## EXECUTIVE SUMMARY

## Source details

**Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2018/cr1867.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2018/cr1867.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2018/cr1867.pdf.json)

---

### Macrofinancial background — Rising financial vulnerabilities
- GDP growth: increased to 1.7 percent in 2017 from 1.5 percent the year before.
- Recovery drivers: solid consumption growth and business investment; monetary policy supportive.
- Household debt: reached 100 percent of disposable income in 2016; mortgage debt accounts for about 90 percent of it.
- Gross corporate debt: nearly 130 percent of GDP, with nearly half intragroup debt and small residual exposures for the Belgian financial system.
- Public debt: remained above 100 percent of GDP since 2011.
- Housing prices: risen by about 20 percent since 2008; overvaluation estimated by the NBB and the ESRB at around 10 percent or less.
- Main threats (Risk Assessment Matrix):
  - Sudden increase in global risk aversion: higher money market rates, steepening yield curve, market liquidity reductions, asset price declines, slower economic activity.
  - Large correction in Belgian real estate market: lower collateral values, credit losses, depressed mortgage loan valuations, increased funding costs.
  - Reassessment of regional sovereign risk: fiscal stress in the EA weakening bank balance sheets and access to wholesale funding.
  - Prolonged low growth and low interest rates in the EA (“low-for-long”): depressed interest margins and profits, higher credit losses, potential rise in housing prices.

### Macrofinancial background — Smaller banks and changing financial sector landscape
- Banking system assets: shrunk from 470 percent of GDP in 2008 to 250 percent today.
- Loans to nonfinancial private sector: rose from 35 percent of bank assets in 2008 to about 50 percent in 2016.
- Banks' bond portfolios: size declined by half over the same period.
- Deposits: rose from under 40 percent of total liabilities to 55 percent.
- Banks hold a fifth of Belgium’s public debt; this accounts for 8 percent of their total assets.
- International footprint: internationally active banks concentrated in Czech Republic, France, Ireland, Luxembourg, Netherlands, and Turkey.
- O-SIIs (designated in 2016): eight banks account for more than 90 percent of total banking system assets.
  - Largest four (BNP Paribas Fortis, KBC Group, Belfius Bank, and ING Belgium): capital surcharges of 1.5 percent of RWA.
  - Others (Euroclear Bank, the Bank of New York Mellon, AXA Bank Europe, and Argenta): surcharges of 0.75 percent, phased in gradually.

### Systemic risk and resilience — Stress tests and sectoral resilience
- Stress-test conclusions:
  - Banks and insurance companies can absorb credit, sovereign, and market losses under severe deterioration.
  - Interbank contagion risk through direct exposures is low.
  - Insurance companies generally resilient; losses in insurers within banking groups do not threaten group soundness.
  - Bank resilience driven by relatively healthy loan portfolios and limited market and liquidity risks.
  - Insurers: sound solvency levels and reduced exposures to guaranteed rates.
- Risks to monitor:
  - Banks’ capacity to cope with interest rate shocks.
  - Credit risk vulnerabilities in selected portfolios.
  - Growing liquidity risk in insurance companies.

### Financial stability policy framework and oversight
- Macroprudential: mortgage-related policy proposed by NBB should be enacted promptly; earlier measures were rejected and a new measure identified for prompt approval.
- Decision-making framework: revise to enhance NBB’s ability to deploy cyclical macroprudential policies in a timely manner.
- SSM: supervises over 90 percent of Belgian banking sector assets; supervision of Belgian SIs more intrusive and forward looking.
- NBB: enhanced supervision of LSIs.
- Resolution planning: SRM for SIs and NBB for LSIs progressing.
- Banking union transition: manage carefully; maintain sufficient capital and loss-absorbing capacity in large subsidiaries to ensure viability of group resolution strategies.
- SWIFT oversight: effective but faces cybersecurity risks; consider complementing moral suasion with regulatory and supervisory powers and enhance information sharing with foreign authorities.
- AML/CFT: continue efforts to enhance framework; steps since 2014 FATF evaluation strengthened framework but further implementation needed.

### Sectoral developments — Insurance
- Insurance sector total assets (2016 market values): 80 percent of GDP.
- Sector stability: stable in aggregate over 2012–16; 12 percent of licensed firms exited since 2013.
- Business model shifts: several insurers ceased selling guaranteed products and moved toward asset management–type instruments; some insurers purchased mortgages—reducing interest/market risk but increasing liquidity risk.
- Capital concerns: low quality of some insurers’ capital noted.

### Main recommendations (selected, with timing)
- Enhance risk analytical framework (NBB): incorporate bank stress testing into systemic risk assessment and macroprudential policy; extend horizon of insurance stress tests; intensify monitoring of insurers’ mortgage loan portfolios and underwriting standards; develop shadow banking monitoring framework with FSMA; enhance commercial real estate data coverage and quality. Timing: ST.
- Approve promptly the new macroprudential measure proposed by the NBB and enhance NBB’s ability to implement cyclical macroprudential tools in a timely manner (MoF). Timing: ST.
- Strengthen bank supervision (NBB/SSM): ensure reliability and consistency of internal models; proactively assess loan classifications to ensure prudent provisioning practices. Timing: C.
- Adjust to insurers’ evolving risk profiles (NBB): address increasing liquidity risk; analyze growth of reinsurance operations; engage with industry to improve insurers’ capital quality. Timing: ST.
- Enhance FC supervision (NBB/SSM): set supervisory expectations for FC governance and risk management; enhance monitoring of intra-group transactions and risk of regulatory arbitrage between insurance and banking sectors. Timing: ST.
- Enhance SWIFT oversight (NBB): complement moral suasion with regulatory and supervisory powers; broaden membership in the SWIFT Oversight Forum; improve information sharing on SWIFT oversight and assurance reports. Timing: ST.
- Ensure feasibility of resolution strategies for banking groups with systemically important subsidiaries and prioritize resolution planning for the two LSIs with the highest share of insured deposits (SRM/NBB). Timing: MT.
- Strengthen the deposit insurance system (MoF): publicly commit to shortening the DIS pay-out period to seven days by 2019; establish credit lines with the MoF; segregate the Guarantee Fund from government funds. Timing: ST.
- Ensure adequate transparency of beneficial ownership of legal persons and arrangements (MoF). Timing: MT.

*Timings legend: C = continuous; I = Immediate (within one year); ST = Short Term (within 1–2 years); MT = Medium Term (within 3–5 years).*

*Source: IMF Financial Sector Assessment Program — Executive Summary (Belgium).*

---

### 9. Belgian insurers have large holdings of domestic sovereign bonds and real estate

### Insurance sector exposures and vulnerabilities
- Sovereign bonds: nearly half of total assets of insurance companies; around two thirds of these are Belgian sovereign bonds.
- Real estate exposures: high, mainly mortgage loans in Belgian and Dutch market.
- Intragroup concentration: some insurers within FCs have concentrated exposures to banks, particularly deposits within the same group.
- Medium-term pressures: declining investment returns as high-coupon bonds mature and are replaced by lower-coupon bonds; companies with high stock of guarantees likely to see profitability drain.
- Business mix effect: insurers focused on non-life and unit-linked life business less affected by low-yield environment.

### Shadow banking and asset management
- Shadow banks’ assets: amounted to 30 percent of GDP at end-2016 (about one-tenth of the banking sector).
- Sector composition: dominated by investment funds (money market and non-equity investment funds), leasing and factoring companies, non-bank lenders, securitization activities not retained on banks’ balance sheets.
- Belgian investment funds (overall): assets equivalent to 35 percent of GDP at end-2016.
- Risk magnitudes:
  - Direct exposures small: 7 percent of banks’ funding comes from shadow banks; banks’ claims on shadow banking sector about 7 percent of their assets.
  - Insurance companies and pension funds exposure: about 17 percent of their total assets.
  - Indirect risks: potential asset price falls and liquidity tightening from investor redemptions; interconnectedness between investment funds and sponsoring banks.

### Captive financial institutions (CFIs)
- CFIs’ liabilities (debt and equity): amounted to 105 percent of GDP in 2016.
- CFIs cash and deposits at Belgian banks: €6 billion (about 1.5 percent of GDP).
- Banks’ claims on CFIs: less than €5 billion.
- Transactions mostly within same corporate group; magnitude and growing size of CFI debt warrant continued monitoring.

### Critical services and cyber/reputational risk (SWIFT)
- SWIFT usage: end-September 2017, 239 market infrastructures using SWIFT.
- SWIFT connectivity: around 11,000 institutions across 200 countries and territories.
- SWIFT functions: supports domestic/international payments and settlement, including central banks’ monetary operations.
- Reputational risk: Belgium and NBB face reputational risk if SWIFT core services incident occurs.
- Legal recognition: NBB recognized SWIFT as critical infrastructure under 2011 Law on the Protection and Security of Critical Infrastructures.

### HLEG recommendations and implementation
- HLEG: issued 10 recommendations to enhance resilience and competitiveness.
- Working groups: five areas — (i) financing the real economy; (ii) regulation and supervision; (iii) digitalization and cyber risk; (iv) growth finance; (v) promoting Brussels as financial center.
- “B-hive”: created to attract investment in digitalization of the financial sector.
- Financial Cybersecurity Council: developing proposals to strengthen Belgium’s cyber resilience.

---

### Stress-test frameworks and key results — solvency and scenarios

### Framework and scenarios
- Two sets of stress tests: macroeconomic-scenario-based solvency tests for banks and insurers; bank-only liquidity/market contagion tests. Tests use end-2016 data.
- Adverse scenario (five years): covered three RAM risks (heightened global risk aversion, correction of housing prices, increased sovereign risk) with nine quarters of negative growth; severity comparable to 2016 EU-wide stress tests but with a more drastic correction of asset prices. Baseline aligned with October 2017 WEO.
- Banks covered: six largest Belgian banks (90 percent of the system), using ECB/SSM confidential supervisory data post-2014 and NBB supervisory data pre-2014.

