (e.g., ESRB, ESMA).
- Institutional roles:
  - The BCL should be involved in the risk analysis of investment funds from a macroprudential perspective and in policy recommendations, within the context of the CRS.

### Macroprudential toolkit for credit institutions and investment funds
- Credit institutions:
  - Authorities have introduced all macroprudential tools contained in the CRD IV/CRR into Luxembourg law and are under the recommendation power of the CRS. These include:
    - Pillar II measures
    - the CCB
    - the systemic risk buffer
    - higher risk weights or loss given default
    - additional capital buffers for global and other systematically important institutions
    - various sectoral measures to address systemic risks
  - CSSF sets the CCB in close cooperation with the central bank and on the basis of a recommendation from the CRS.
  - The BCL is responsible for supervising the general liquidity situation in the markets as well as evaluating market operators for this purpose according to its organic law.
  - Under the SSM regulation, the ECB can apply higher requirements for capital buffers and more stringent measures than those applied by national authorities (“topping-up power”), but cannot set lower requirements than those set nationally.
  - The Governing Council is the ultimate decision-maker for macroprudential policy in the ECB; the Council decides on macroprudential measures based on a proposal by the Supervisory Board, taking into account input of the ECB’s Financial Stability Committee and the Macroprudential Coordination group.
- CRS actions and CSSF decisions:
  - The CRS has issued opinions and recommendations related to bank capital buffers. Since end-2015, the CRS issued recommendations regarding the CCB, recommending exemption of small and medium sized investment firms from the CCB and the capital conservation buffer.
  - Based on calculations and calibration of the BCL and CSSF, and after taking into account the CRS recommendation, the CSSF decided to set the CCB at zero.
  - CRS latest opinion and recommendation issued on July 1, 2016 was implemented by the CSSF’s decision on August 31, 2016 requesting a minimum risk weight threshold to be applied by domestic IRB credit institutions to exposures secured by residential real estate to correct for inadequate risk weights.
  - CRS published a recommendation regarding activation and calibration of the capital buffer applicable to the Other Systemically Important Institutions (the list of O-SIIs comprises six banks). Based on the opinion of the CRS, the CSSF issued its decision in the form of a regulation.
- Investment funds microprudential LMTs:
  - Asset managers can make use of a set of microprudential LMTs and are obligated to ensure funds can meet redemption requests according to fund policy.
  - According to a comparative IOSCO study, asset managers in Luxembourg usually can avail themselves of a wide variety of tools to manage redemptions and liquidity risks (e.g., swing pricing, suspension of redemption, gating, fees, etc.).
  - Some tools (such as suspension of redemptions) could be used for macroprudential purposes, but effectiveness of other tools is currently not well researched from a macroprudential perspective.

### Legal and legislative recommendations
- CRS should recommend legislative action to ensure the toolkit contains all standard macroprudential instruments necessary for achieving ultimate and intermediate objectives.
- In particular, there should be legal clarity to ensure that limits to LTVs, DTIs, or DSTIs are available as part of the toolkit.
  - Note from authorities’ response: it is currently not possible legally to set limits to LTVs, DTIs or DSTIs.
- Further investigation needed to assess effectiveness of these tools in mitigating financial stability risks; undertake survey among asset managers on LMTs effectiveness.
- Specific FSB-aligned recommendations (as reflected in the text and FSB Consultative Document):
  - I. reporting requirements are adequate and meaningful information is available to monitor risks and assess liquidity profile of funds and their synthetic leverage on a regular basis;
  - II. disclosure requirements to investors are appropriate;
  - III. asset managers have proper guidance from the regulator in relation to frequency, coverage, modalities of stress tests to support liquidity risk management with regard to various risks (liquidity risks, market risks, counterparty risks);
  - IV. asset managers could report the results and parameters of the stress tests to the regulator.
  - Going beyond the FSB recommendation, asset managers should be required to report the results, scenarios and parameters of the stress tests to the regulator.

### Institutional involvement and capacity building
- CSSF actions to pursue:
  - Develop capacity to undertake systemic stress tests for the investment fund industry, assessing resilience to liquidity, market, and credit risk while accounting for interlinkages with banks.
  - Provide clear guidance governing use of liquidity tools by asset managers and assess their effectiveness.
  - Strengthen systematic monitoring by incorporating detailed data on synthetic leverage, concentration in asset classes, and securities financing transactions into risk-based scoring.
- Role of BCL:
  - BCL should be involved in risk analysis of investment funds from a macroprudential perspective and in policy recommendations within the CRS framework.
- Rationale:
  - Asset managers’ stress tests typically serve consumer protection and cannot take a financial stability and systemic perspective or internalize the impact of their actions on other asset managers’ behavior.

### Appendix I — Comparative roles of central banks in macroprudential committees (France and Germany)
- France (Haut Conseil de Stabilité Financière, HCSF):
  - HCSF established by law of July 26, 2013; comprises eight members including the minister of Finance (Chairman) and the governor of the Banque de France.
  - Decisions on risk warnings and recommendations require a simple majority; binding instruments require four favorable votes.
  - Treasury serves as Secretariat of the HCSF.
  - Banque de France leads identification and monitoring of systemic risks and can propose HCSF use of macroprudential instruments.
  - HCSF (as designated authority) has binding powers on instruments including the countercyclical capital buffer, the systemic risk buffer, a flexibility package in Article 458 of the CRR, and borrower-based measures (e.g., limits on LTV, DSTI).
  - Banque de France publishes an evaluation of systemic risks twice a year.
- Germany (Financial Stability Committee, FSC):
  - FSC created under the Financial Stability Act of 2012; comprises three senior representatives each from the Ministry of Finance (chair and deputy chair), the Bundesbank, and BaFin; FMSA chair is non-voting advisory member.
  - FSC meets at least quarterly; tasks include discussing financial stability factors, strengthening cooperation in crises, advising on ESRB warnings/recommendations, reporting annually to Bundestag, issuing warnings and recommendations.
  - FSC’s main tool: power to issue warnings and recommendations with a ‘comply or explain’ mechanism; decisions require simple majority though FSC strives for unanimity on key outputs.
  - Bundesbank responsibilities: analyzing and identifying financial stability risks, making proposals to the FSC on warnings/recommendations, evaluating their implementation, preparing FSC’s Annual Report to Bundestag.
  - Major FSC decisions cannot be taken against votes of Bundesbank representatives.
  - Bundesbank publishes a Financial Stability Review annually.

*Source: IMF staff analysis and recommendations as presented in the provided content unit.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17256.pdf_