### Banks — solvency (key quantitative results)
- Aggregate CET1 ratios (adjusted): range between 15.1 and 15.5 percent initially, peak at 15.6 percent in 2018, stabilize around 15 percent by 2021.
- Regulatory minima: fully-loaded minima of 8½ percent for the four largest O-SIIs and 7¾ percent for the remaining two O-SIIs.
- Regulatory capital decline: projected additional decline of 30 basis points by 2021 due to elimination of capital instruments no longer eligible as Tier 2.
- Under the adverse scenario:
  - Average CET1 ratio falls by 370 basis points from 15.1 percent at end-2016 to a low point of 11.4 percent in 2018 before trending back to 13.2 percent by 2021.
  - RWAs rise by 290 bps in the first two years, driven mainly by increase in risk weight density of domestic mortgage portfolio from an average of 11.5 percent in 2016 to 25.8 percent in 2019.
  - Early years combined impact: credit (140 bps) and valuation (200 bps) losses; cumulative through 2021 credit (300 bps) and valuation (300 bps) losses—largely absorbed, on average, by banks’ revenues.
  - Potential IFRS9 impact: estimated limited at no more than 25bps of CET1 for most Belgian banks.
- Resilience drivers: low NPLs, larger share of mortgages with low initial default rates, smaller share of consumer loans, resilient projected net interest income, higher reliance on deposits, active hedging strategies.
- Repricing maturity: average repricing maturity of Belgian banks’ home loans around 8.5 years.

### Insurers — solvency (key quantitative results)
- Sample: eight composite insurers accounting for 78 percent of the market; regulatory capital measures used as hurdles.
- Adverse scenario:
  - Median solvency ratio drops from 184 to 124 percent.
  - Low-for-long scenario: median solvency ratio declines to 145 percent.
  - In each scenario one company drops below solvency ratio of 100 percent, but capital needed to restore solvency is very small.
- Loss drivers: higher spreads on Belgian sovereign and higher risk-free rates in adverse scenario; lower risk-free rates in low-for-long scenario.
- Life insurers: resilient to longevity and mortality shocks.
- Post-shock behavior: insurers would rebalance asset allocations gradually—divest equity and sub-investment-grade corporate bonds, increase sovereign bond holdings—potentially stabilizing for Belgian sovereign debt market.

### Liquidity stress tests, asset encumbrance, and contagion
- Two liquidity frameworks: LCR-based approach applied to all banks; implied cash-flow tests under six scenarios for seven major banks.
- System-wide LCR ratio: 140 percent in March 2017 (tests’ starting point).
- Stressed LCR changes: falls by 40 basis points under systemic scenario, by 46 basis points under idiosyncratic scenario, and by 64 basis points under combined scenario—leaving stressed LCRs at reasonably high levels.
- Cash-flow tests: largely confirm LCR results.
- Asset encumbrance: average ratio 12 percent in 2016; significantly higher for a few large banks. Sources include large derivative books against cash collateral, covered bonds against mortgage loans, repo transactions supported by general collateral.
- Contagion analysis: no bank triggered consecutive defaults by other institutions—driven by small interbank exposures relative to capital and low interbank network connectivity.
- CoVaR analysis: inward and outward spillover risk moderate.

---

### Macroprudential policy framework and recommendations

### Framework and recent NBB actions
- Since April 2014: NBB responsible for monitoring systemic risks and taking macroprudential action; framework uses early-warning indicators, stress tests, and market trend analysis.
- Macroprudential measures require a Royal Decree; NBB must act with Minister of Finance or Council of Ministers.
- NBB actions:
  - 2013: 5 percent risk weight add-on for banks using IRB models to mitigate residential real estate risks.
  - 2016: capital surcharges for eight O-SIIs; quarterly assessment of counter-cyclical capital buffer, currently set at 0.
  - Early 2017: proposed increase in capital charges linked to mortgage riskiness (proxy: LTV), rejected by government.
  - November 2017: proposed alternative measure to scale up banks’ mortgage risk weights by a fixed factor; should be approved promptly.

### Key recommendation
- Grant the NBB power to implement directly cyclical macroprudential policies to avoid delays caused by required approval from Minister of Finance or Council of Ministers; ensure ex-post accountability via reporting to Parliament and/or public disclosure.

---

### Systemic risk analytical framework and supervisory priorities

### Areas for strengthening
- (i) Strengthen bank stress testing framework to cover all SIs and broaden interconnectedness analysis.
- (ii) Develop multi-period horizons for insurance stress tests and use results in validation of companies’ ORSA.
- (iii) Enhance coverage and quality of commercial real estate data.
- (iv) Deepen understanding of systemic risks posed by shadow banking and asset management.
- Additional: NBB should set up monitoring framework for risks from insurers’ mortgage lending.

### Prudential supervision — direction and recommendations
- Upgrades since 2013 FSAP: new national banking and insurance laws; amendments to FICOD transposed; Solvency II implemented.
- SSM: responsible for over 90 percent of banking assets; supervision more intrusive.
- NBB: enhanced supervision of LSIs.
- Recommendation: NBB and ECB should continue developing supervisory approach and devote adequate supervisory intensity to systemically important Belgian subsidiaries of EA banks, complex FCs, and evolving insurance risk profiles.

### Banking and FC supervision — key recommendations
- Maintain sufficient capital and adequate supervision of systemically important subsidiaries during transition to full banking union; support gradual implementation of changes to prudential requirements and supervisory focus.
- Internal models: complete SSM targeted reviews to reduce unwarranted RWA variability; increase boards’ oversight of models.
- NPLs: supervisors should be proactive to ensure prudent provisioning; consider additional regulatory measures and intrusive supervisory reviews.
- Related party transactions: broaden legal definition of related parties and transactions; require banks to identify related parties; supervisors to provide guidance on evaluating FC intragroup transactions and regulatory arbitrage risks.
- SPEs: bring SPEs within supervision scope; supervisors should have power to determine consolidation for regulatory purposes; consider off-balance-sheet activities in stress tests.
- FC governance: heighten supervisory expectations and define best practices beyond existing SSM Supervisory Manual.

### Insurance supervision — findings and recommendations
- Evolving risk profiles: increasing liquidity risk from transition to asset management products and mortgage portfolios; implement robust liquidity risk regulatory framework over medium to long term.
- Brexit: prompted reallocation of reinsurance business to Belgium, adding challenges.
- NBB: should implement measures to address rising liquidity risk, retain highly-qualified staff, and enhance resources as industry complexity increases.
- Capital quality concerns: reliance on subordinated loans from parent banks; unrecognized gains vulnerable to redemption risk; volatility adjustment may overstate solvency.
- Recommendation: proactive engagement with industry to improve capital quality.

### SWIFT oversight — findings and recommendations
- Status: SWIFT not a regulated payment/settlement system but under NBB oversight as CSP; oversight based on moral suasion under protocol between SWIFT and NBB; supported by G-10 central banks.
- Risks: effectiveness depends on SWIFT cooperation; lack of cooperation, especially in crisis, limits legal recourse and poses reputational risk.
- Recommendations:
  - Consider complementing moral suasion with additional regulatory and supervisory powers to provide legal backing and transparency for NBB’s oversight role (address delays in implementing recommendations or lack of timely incident reporting).
  - Broaden membership in SWIFT Oversight Forum and expand sharing of oversight and assurance reports; include countries from different regions and development stages; provide more information to authorities with legitimate interest.

---

### Financial safety net, resolution, and deposit insurance

### Progress and remaining needs
- Progress: establishment of SSM and SRM; national implementation of EU recovery and resolution framework; NBB Resolution Board established.
- Remaining needs: operationalize recovery and resolution framework fully; strengthen depositor protection; address operational deficiencies.

### Loss-absorbing capacity and resolution strategy
- Concerns: potentially insufficient loss-absorbing capacity at large subsidiaries of EA banks; SRB intended to decide on internal MREL allocation and subsidiary-level targets in 2018, possibly with transitional period.
- Risk: insufficient subsidiary-level MREL and subsidiaries holding bail-inable parent debt could jeopardize SPE strategy and prompt separate resolution with large creditor losses and contagion.
- Recommendation: SRM should ensure feasibility of resolution strategies for groups with systemically important subsidiaries; internal MREL targets should support group resolution strategy and recapitalization of material subsidiaries, consistent with FSB and EBA guidance.

### Guarantee Fund and DIS
- Current structure: Guarantee Fund administers DIS and national resolution fund; fees transferred to government (not segregated).
- Recommendations:
  - Segregate funds from government funds to ensure ready access in fiscal duress.
  - DIS should have standing credit lines with Ministry of Finance.
  - DIS pay-out period should be shortened to seven days in 2019 instead of 2024.

### NBB resolution capacity for LSIs and operational improvements
- NBB should enhance resolution ability for LSIs; prioritize resolution planning for two LSIs with highest share of insured deposits (insured deposits in these two exceed DIS funds).
- Ensure smooth transition from early intervention to resolution; establish protocol for cooperation between NBB supervisory and resolution staff.
- Ex-ante judicial review of NBB’s transfer of assets and liabilities currently takes at least seven business days; this delay should be eliminated or shortened.
- Resolution Board committee: mandate proactive oversight of financial crisis preparedness, including regular simulation exercises.

---

### Financial integrity — AML/CFT findings and recommendations

### Findings since 2014 evaluation
- 2014 AML/CFT evaluation: well-established regime with deficiencies in authorities’ understanding of ML/TF risks, preventive measures implementation in some sectors, AML/CFT supervision, and transparency of legal entities.
- Legal/institutional changes:
  - New AML/CFT law transposing EU 4th AML Directive in force October 2017; strengthens preventive measures and bases a registry of beneficial owners expected operational mid-2018.
  - Updated ML/TF risk assessment and measures facilitating TF-related targeted financial sanctions and domestic designation of terrorists.
  - NBB increased and centralized AML/CFT resources, developed risk-based supervision, collected granular information, refined analysis.
  - Other supervisors increased outreach and access to tools facilitating customer due diligence, increasing suspicious transaction reporting.

### AML/CFT recommendations
- Continue strengthening effectiveness of AML/CFT regime.
- Communicate results of updated risk assessments to reporting entities.
- Ensure effective implementation of new risk-based supervision framework.
- Ensure adequate transparency of beneficial ownership of legal persons and arrangements (notwithstanding ongoing EU discussions).

---

### Selected macrofinancial and system indicators (preserved lines)

- Real GDP 1.5 1.7 1.9 1.7 1.5 1.5 1.5 1.5
- Domestic demand 2.1 1.4 1.8 1.7 1.5 1.5 1.5 1.5
- Private consumption 1.7 1.1 1.4 1.6 1.6 1.6 1.6 1.6
- Public consumption 0.5 0.7 0.7 0.6 0.6 0.7 0.6 0.6
- Gross fixed investment 3.6 1.1 3.7 3.2 2.1 2.1 2.2 2.2
- Exports, goods and services 7.5 4.5 4.7 4.0 3.8 3.4 2.9 3.1
- Imports, goods and services 8.4 4.3 4.6 4.1 3.9 3.4 2.9 3.1
- Household saving ratio 11.2 11.6 12.3 12.3 12.5 12.5 12.5 12.5
- Potential output growth 1.2 1.4 1.2 1.4 1.6 1.6 1.6 1.6
- Output gap (in percent) -0.5 -0.2 0.4 0.7 0.6 0.5 0.3 0.2
- Unemployment rate (in percent) 7.9 7.3 7.0 6.8 6.7 6.7 6.6 6.6
- Consumer prices 1.8 2.2 1.6 1.8 1.8 1.9 1.9 2.0
- Revenue 50.7 51.1 50.4 50.1 49.9 49.9 49.9 49.9
- Expenditure 53.2 52.3 51.7 51.4 51.1 51.1 51.1 51.1
- General government balance -2.5 -1.2 -1.3 -1.3 -1.3 -1.2 -1.2 -1.2
- General government debt 105.7 103.3 101.1 99.1 97.4 95.7 94.0 93.0
- Gross national savings (in percent of GDP) 24.0 23.9 24.5 24.8 25.1 25.3 25.4 25.6
- Nominal GDP (in billions of euros) 423.0 438.2 453.6 468.9 483.4 498.6 514.2 530.9
- Population (in millions) 11.3 11.4 11.4 11.5 11.5 11.6 11.7 11.7

---

### Banking sector stress testing framework (STeM) — methodology highlights

### Top-down TD framework and model architecture
- TD by NBB and TD by FSAP Team.
- For STA exposures: stressed NPL ratios, stressed coverage ratios, and stressed transition matrix for performing exposures.
- Market risk: stress to all sovereign issuers to which Belgian banks are exposed; corporate benchmark index (BAA) modeled separately.
- Extensive model set:
  - Over 55 credit risk models and around 500 econometric specifications estimated for PDs.
  - Net trading income projected using Bayesian VAR at bank level.
  - Funding costs linked to euribor benchmark rates and bank spreads by instrument; estimated with Bayesian VAR.
  - Mark-to-market losses from full revaluation of sovereign securities projected for twenty-three issuers and a BAA corporate index.

### Tail shocks — adverse scenario calibration (quantified impacts)
- Narrative: re-emergence of financial stress and sovereign default risk in the euro area with money market spreads rise by 125 bps and 10y Belgium government bond yields increase by 150 bps.
- Global tightening: long-term yields raise by average of 100bps; equity prices fall 20 percent in EA, Japan, UK, and U.S.
- Domestic contraction: private investment and private consumption drop by 12 percent and 3 percent, respectively; real residential and commercial property prices fall by 20 percent peak-to-trough.
- Scenario severity: 3.1 standard deviation move in two-year cumulative real GDP growth by 2019 (1990–2016).
- Quantified impacts:
  - Belgium output falls 8.1 percent below baseline by 2019.
  - Consumption price inflation falls 3.5 percentage points below baseline by 2020.
  - Unemployment rate rises 2.2 percentage points above by 2019.
  - Government debt ratio rises 17.9 percentage points above baseline in Belgium by 2021.
- Additional idiosyncratic and system-wide funding risk shock linked to banks’ spreads over benchmark under stress included.

### Regulatory calibrations and reporting
- Capital hurdles for Big-4 Belgian banks (including O-SII surcharge): CET1/Tier 1/CAR at 6.0/7.5/9.5 percent of RWAs.
- Hurdles for other two O-SIIs: CET1/Tier 1/CAR at 5.25/6.75/8.75 percent with additional 2.5 percent hurdle for capital buffer breach.
- Leverage ratio hurdle rate: 3 percent (Tier 1 capital).
- Reporting includes evolution of CET1, Tier 1, CAR, leverage, contributions to profits and CET1, number of banks below hurdles, and capital shortfall in GDP terms.

---

### Appendix IV — Implementation of 2013 FSAP Recommendations (selected status)

- Formalize NBB–FSMA cooperation: Implemented.
- Make stress testing routine in macrofinancial policy: Implemented.
- Enhance insurer stress testing with market-consistent valuations: Implemented.
- Complete business model reviews for banks and insurers: Implemented.
- Develop explicit conglomerates supervision framework: Partially implemented.
- Designate NBB as macroprudential authority: Implemented (law of April 25, 2014); macroprudential measures require Royal Decree.
- Review supervisory processes and calibrate intensity for smaller institutions: Implemented.
- Embed board engagement in supervision: Implemented.
- Empower NBB to pre-approve major acquisitions: Implemented (new BL Article 77).
- Maintain liquidity regime until LCR adopted: Implemented.
- Implement Solvency II and ORSA: Implemented.
- Empower NBB to take immediate recovery measures notwithstanding appeal: Implemented.
- Formalize crisis coordination MOU and cross-institutional coordination: Partially implemented.
- Request RRPs for all domestic systemically important firms: Partially implemented (RRPs mandated for banks; insurers still early stage).
- Grant NBB explicit mandate as resolution authority: Implemented (Article 12ter of NBB Organic Act).
- Improve bank resolution toolkit and reduce ex ante procedural requirements: Partially implemented (ex-ante judicial review still required and time-consuming).
- Revamp DIS, establish ex ante fund and depositor preference: Partially implemented (depositor preference established; deposit insurance funds not segregated).

*Appendix IV. Implementation of 2013 FSAP Recommendations (cr1867).*

---

*Source: cr1867.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 5

### EXECUTIVE SUMMARY

### Macrofinancial background — Rising financial vulnerabilities
- GDP growth is estimated to have increased to 1.7 percent in 2017 from 1.5 percent the year before.
- The recovery has been driven by solid consumption growth and business investment; monetary policy has been supportive.
- Household debt reached 100 percent of disposable income in 2016, with mortgage debt accounting for about 90 percent of it.
- Gross corporate debt is nearly 130 percent of GDP, with nearly half accounted for by intragroup debt and small residual exposures for the Belgian financial system.
- Public debt has remained above 100 percent of GDP since 2011.
- Housing prices have risen by about 20 percent since 2008; overvaluation is estimated by the NBB and the ESRB at around 10 percent or less.
- Main threats summarized in the Risk Assessment Matrix include:
  - A sudden increase in global risk aversion: higher money market rates, a steepening yield curve, reductions in market liquidity, asset price declines, and slower economic activity.
  - A large correction in the Belgian real estate market: lower collateral values, credit losses, depressed mortgage loan valuations, increased funding costs.
  - A reassessment of regional sovereign risk: fiscal stress in the EA weakening bank balance sheets and access to wholesale funding.
  - A prolonged period of low growth and low interest rates in the EA (“low-for-long”): depressed interest margins and profits, higher credit losses, potential rise in housing prices.

### Macrofinancial background — Smaller banks and changing financial sector landscape
- Banking system assets have shrunk from 470 percent of GDP in 2008 to 250 percent today.
- Loans to the nonfinancial private sector increased from 35 percent of bank assets in 2008 to about 50 percent in 2016.
- The size of banks' bond portfolios declined by half over the same period.
- Deposits rose from under 40 percent of total liabilities to 55 percent.
- Banks hold a fifth of Belgium’s public debt; this accounts for 8 percent of their total assets.
- Internationally active banks are concentrated on core markets (Czech Republic, France, Ireland, Luxembourg, Netherlands, and Turkey) with very limited exposure outside them.
- Eight Belgian banks were designated as other systemically important institutions (O-SIIs) in 2016, accounting for more than 90 percent of total banking system assets:
  - The largest four (BNP Paribas Fortis, KBC Group, Belfius Bank, and ING Belgium) are subject to capital surcharges of 1.5 percent of risk-weighted assets (RWA).
  - The others (Euroclear Bank, the Bank of New York Mellon, AXA Bank Europe, and Argenta) are subject to surcharges of 0.75 percent; the surcharges are being phased in gradually.

### Systemic risk and resilience — Stress tests and sectoral resilience
- Stress tests on banks and insurance companies confirm they can absorb credit, sovereign, and market losses in the event of a severe deterioration in macrofinancial conditions.
- The risk of interbank contagion through direct exposures is low.
- Insurance companies are generally resilient; losses in insurers that belong to banking groups do not threaten group soundness.
- Bank resilience reflects relatively healthy loan portfolios and limited exposure to market and liquidity risks.
- Insurance companies have sound solvency levels and reduced exposures to guaranteed rates.
- Risks to monitor closely:
  - Banks’ capacity to cope with interest rate shocks.
  - Credit risk vulnerabilities in selected portfolios.
  - Growing liquidity risk in insurance companies.

### Financial stability policy framework and oversight
- A mortgage-related macroprudential policy recently proposed by the NBB needs to be enacted promptly; following rejection of earlier measures, a new measure has been identified and should be approved promptly.
- The framework for macroprudential decision making should be revised to enhance the NBB’s ability to deploy cyclical macroprudential policies in a timely manner.
- The Single Supervisory Mechanism (SSM) supervises over 90 percent of Belgian banking sector assets and has made supervision of Belgian significant institutions (SIs) more intrusive, forward looking, and effective.
- NBB has enhanced supervision of less significant institutions (LSIs).
- Resolution planning for SIs by the Single Resolution Mechanism (SRM) and for LSIs by the NBB is progressing.
- Transition to a full banking union must be carefully managed; sufficient capital and loss-absorbing capacity should be kept in large subsidiaries to ensure viability of group resolution strategies.
- SWIFT oversight by the NBB has proven effective but faces new risks (notably cybersecurity incidents); authorities should consider complementing moral suasion with regulatory and supervisory powers and enhance information sharing with foreign authorities.
- Belgium should continue efforts to enhance its AML/CFT framework; steps taken since the 2014 FATF evaluation have strengthened the framework, but further implementation of FATF recommended actions is needed.

### Sectoral developments — Insurance
- Total assets of the insurance sector were, at 2016 market values, 80 percent of GDP.
- The sector has been stable over 2012–16 in aggregate; 12 percent of licensed firms exited since 2013.
- Several insurers have ceased to sell guaranteed products and moved toward asset management-type instruments; some insurers have purchased mortgages.
- These changes reduce exposure to interest rate and market risks but increase exposure to liquidity risk.
- Concerns exist over the low quality of some insurers’ capital.

### Main recommendations (selected, with timing)
- Enhance the risk analytical framework (NBB): incorporate bank stress testing into systemic risk assessment and macroprudential policy; extend horizon of insurance stress tests; intensify monitoring of insurers’ mortgage loan portfolios and underwriting standards; develop shadow banking monitoring framework with FSMA; enhance commercial real estate data coverage and quality. Timing: ST.
- Approve promptly the new macroprudential measure proposed by the NBB and enhance the NBB’s ability to implement cyclical macroprudential tools in a timely manner (MoF). Timing: ST.
- Strengthen bank supervision (NBB/SSM): ensure reliability and consistency of internal models; proactively assess loan classifications to ensure prudent provisioning practices. Timing: C.
- Adjust to insurers’ evolving risk profiles (NBB): address increasing liquidity risk; analyze growth of reinsurance operations; engage with industry to improve insurers’ capital quality. Timing: ST.
- Enhance financial conglomerate (FC) supervision (NBB/SSM): set supervisory expectations for FC governance and risk management; enhance monitoring of intra-group transactions and risk of regulatory arbitrage between insurance and banking sectors. Timing: ST.
- Enhance SWIFT oversight (NBB): complement moral suasion with regulatory and supervisory powers; broaden membership in the SWIFT Oversight Forum; improve information sharing on SWIFT oversight and assurance reports. Timing: ST.
- Ensure feasibility of resolution strategies for banking groups with systemically important subsidiaries and prioritize resolution planning for the two LSIs with the highest share of insured deposits (SRM/NBB). Timing: MT.
- Strengthen the deposit insurance system (MoF): publicly commit to shortening the DIS pay-out period to seven days by 2019; establish credit lines with the MoF; segregate the Guarantee Fund from government funds. Timing: ST.
- Ensure adequate transparency of beneficial ownership of legal persons and arrangements (MoF). Timing: MT.

*Timings legend as used in recommendations: C = continuous; I = Immediate (within one year); ST = Short Term (within 1–2 years); MT = Medium Term (within 3–5 years).*

*Source: IMF Financial Sector Assessment Program — Executive Summary (Belgium).*

### 9.      Belgian insurers have large holdings of domestic sovereign bonds and real estate.

### 9.      Belgian insurers have large holdings of domestic sovereign bonds and real estate.

### Insurance sector exposures and vulnerabilities
- Sovereign bonds account for nearly half of total assets of insurance companies and around two thirds of these are Belgian sovereign bonds.
- Real estate exposures are high and come mainly in the form of mortgage loans issued in the Belgian and Dutch market.
- Some insurers, as part of a financial conglomerate (FC), have concentrated exposures towards banks, particularly in the form of deposits within the same group.
- Over the medium term, insurers face declining investment returns as high-coupon bonds mature and are replaced by lower-coupon bonds; companies with a high stock of guarantees are likely to experience a drain on profitability.
- Insurers focused on non-life and unit-linked life business will be less affected by the low-yield environment.

### Shadow banking and asset management
- Assets of shadow banks amounted to 30 percent of GDP (about one-tenth of the banking sector) at end 2016.
- The sector is dominated by investment funds, including money market and non-equity investment funds, and also includes leasing and factoring companies, lenders outside banking and insurance groups that provide consumer and mortgage credit, and securitization activities not retained on banks’ balance sheets.
- Belgian investment funds overall (including those outside the shadow banking sector) had assets equivalent to 35 percent of GDP at end-2016.
- Risks:
  - Direct exposures are relatively small: only 7 percent of banks’ funding comes from the shadow banks and banks’ claims on the shadow banking sector are also about 7 percent of their assets.
  - Insurance companies and pension funds have higher exposure at about 17 percent of their total assets.
  - Indirect risks arise from potential asset price falls and liquidity tightening if fund managers face investor redemptions, and from interconnectedness between investment funds and their sponsoring banks, which may support funds even absent contractual obligations.

### Captive financial institutions (CFIs)
- CFIs’ liabilities (debt and equity) amounted to 105 percent of GDP in 2016.
- CFIs hold €6 billion (about 1.5 percent of GDP) in cash and deposits at Belgian banks.
- Belgian banks have less than €5 billion in claims on CFIs.
- Transactions are mostly within the same corporate group and not intermediated by financial firms, but the magnitude and growing size of CFI debt warrant continued monitoring.

### Critical services and cyber/reputational risk (SWIFT)
- At end-September 2017, 239 market infrastructures were using SWIFT.
- Around 11,000 institutions across 200 countries and territories are connected to SWIFT.
- SWIFT supports domestic and international payments and settlement of payments and securities transactions, including in central banks’ monetary operations.
- Belgium and the NBB face reputational risk in case of an incident affecting SWIFT’s core services.
- NBB has recognized SWIFT as a critical infrastructure under the 2011 Law on the Protection and Security of Critical Infrastructures, subjecting SWIFT to additional security planning requirements.

### HLEG recommendations and implementation
- The High-Level Expert Group (HLEG) issued 10 recommendations to enhance resilience and competitiveness.
- Working groups established in five areas: (i) financing the real economy; (ii) regulation and supervision; (iii) digitalization and cyber risk; (iv) growth finance; and (v) promoting Brussels as a financial center.
- A “B-hive” (banks, insurers, government) was created to attract investment in digitalization of the financial sector.
- A Financial Cybersecurity Council is developing proposals to strengthen Belgium’s cyber resilience.

### Stress-test frameworks and key results — solvency and scenarios
- Two sets of stress tests: macroeconomic-scenario-based solvency tests for banks and insurers, and bank-only liquidity/market contagion tests. Tests use end-2016 data.
- Adverse scenario (five years) covered three RAM risks (heightened global risk aversion, correction of housing prices, increased sovereign risk) with nine quarters of negative growth; severity comparable to 2016 EU-wide stress tests but with a more drastic correction of asset prices. Baseline aligned with October 2017 WEO.
- Banks covered: six largest Belgian banks (90 percent of the system), using ECB/SSM confidential supervisory data post-2014 and NBB supervisory data pre-2014.

Banks — solvency
- Aggregate CET1 ratios (adjusted to exclude instruments ineligible under Basel III) range between 15.1 and 15.5 percent initially, peak at 15.6 percent in 2018, and stabilize at around 15 percent by 2021.
- These levels are above the fully-loaded minima of 8½ percent for the four largest O-SIIs and at 7¾ percent for the remaining two O-SIIs.
- Total regulatory capital is projected to decline by an additional 30 basis points by 2021 due to elimination of capital instruments no longer eligible as Tier 2 capital.
- Under the adverse scenario:
  - The average CET1 ratio falls by 370 basis points from 15.1 percent at end-2016 to a low point of 11.4 percent in 2018 before trending back to 13.2 percent by 2021.
  - RWAs rise by 290 bps in the first two years, driven mainly by an increase in the risk weight density of the domestic mortgage portfolio from an average of 11.5 percent in 2016 to 25.8 percent in 2019.
  - Combined impact in early years: credit (140 bps) and valuation (200 bps) losses; cumulative through 2021 credit (300 bps) and valuation (300 bps) losses—largely absorbed, on average, by banks’ revenues.
  - Potential impact of IFRS9 implementation is estimated to be limited at no more than 25bps of CET1 for most Belgian banks.
- Resilience drivers: low levels of NPLs, larger share of mortgages with low initial default rates, smaller share of consumer loans, resilient projected net interest income, higher reliance on deposits, active hedging strategies.
- Average repricing maturity of Belgian banks’ home loans is around 8.5 years.

Insurers — solvency
- Tests covered eight composite insurers accounting for 78 percent of the market; regulatory capital measures used as hurdles.
- In the adverse scenario:
  - Median solvency ratio drops from 184 to 124 percent.
  - In the low-for-long scenario, the median solvency ratio declines to 145 percent.
  - In each scenario one company drops below a solvency ratio of 100 percent, but the capital needed to restore solvency is very small.
- Loss drivers: higher spreads on the Belgian sovereign and higher risk-free rates in the adverse scenario; lower risk-free interest rates in the low-for-long scenario.
- Life insurers are resilient to longevity and mortality shocks.
- Insurers would rebalance asset allocations gradually after shocks, divesting equity and sub-investment-grade corporate bonds and increasing holdings of sovereign bonds—potentially stabilizing for the Belgian sovereign debt market.

### Liquidity stress tests, asset encumbrance, and contagion
- Two liquidity frameworks: (i) LCR-based approach applied to all banks; (ii) implied cash-flow tests under six scenarios for seven major banks.
- System-wide LCR ratio was 140 percent in March 2017 (tests’ starting point).
- Stressed LCR changes: falls by 40 basis points under the systemic scenario, by 46 basis points under the idiosyncratic scenario, and by 64 basis points under the combined scenario—leaving stressed LCRs at reasonably high levels.
- Cash-flow-based tests largely confirm LCR results.
- Average asset encumbrance ratio of Belgian banks was 12 percent in 2016; significantly higher for a few large banks. Sources include large derivative books against cash collateral, covered bonds against mortgage loans, and repo transactions supported by general collateral. Asset encumbrance risks under stress should be monitored separately as they are not well captured by the LCR.
- Contagion analysis based on large exposures and simulation of single counterparty defaults found no bank triggered consecutive defaults by other institutions—driven by small interbank exposures relative to capital and low interbank network connectivity.
- CoVaR analysis indicates the risk of inward and outward spillovers caused by stress in domestic or foreign peer banks is moderate.

### Macroprudential policy framework and recommendations
- Since April 2014 the NBB is responsible for monitoring systemic risks and taking macroprudential action; framework uses early-warning indicators, stress tests, and market trend analysis.
- NBB and FSMA prepared a report on asset management and shadow banking.
- Macroprudential measures require issuance of a Royal Decree; thus the NBB must act in conjunction with the Minister of Finance or Council of Ministers.
- NBB actions to date:
  - 2013: introduced a 5 percent risk weight add-on for banks using IRB models to mitigate residential real estate risks.
  - 2016: introduced capital surcharges for eight O-SIIs and began quarterly assessment of a counter-cyclical capital buffer, currently set at 0.
  - Early 2017: NBB proposed an increase in capital charges linked to mortgage riskiness (proxy: LTV), rejected by government.
  - November 2017: NBB proposed an alternative measure to scale up banks’ mortgage risk weights by a fixed factor; the measure should be approved promptly.
- Key recommendation: Grant the NBB the power to implement directly cyclical macroprudential policies to avoid delays caused by required approval from Minister of Finance or Council of Ministers; ex-post accountability can be ensured via reporting to Parliament and/or public disclosure of rationale for actions.

*Source: cr1867.*

### 33.      The authorities should continue strengthening their systemic risk analytical

### 33.      The authorities should continue strengthening their systemic risk analytical

### Systemic risk analytical framework
- Concrete areas for strengthening:
  - (i) further strengthening the bank stress testing framework to cover all SIs and broadening the coverage interconnectedness analysis;
  - (ii) developing multi-period horizons for insurance stress tests and using the results in the validation of companies’ Own Risk and Solvency Assessment (ORSA);
  - (iii) enhancing the coverage and quality of the commercial real estate data; and
  - (iv) deepening understanding of the potential systemic risks posed by the shadow banking and asset management sectors.
- Additional recommendation:
  - NBB should set up a monitoring framework for the analysis of risks arising from mortgage lending by insurers.

### B. Prudential Supervision — overall findings and direction
- Financial sector supervision has been upgraded markedly since the 2013 FSAP:
  - New national banking and insurance laws have been issued.
  - Amendments to the EU Financial Conglomerate Directive (FICOD) have been transposed.
  - Solvency II has been implemented.
- The Single Supervisory Mechanism (SSM) is responsible for over 90 percent of the Belgian banking sector assets and has made supervision of Belgian SIs more intrusive, forward looking, and effective.
- NBB has enhanced the supervision of LSIs.
- Recommendation:
  - NBB and ECB should continue to develop their supervisory approach and devote sufficient attention and adequate supervisory intensity to systemically important Belgian subsidiaries of EA banks, complex FCs, and evolving insurance risk profiles.

### Banking and Financial Conglomerate Supervision — key findings and recommendations
- Maintain sufficient capital and adequate supervision of systemically important subsidiaries of EA banks during the transition to a full banking union.
  - Staff supports completion of the banking union, inclusive of a European deposit insurance scheme and a common fiscal backstop, but advises gradual implementation of changes to prudential requirements and supervisory focus.
  - International standards require supervisors to supervise each bank on a stand-alone basis and ensure adequate allocation of capital within different entities of a banking group in line with the distribution of risks.
- Internal models:
  - Belgian banks’ reliance on internal models is significant.
  - Completing the SSM’s ongoing targeted reviews of internal models is needed to reduce unwarranted variability of risk-weighted assets.
  - Supervisors should demand greater involvement of bank boards in oversight of models.
- Nonperforming loans (NPLs):
  - NPLs are relatively low in Belgium, but supervisors should take a more proactive role to ensure prudent provisioning standards.
  - Although ECB guidelines introduce prudential considerations, additional regulatory measures and more intrusive supervisory reviews are recommended.
- Related party transactions:
  - The legal definition of related party transaction in the Belgian framework is too narrow.
  - Recommendations:
    - Broaden the definition of related parties and the types of transactions covered.
    - Require banks to establish sounder policies and processes to identify related parties.
    - Supervisors should develop guidance for evaluation of FC intragroup transactions, assess economic purpose, and identify transactions aimed at circumventing regulatory requirements.
    - Supervisory manuals should highlight remaining risk transmission channels including reputational risk where supplementary supervision has been waived.
- Special purpose entities (SPEs):
  - SPEs should be brought within the scope of supervision.
  - Supervisors should have the power to determine whether an SPE is to be fully or proportionally consolidated for regulatory purposes.
  - Consider the overall nature of the relationship between SPEs and financial groups beyond traditional control and influence criteria.
  - Stress tests and scenario analyses should consider all relevant off-balance sheet activities.
- Financial conglomerate (FC) governance:
  - Supervisory expectations on FC governance and risk management should be heightened.
  - The SSM Supervisory Manual provides limited insight beyond regulatory requirements; defining best practices and providing further guidance is critical.

### Insurance Supervision — findings and recommendations
- Evolving insurer risk profiles:
  - Increasing liquidity risk due to transition to asset management type products and acquisition of mortgage loan portfolios.
  - Insurers currently have sufficient liquid assets for immediate needs, but a robust regulatory framework for liquidity risk should be put in place over the medium to long term.
  - Brexit has prompted reallocation of reinsurance business to Belgium, posing additional challenges.
  - NBB should implement measures to address rising liquidity risk, strive to retain highly-qualified staff, and enhance resources as industry size and complexity increases.
- Capital quality:
  - Industry meets Solvency II requirements, but reliance on lower quality forms of capital is a concern:
    - Subordinated loans from parent banks.
    - Unrecognized gains on new insurance products with greater flexibility of surrender, vulnerable to redemption risk.
  - Use of the volatility adjustment may have led to an overstatement of insurers’ solvency.
- Recommendation:
  - Proactive engagement with the industry to promote gradual improvements in the quality of capital.

### C. SWIFT Oversight — findings and recommendations
- Current status:
  - SWIFT is not a regulated payment or settlement system but is subject to NBB oversight as a CSP.
  - Practical oversight modalities are laid down in a protocol between SWIFT and the NBB.
  - Oversight approach is based on moral suasion; NBB has primary oversight responsibility, supported by the G-10 central banks.
  - NBB has information-sharing arrangements with the Eurosystem High-Level Group on SWIFT Oversight and the SWIFT Oversight Forum.
- Evolving risks and challenges:
  - Effectiveness depends on SWIFT’s continued willingness to cooperate.
  - Changing nature of risks, including cybersecurity incidents at SWIFT’s customers, calls for reassessment.
  - Lack of cooperation by SWIFT, particularly in a crisis, would leave Belgian authorities with limited legal means to react and could pose significant reputational risks to Belgium and the NBB.
- Recommendations:
  - Consider complementing NBB’s moral suasion with additional regulatory and supervisory powers to provide legal backing and transparency for NBB’s oversight role.
    - Additional powers could address delays in implementing recommendations or lack of timely incident reporting.
  - Broaden membership in the SWIFT Oversight Forum and expand sharing of SWIFT oversight and assurance reports:
    - Forum should include countries from different regions and at different stages of economic development.
    - More information should be available to authorities not part of the core group but with a legitimate interest, particularly for SWIFT’s self-assessment against oversight expectations and its information security assurance reports.

### Financial safety net and crisis management — findings and recommendations
- Progress to date:
  - Establishment of the SSM and SRM at the European level.
  - National implementation of the EU recovery and resolution framework and establishment of the NBB Resolution Board.
  - NBB participates in the SSM and the SRM; national authorities continue roles for deposit insurance and emergency liquidity assistance (ELA).
- Remaining needs:
  - Additional measures are needed to fully operationalize the new recovery and resolution framework, strengthen depositor protection, and address operational deficiencies.
- Loss-absorbing capacity concerns:
  - Belgian authorities are concerned about potentially insufficient loss-absorbing capacity at large subsidiaries of EA banks.
  - Such subsidiaries are subject to group RRPs and expected to be resolved at parent level under a single point of entry (SPE) resolution strategy.
  - SRB intends to decide on internal loss absorbing capacity (or MREL, in the EU) allocation within groups and on subsidiary-level targets in 2018, possibly subject to a transitional period.
  - Risk: Lack of sufficient subsidiary-level MREL, together with subsidiaries holding bail-inable debt issued by parent, could jeopardize the SPE strategy and lead to separate resolution with unduly large losses for creditors and contagion to the real economy.
- Recommendations on resolution strategy:
  - SRM should ensure feasibility of resolution strategies for banking groups with systematically important subsidiaries.
  - Internal MREL targets should support group resolution strategy and enable recapitalization of material subsidiaries, consistent with FSB and EBA guidance.
- Guarantee Fund for Financial Services:
  - The fund administers both the Belgian DIS and the national resolution fund; both are notional funds and fees collected are transferred to the government.
  - Recommendation:
    - Funds should be segregated from government funds to ensure consistency with international standards and ready access, especially in fiscal duress.
    - DIS should have standing credit lines with the Ministry of Finance.
    - DIS pay-out period should be shortened to seven days in 2019 instead of 2024 to increase depositor confidence.
- NBB resolution capacity for LSIs:
  - NBB should enhance ability to undertake effective resolution of LSIs.
  - Prioritize resolution planning for the two LSIs holding the highest share of insured deposits; currently insured deposits in these two LSIs exceed the DIS funds.
  - Ensure a smooth and decisive transition from early intervention to resolution for LSIs with ample time for resolution preparation.
  - Establish a protocol detailing cooperation and information sharing between NBB supervisory and resolution staff.
- Operational improvements:
  - Ex-ante judicial review of all NBB’s decisions on transfer of assets and liabilities currently takes at least seven business days; this delay should be eliminated or shortened.
  - In a system-wide crisis, NBB Resolution Board could serve as a platform for cooperation while member agencies exercise their powers autonomously.
  - A committee of the Resolution Board should be mandated to proactively oversee national financial crisis preparedness, including organizing regular financial crisis simulation exercises.

### Financial integrity — findings and recent reforms
- 2014 AML/CFT evaluation:
  - Found a well-established regime with some deficiencies.
  - Overall, the regime produced relatively good results.
  - Adjustments were necessary on authorities’ understanding of ML/TF risks and AML/CFT strategy, preventive measures implementation in some sectors, AML/CFT supervision, and transparency of legal entities.
- Legal and institutional changes since 2014:
  - New AML/CFT law transposing the EU 4th AML Directive came into force in October 2017.
    - Strengthens preventive measures and sets the basis for a registry of beneficial owners of legal entities and arrangements (expected to become operational in mid-2018).
  - Authorities updated the assessment of Belgium’s ML/TF risks and took measures to enable swifter implementation of TF-related targeted financial sanctions and the domestic designation of terrorists.
  - NBB increased and centralized its AML/CFT resources and started developing a risk-based approach to supervision, collecting more granular information from supervised entities, and refining its analysis.
  - Other AML/CFT supervisors increased outreach to reporting entities and provided access to tools facilitating customer due diligence, leading to a significant increase in suspicious transactions reporting.

*IMF staff report excerpt.*

### 57.      The authorities should continue to strengthen the effectiveness of the AML/CFT

### 57.      The authorities should continue to strengthen the effectiveness of the AML/CFT regime.

### AML/CFT policy recommendations
- The authorities should continue to strengthen the effectiveness of the AML/CFT regime.
- They should communicate the results of the updated risk assessments to reporting entities.
- They should ensure that the new risk-based supervision framework is implemented in an effective way.
- Notwithstanding ongoing EU level discussions, the authorities should ensure adequate transparency of beneficial ownership of legal persons and arrangements.

### Macrofinancial developments (high-level observations from 2008–2017)
- A moderate economic recovery is proceeding alongside a dynamic financial cyclical upswing.
- The economic recovery begun in 2014 has been modest.
- The financial cycle has gathered strength since 2016.
- Leverage has risen steadily among households and picked up steam in the last two years among corporates.
- The financial cycle has been fueled by low and declining interest rates, compressed credit risk premia, and low volatility risk premia.
- Sources cited: National Bank of Belgium; Bloomberg L.P.; Haver Analytics; Eurostat; Thomson Reuters; Barclays Capital Research; and IMF staff calculations.

### FSAP solvency stress test results — banking sector
- Under the adverse scenario, all banks would still meet minimum requirements but there is a large dispersion of impact across banks.
- Risk-based bank CET1 ratios decline by 370bps at the low point of stress to 11.4 percent.
- Profit and loss impact is driven by the compression in net interest income and an increase in loan loss rates.
- The fall in aggregate capital ratios in 2018 is mainly driven by stressed RWAs, credit losses, and portfolio valuation losses.
- Note on sample: The sample of banks included the six major Belgian banks.
- Note on presentation: Boxplots include the mean (yellow dot), the 25th and 75th percentiles (grey box, with the change of shade indicating the median), and the 10th and 90th percentiles (whiskers). The dashed line indicates the minimum capital regulatory ratio.
- Source cited: IMF Staff Estimates.

### Insurance solvency stress tests — summary findings
- The Belgian insurance sector is well capitalized and able to withstand severe shocks to financial markets.
- Solvency ratios decline markedly in the adverse scenarios, but generally remain above 100.
- The scenarios impact gross assets and liabilities in opposite directions, but reduce available own funds.
- On aggregate, the sector remains profitable after stress in the IMF adverse scenario and solvency ratios recover slowly.
- Note: Return on equity projections after stress are only available for six companies out of the sample of eight.
- Source cited: IMF staff calculations based on company submissions.

### Selected economic indicators (Table 1) — extracted lines preserved as in source
- Real GDP1.51.71.91.71.51.51.51.5
- Domestic demand2.11.41.81.71.51.51.51.5
- Private consumption1.71.11.41.61.61.61.61.6
- Public consumption0.50.70.70.60.60.70.60.6
- Gross fixed investment3.61.13.73.22.12.12.22.2
- Stockbuilding 1/0.2   0.4   0.0   0.0   0.0   0.0   0.0   0.0
- Foreign balance 1/-0.6   0.3   0.1   0.0   0.0   0.0   0.0   0.0
- Exports, goods and services7.54.54.74.03.83.42.93.1
- Imports, goods and services8.44.34.64.13.93.42.93.1
- Household saving ratio 11.211.612.312.312.512.512.512.5
- Potential output growth1.21.41.21.41.61.61.61.6
- Potential output growth per working age person1.11.11.11.41.61.61.61.6
- Output gap (in percent)-0.5-0.20.40.70.60.50.30.2
- Unemployment rate (in percent)7.97.37.06.86.76.76.66.6
- Employment growth1.21.21.10.90.70.60.60.6
- Consumer prices1.82.21.61.81.81.91.92.0
- GDP deflator1.61.81.61.71.61.61.61.7
- Revenue50.751.150.450.149.949.949.949.9
- Expenditure53.252.351.751.451.151.151.151.1
- General government balance-2.5-1.2-1.3-1.3-1.3-1.2-1.2-1.2
- Structural balance-2.2-1.1-1.5-1.7-1.5-1.4-1.4-1.3
- Structural primary balance0.71.40.80.50.60.50.50.5
- Primary balance0.41.41.00.80.80.70.70.6
- General government debt105.7103.3101.199.197.495.794.093.0
- Goods and services balance1.31.01.11.01.11.21.01.1
- Current account0.10.10.30.20.50.60.40.5
- Euro per U.S. dollar, period average 2/0.90.9..................
- NEER, ULC-styled (2005=100) 2/98.9101.2..................
- REER, ULC-based (2005=100) 2/99.0105.5..................
- Memorandum items: Gross national savings (in percent of GDP)24.023.924.524.825.125.325.425.6
- Gross national investment (in percent of GDP)23.923.824.124.524.624.825.025.1
- Nominal GDP (in billions of euros)423.0438.2453.6468.9483.4498.6514.2530.9
- Population (in millions)11.311.411.411.511.511.611.711.7

### Structure of the financial system and key indicators (selected lines preserved)
- Banking sector: Number of credit institutions1101071041071081041041039990
- Banking sector: Total assets (in billions of euros)1,578   1,422   1,191   1,1511,1471,049    9619969701022
- Insurance sector: Number of insurance companies156151147145142134130128119118
- Insurance sector: Total assets (in billions of euros)220224234249257265    271281286327
- Other financial intermediaries: Number of stockbroking firms26232323222020202020
- Management companies of undertakings for collective investment: Number7777777778
- Assets under management (selected entries)4925496234345.26.3 and 252193189194178178175201217.6221.6
- Sources: National Bank of Belgium, Belgian Asset Managers Association, and Financial Services and Markets Authority.

### Financial soundness indicators — banking sector (selected lines preserved)
- Return on assets-0.10.50.00.10.30.50.60.6
- Return on equity-2.710.70.73.05.97.710.19.1
- Net interest income to total income79.168.371.271.662.670.267.766.0
- Interest margin0.81.21.21.31.21.61.81.8
- Cost/income ratio77.766.067.373.462.461.258.658.4
- Total assets (in percent of GDP)349.2323.2310.2278.7251.0249.0236.5266.1
- Mortgage loans (in billions euros)158.0   178.5   183.9   188.3   190.8   202.4    216.1229.7
- Non-performing loans (NPL) as percent of gross loans2.72.83.23.23.12.72.62.4
- Regulatory capital to risk-weighted assets17.319.318.518.118.717.318.718.8
- Regulatory Tier 1 capital to risk-weighted assets13.215.515.115.816.415.116.016.2
- Capital to assets4.55.04.65.86.46.66.57.1
- Sources: National Bank of Belgium.

### Insurance sector indicators (selected lines preserved)
- Shareholder equity and reserves / total assets5.25.15.34.94.8...
- Solvency coverage ratio (Solvency I)196.7207.4221.3213.1......
- Solvency coverage ratio (Solvency II, SCR)  1/.........183.7175.8189.4
- Growth in gross written premiums - life business12.8             -22.9-0.1-5.8-4.5...
- Return on equity  2/20.611.29.78.514.3...
- Liquid assets (bonds, listed stocks, deposits) / total assets71.870.369.167.367.066.0
- Sources: NBB

### Risk Assessment Matrix (RAM) — principal risks, likelihood, and expected impact
- Sudden increase in global risk aversion
  - Overall Level of Concern: Low
  - Likelihood of severe realization in 1–3 years: Medium
  - Expected impact on financial stability:
    - Repricing in global fixed income markets triggered by an abrupt decompression of asset risk premia amplified by low secondary market liquidity, interacted with the reemergence of financial stress in the euro area.
    - Would lead to a sizeable pick-up in money market rates, a steepening of the yield curve, reductions in market liquidity, and broad-based financial market dislocation, leading to mounting losses in fair value instruments and pushing up funding costs.
    - Belgian banks’ ability to issue debt securities in wholesale markets would be hampered by market disruptions exacerbating liquidity risk.
- A large correction in the Belgian real estate market
  - Overall Level of Concern: Low
  - Likelihood of severe realization in 1–3 years: High
  - Expected impact on financial stability:
    - After picking up strongly in 2015, housing price increases slowed down in Belgium in 2016. Overvaluation estimates have stabilized at around 8 percent.
    - Exposures to the construction and real estate sector have grown dynamically over the last decade with 10 percent of the loans granted to Belgian regulated real estate investment companies (REITS).
    - A fall in real estate prices would lead to higher impairment charges affecting primarily highly leveraged households given the relatively high share of risky mortgage loans in Belgium. Insurers hold sizable mortgage loan portfolios compared to EU peers, amounting to almost 10 percent of assets.
    - The extension of the macroprudential measure to add a 5pp risk weight add-on for real estate mortgages by IRB banks has increased Belgian banks’ capacity to absorb losses.
- Reassessment of regional sovereign risk
  - Overall Level of Concern: Low
  - Likelihood of severe realization in 1–3 years: High
  - Expected impact on financial stability:
    - Financial stress in the euro area could re-emerge triggered by political uncertainty, faltering reforms, or confidence shocks over debt sustainability concerns.
    - Re-emerging sovereign debt sustainability concerns would push down securities’ market valuation, weaken banks’ and insurers’ balance sheets and worsen banks’ funding costs.
    - The relative importance of sovereign bonds in banks’ fixed income securities portfolio increased to about 75 percent in 2016, while insurers hold nearly 60 percent of their assets in sovereign bonds.
- A prolonged period of low growth and low interest rates in the EA
  - Overall Level of Concern: Medium
  - Likelihood of severe realization in 1–3 years: Medium
  - Expected impact on financial stability:
    - Low nominal growth would impact Belgium through falls in export demand, financial linkages, and confidence effects.
    - Low credit growth and low lending rates would adversely affect bank earnings through a compression of net interest income. Borrowers’ creditworthiness would also be affected, leading to greater than expected defaults, write-offs, and loan impairment charges.
    - Insurers, despite partially shifting away from guaranteed life business and improving ALM, remain constrained because low yields still weigh heavy on profitability.

### Banking sector: Solvency test — institutional perimeter and stress testing framework
- Institutions included: Six major banks: Argenta, AXA Bank Belgium, Belfius Banque, BNP Paribas Fortis, ING Belgium, and KBC Group.
- Market share covered: About 90 percent of total banking sector assets.
- Effective date: December 2016.
- Data: Supervisory data.
- Scope of consolidation: Projection of consolidated ratios based on solo estimates (NBB) and consolidated group basis (FSAP team).
- Treatment of insurance activities: Insurance-generated dividends and commissions are recognized in financial conglomerates’ income statement. Bank P&L projections incorporate the results of the insurance stress test through the impact of the upstreaming of dividends and fees and commissions on net income.
- Stress testing process:
  - Both NBB and the FSAP team conducted TD macroprudential stress tests based on the WEO forecast (baseline) and IMF’s Global Macrofinancial Model with shocks to residential and commercial real estate prices estimated outside the framework (adverse).
  - For IRB exposures, the FSAP team calibrated a separate credit risk model for five Basel asset classes, core industry sectors, and eleven material geographies for internationally active banks including Belgium, Bulgaria, Czech Republic, France, Hungary, Ireland, Luxembourg, Netherlands, Slovakia, Switzerland and Turkey.

*Sources: Haver Analytics, Belgian authorities, and IMF staff projections.*

### Appendix II. Banking Sector Stress Testing Matrix (STeM)

### Appendix II. Banking Sector Stress Testing Matrix (STeM)

### Banking Sector: Solvency Test — Framework and Scope
- Framework: Top-down (TD) by NBB and TD by FSAP Team.
- For STA exposures: stressed NPL ratios, stressed coverage ratios, and a stressed transition matrix for performing exposures are projected.
- For market risk: stress to all sovereign issuers to which Belgian banks are exposed is modeled. A corporate benchmark index (BAA corporate index) is modeled separately.
- TD stress test included:
  - assessment of the impact from a ‘low-for-long’ environment; and
  - a sensitivity test of the mortgage portfolio.

### Channels of Risk Propagation — Methodology
- Credit and portfolio risks projected using borrower-level stressed financials and macro models based on stressed projections for key macroeconomic and financial variables.
- NBB modeled impact of a sharp rise in wholesale and retail funding costs and pass-through to customers using econometric work.
- A comprehensive battery of econometric and structural models was developed and calibrated for the 2018 Belgium FSAP:
  - Over 55 credit risk models and around 500 econometric specifications estimated for PDs based on bank-specific regressions, panel regressions, and dynamic equations.
  - Net trading income on equity positions, debt instruments, and trading derivatives projected using a Bayesian VAR approach at the bank level.
  - Bank funding costs linked to euribor benchmark rates and bank spreads separately for deposits and outstanding debt instruments; funding costs estimated using a Bayesian VAR approach at the bank level and by instrument (deposits, debt instruments).
  - Lending rates linked to OLO benchmark rates for mortgages, bank commercial spreads over stressed funding costs, and macrofinancial conditions.
  - Mark-to-market losses from full revaluation of sovereign securities projected for twenty-three issuers and a BAA corporate index, excluding shocks to portfolio hedges for interest rate risk.

### Tail Shocks — Scenario Analysis
- Adverse scenario calibration:
  - Uses IMF’s Global Macrofinancial Model and auxiliary models to estimate stressed paths for residential and commercial real estate prices.
  - Follows a layer-of-shocks approach with simultaneous exogenous shocks and endogenous structural response amplifying impacts.
  - Narrative features re-emergence of financial stress and sovereign default risk in the euro area (money market spreads rise by 125 bps and 10y Belgium government bond yields increase by 150 bps).
  - Tightening of global financial conditions: long-term yields raise by an average of 100bps and equity prices fall by 20 percent in the EA, Japan, the UK and the U.S.
  - Domestic demand-driven contraction in Belgium: private investment and private consumption drop by 12 percent and 3 percent, respectively; real residential property prices and commercial real estate prices fall by 20 percent peak-to-trough.
  - Regional layer of shocks from de-globalization initiatives affecting Germany and Central and Eastern European Economies.
  - Scenario constitutes a 3.1 standard deviation move in two-year cumulative real GDP growth rate by 2019, calculated over 1990–2016.
  - Quantified impacts:
    - Belgium output falls 8.1 percent below baseline by 2019.
    - Consumption price inflation falls 3.5 percentage points below baseline by 2020.
    - Unemployment rate rises 2.2 percentage points above by 2019.
    - Within the euro area: high spread economies output falls 9.1 percent below baseline at low point in 2019; low spread economies fall 7.2 percent below baseline at low point in 2019.
    - Government debt ratio rises 17.9 percentage points above baseline in Belgium by 2021.
  - Scenario includes an additional idiosyncratic and system-wide funding risk shock linked to banks’ spreads over benchmark under stress.

### Sensitivity Analysis
- Shocks considered:
  - Shocks to Belgium residential house prices impacting stressed LGDs.
  - Shocks to the euro swap curve.
  - Shocks to FX rates.
  - Low-for-long environment.
  - Shocks to concentration risk to single obligors.
  - Interest sensitivity gap of the ALM book under a range of market scenarios.
  - IRRBB excluding derivatives from the repricing gap schedule.

### Risks and Buffers — Positions and Risk Factors Assessed
- Credit risk:
  - Estimated according to the national implementation of the CRD IV framework.
  - Positions include retail exposures, corporate exposures, sovereign/public sector exposures, and exposures to financial institutions.
  - Covered bonds and securitization exposures included.
  - Off-balance sheet exposures included using baseline and stressed Credit Conversion Factors (CCFs).
- Sovereign risk:
  - Mark-to-market valuation of securities (from shocks to interest rates and credit spreads) in trading book and AFS/FVO linked to macro scenario.
  - All sovereign issuers relevant for Belgian banks included: Austria, Belgium, Bulgaria, Canada, Czech Rep., Germany, Spain, Finland, France, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, Portugal, Slovak Rep, Slovenia, Singapore, and United States.
- Market risk other than sovereign risk:
  - Market stress from shocks to changes in interest rates, exchange rates, credit spreads, commodities, and equity prices.
- Profits:
  - For Belgian financial conglomerates, stressed revenues from insurance activities under the stress test of the insurance sector are projected.
  - Net trading income from equity positions, debt instruments, and trading derivatives.
  - Income from loans and non-loan activities.
  - Interest income declines for amount of lost income from defaulted loans; interest income from non-defaulting loans is estimated according to satellite models.
  - Interest expenses increase due to rising funding costs linked to macroeconomic scenario with empirically estimated pass-through, and add-on funding stress from a market event with no pass-through to lending rates.
  - Net fee and commission income and other income evolve with macroeconomic conditions and banks’ balance sheets.
  - No change in business models (no rebalancing of portfolio).
  - Business models and balance sheets evolve over the stress horizon according to the scenario.

### Regulatory Impact and Behavioral Adjustments
- Regulatory impact:
  - Effects of phase-out of no-longer-eligible additional Tier 1 and Tier 2 capital included.
  - No conversion of additional Tier 1 capital is assumed during the stress horizon.
- Dynamic balance sheet assumptions:
  - Credit supply effects are disallowed to calibrate credit risk projections.
  - Balance sheets evolve with key macroeconomic aggregates adjusting for credit demand effects.
  - EAD under stress from off-balance sheet exposures increases about 5–10 percent on average.
  - All facilities are assumed contractually irrevocable (“committed”) to extend funds in the future (conservative assumption).
  - Maturing assets replaced by exposures of same type and risk.
  - Dividends linked to banks’ net profits: under positive profits, dividend payout floor set at 30 percent; otherwise, no dividend payout assumed.
  - Effective tax rate evolves with the macro scenario.
  - Losses are recognized in the same year that a shock hits.
  - If banks’ capital ratio falls below regulatory minimum during the stress test horizon, no prompt corrective action is assumed.

### Regulatory and Market-Based Standards and Parameters
- Calibration of risk parameters:
  - Credit risk projections based on loan loss provision ratios and non-performing exposures.
- Parameter definitions:
  - Point-in-time (PiT) PDs and LGDs for expected losses (P&L impact) and stressed regulatory PDs and LGDs on non-defaulted exposures for regulatory capital requirements (RWAs).
  - Estimated non-defaulted PDs by Basel asset class and material geography.
  - Non-defaulted LGDs calculated post-credit risk mitigation by Basel asset class based on ECB’s generator engine (scenario analysis), with add-on adjustments for mortgages (sensitivity analysis).
- Parameter calibration:
  - For IRB exposures, shifts to PDs informed by shocks to credit risk losses based on Moody’s EDFs rates (non-mortgage portfolios), and credit registry data (mortgage portfolio). PDs and LGDs evolve with macroeconomic and financial variables of the scenario.
  - For STA exposures, inflows into NPL categories based on bank-specific and regression estimates using supervisory data merging pre-2014 NBB supervisory reporting and post-2014 ECB ITS templates, including risk migration for performing exposures, and stressed coverage ratios.
- Regulatory standards:
  - Capital definition according to Belgium implementation of CRD IV rulebook, including CET1, Tier 1, and total CAR.
  - Capital components no longer eligible for additional Tier 1 and Tier 2 capital components follow CRR’s transitional path.
  - CET1/Tier 1/CAR ratio hurdle rate at 6.0/7.5/9.5 percent of RWAs for regulatory minimum capital of the Big-4 Belgian banks (including the O-SII fully implemented capital surcharge).
  - CET1/Tier 1/CAR ratio hurdle rate at 5.25/6.75/8.75 percent of RWAs for regulatory minimum capital of the other two O-SII Belgian banks with an additional 2.5 percent hurdle rate for the capital buffer breach.
  - Leverage ratio (3 percent hurdle rate met with Tier 1 capital) using the Belgian implementation of CRD IV.

### Reporting Format for Results
- Output presentation includes:
  - Evolution of CET1, Tier 1, CAR, and leverage ratio for the aggregate banking system.
  - Contribution of key drivers to aggregate net profits and aggregate CET1 capital ratios.
  - Number of banks and share of total assets below hurdle rates.
  - Capital shortfall in terms of nominal GDP.

---

### Liquidity Stress Testing Matrix (Conducted with NBB)

### Institutional Perimeter, Coverage, and Data
- Institutions:
  - All Belgian banking institutions for the LCR-based test including seven SIs, two significant subsidiaries of EU SIs, ten core LSIs, ten other LSIs, and four subsidiaries of EU SIs with presence in Belgium. Dexia is excluded as a run-off vehicle.
  - All eight Belgian SIs for the cash-flow based test.
- Market share: Between 95 and 100 percent of banking sector total assets.
- Data and base date:
  - Contractual based tests: end-2016 data.
  - LCR test: supervisory data as of June 30, 2017.
  - Cash-flow liquidity stress tests: based June 30, 2017 except for the two significant subsidiaries of EU STs based on end-2016 data.
  - Based on granular supervisory data.

### Channels of Risk Propagation — Methodology
- Basel III measures of liquidity risk—the LCR conducted on four calibrated scenarios.
- Two implied cash flow tests under six alternative scenarios.
- Evolution and drivers of asset encumbrance ratio analyzed.

### Risks and Buffers
- Risks assessed:
  - Funding risk, rollover risk, market liquidity risk, liquidity risk related to systemic events, idiosyncratic risks, margin requirements related to cash collateral for derivative positions, and government bonds for repo operations.
- Buffers:
  - HQLA securities assessed at market values net of haircut on a security-by-security basis.

### Tail Shocks — Size of the Shock and Scenarios
- Four separate scenarios for LCR-based tests:
  - LCR Scenario under standard assumptions calibrated by BCBS.
  - Systemic stress scenario: lower market values and higher haircuts to HQLA assets and impact some net outflows (higher drawings on liquidity lines; reduced inflows from financial counterparts).
  - Idiosyncratic stress scenario: higher run-off rates to unsecured funding (with 10 percent run-off rates for stable deposits), and lower inflow rates.
  - Combined stress scenario of systemic and idiosyncratic risks taking the most stressed haircuts/run-off rates from the previous scenarios.
- An LCR “Belgium wholesale stress” scenario replicates liquidity stress observed during the global financial crisis characterized by:
  - (i) a freeze of wholesale funding on the interbank market, secured funding market via repo and covered bonds, and the commercial paper market (with a run-off rate for operational deposits of 75 percent and for not-fully covered corporate deposits of 100 percent); and
  - (ii) liquidity risk from sizeable margin calls related to secured funding, derivatives and foreign currency funding due to market liquidity shocks, derivative assignments, and unwinds and disruptions in the FX swap market (with rollover of secured funding backed by other than Level 1 and Level 2A assets of up to 0 percent).
- Six separate scenarios for implied cash-flow based tests over eighteen maturity buckets (one-day through twelve months cumulative):
  - S0: baseline.
  - S1: Contractual: excludes modeling adjustments to non-maturity assets and liabilities.
  - S2: Macroeconomic: includes lower inflows from debt issuance and monies due; incorporate higher haircuts on banks’ counterbalancing capacity.
  - S3: Idiosyncratic: higher run-off rates to liabilities, including 10 percent run-off rates for stable deposits and 30 percent for other deposits.
  - S4: Idiosyncratic (no inflows): excludes most contractual inflows except for central banks and derivative receivables.
  - S5: Combined scenario including S2 and S3 assumptions.

### Regulatory Standards
- Counterbalancing capacity above net cash outflows under stress scenario.
- CRD IV full implementation for the LCR ratio at 100 percent.

### Reporting Format for Results
- Output presentation includes:
  - Changes in average liquidity position and counterbalancing capacity for each scenario.
  - Distribution of banks’ liquidity position for each scenario.
  - Number of banks with counterbalancing capacity below net cash outflows.
  - Banks’ post-shock net liquidity position.
  - Liquidity shortfall in terms of banking system total liabilities.

*Source: Appendix II. Banking Sector Stress Testing Matrix (STeM), cr1867 - Appendix II. Banking Sector Stress Testing Matrix (STeM).*

### Appendix IV. Implementation of 2013 FSAP Recommendations

### Appendix IV. Implementation of 2013 FSAP Recommendations

### Overall financial stability oversight
- Formalize procedures and improve information exchange between the NBB and FSMA.
  - Implemented. Cooperation arrangements between NBB and FSMA have been formalized.
- Make stress testing a routine tool within the macrofinancial policy and surveillance framework.
  - Implemented. Results of a supervisory solvency stress test on Belgian LSIs will be used as input for setting Pillar 2 Guidance (P2G) of LSIs in the Supervisory Review and Evaluation Process (SREP) from 2017 onwards. In the insurance sector, passing the low-for-long scenario of the annual stress test is a precondition for receiving an exemption from building up additional interest-rate risk reserves.
- Enhance further stress testing of insurers using a market consistent valuation framework.
  - Implemented. Stress tests are generally based on the Solvency II valuation of assets and liabilities, but also use scenarios with a substantially lower ultimate forward rate, thereby eliminating the most important deviation from market-consistent liability valuation in Solvency II.
- Complete the ongoing business model reviews for both banks and insurance companies, and develop a strategy for both sectors over the medium term.
  - Implemented. Reviews of banks’ business models have been completed and are an integral part of the supervisory approach. Insurance supervisors have identified unsustainable business lines of life insurers and have actively engaged with insurers to change business models.
- Develop an explicit conglomerates supervision framework and ensure consistent application of governance requirements across financial conglomerates.
  - Partially implemented. The new BL provides an appropriate legal framework for FC supervision but supervisory procedures need to be further developed.
- Designate the NBB as the macroprudential authority, ensuring a regular dialogue with FSMA and MoF on macroprudential and financial stability matters.
  - Implemented. The NBB has been assigned by the law of April 25, 2014, as the designated macroprudential authority. A general MOU regarding the collaboration between the NBB and the FSMA was concluded on March 14, 2013. Any macroprudential measure of the NBB requires a Royal Decree signed by the Minister of Finance (in case of Art. 458 measures deliberated in the Council of Ministers) for implementation.

### Banking regulation and supervision
- Review supervisory processes and calibrate intensity and resource allocation based on institutions’ risk profiles, particularly for smaller institutions.
  - Implemented. The establishment of the SSM revamped supervisory processes and resources allocation. SIs are supervised directly by the ECB following a harmonized and risk-based approach. LSIs are supervised by the NBB (under the ECB oversight), which considers the institutions’ risk profile to determine the appropriate level of engagement.
- Embed engagement with bank and insurance boards in the supervisory process in a systematic way.
  - Implemented. The supervisory process for banks includes quarterly meetings with members of the board. Solvency II, especially the implementation of its Own Risk and Solvency Assessment (ORSA), enabled the supervisors to engage with the insurance company boards more frequently and proactively.
- Empower the NBB to pre-approve a major acquisition by a credit institution.
  - Implemented. The new BL (Article 77) requires prior authorization of major acquisitions by the supervisory authorities.
- Maintain current liquidity regulatory regime until the Basel III Liquidity Coverage Ratio (LCR) is fully adopted and phased in at the European level.
  - Implemented. LCR has been implemented by the CRR.

### Insurance regulation and supervision
- Formulate a baseline prudential supervisory program for insurers and risk-based conduct-of-business supervision of insurers and intermediaries.
  - Implemented. Supervisory tools have been developed for line supervisors to derive the financial positions of baseline scenarios and compare them with those of peers easily.
- Align findings of insurance stress testing with contingency planning in the context of the recovery and resolution framework.
  - Partially implemented. Recovery and resolution plans have not been fully developed.
- Implement elements of Solvency II, including an ORSA regime.
  - Implemented. Solvency II, including ORSA requirements, has been implemented.
- Empower the NBB to take immediate recovery measures notwithstanding an appeal by an insurer.
  - Implemented. The NBB Organic Act has been amended to enable the NBB to take immediate recovery measures for an insurer notwithstanding an appeal by the insurer.

### Securities markets supervision
- Establish an Emerging Risk Committee at the FSMA and formalize framework for detecting and monitoring emerging risks.
  - Implemented. The FSMA established an Internal Committee for External Risks in 2015, with the role to assist in detecting, identifying and monitoring emerging risks, trends, and vulnerabilities and to guide in responding to market developments.

### Crisis management and resolution framework
- Formalize domestic coordination arrangements for the financial safety net participants via a crisis management MOU and the establishment of a cross-institutional coordination group.
  - Partially implemented. The Resolution College with relevant membership has been established. However, it is not mandated to ensure regular intra- and inter-agency financial crisis simulation exercises, and crisis preparedness more generally.
- Request recovery and resolution plans (RRPs) for all domestic systemically important firms.
  - Partially implemented. This is mandated in Articles 111 and 228 of the Banking Law. However, RRPs are not required for insurers and their establishment is still at an early stage.
- Grant NBB an explicit mandate as the resolution authority.
  - Implemented. This is laid down in Article 12ter of the NBB Organic Act.
- Improve the bank resolution toolkit by reducing ex ante procedural requirements, extending the framework to all banks and enhancing powers for special inspectors.
  - Partially implemented. Article 296 and further of the Banking Law continue to require an ex ante judicial review of key resolution decisions, which could take several days. The resolution framework now applies to all credit institutions. The powers of the special commissioner are available and divided between the ‘special inspector,’ ‘provisional managers,’ ‘provisional administrators,’ and more generally the NBB.
- Revamp the deposit guarantee scheme, establish ex ante fund and depositor preference.
  - Partially implemented. Depositor preference has been established and protocols are in place to draw on the Federal Treasury for payouts. However, deposit insurance funds are not segregated from the general government revenue.

*Appendix IV. Implementation of 2013 FSAP Recommendations (cr1867).*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1867.pdf_