## 1belea2023006

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### Executive summary — background and macrofinancial context
- FSAP conducted against a cooling real estate market, increasing interest rates, and a weaker economic environment.
- Inflationary pressures and a rapid tightening of financial conditions have weakened activity and reined in credit demand.
- GDP growth is projected to slow in 2023 and 2024, before returning to potential over the medium-term.
- Main financial stability risks:
  - Large, concentrated, and interconnected banking sector.
  - Private sector indebtedness.
  - Exposure to interest rate risk and the residential and commercial real-estate sectors.
- Strengths:
  - Strong net asset position of households.
  - Relatively low overvaluation in real estate.
  - Strong customer deposit base of banks.

### Overall financial-sector assessment and key statistics
- Financial sector remained resilient despite shocks; systemic risks are rising.
- Bank profitability and capital have surpassed pre-pandemic levels and liquidity buffers remain comfortable.
- Insurance and investment funds sectors have also weathered the pandemic well.
- Selected size and structure indicators:
  - Banks account for 50 percent of financial sector assets (220 percent of GDP).
  - Retail deposits: 60 percent insured.
  - At end-2022, banks‘ capital adequacy ratio dominated by CET1: 20.1 percent.
    - Footnote: CET1 ratio is 17.3 percent at year-end 2022.
  - Investment funds susceptible to run risks: approximately €151 billion AuM at end-2022.
  - EB assets: rose from €29 billion to €129 billion during 2022.
  - Outstanding debt securities: approximately 139 percent of GDP.
  - Market value of listed shares: about 59 percent of GDP.
  - Banking network: 30 domestic licensed credit institutions, 46 EEA and five non-EEA branches.
    - Four largest banks account for 73 percent of assets.
    - Foreign ownership in banking sector: 48 percent.
    - Ten banks with 78 percent market share identified as Significant Institutions (SIs).
    - 16 Less Significant Institutions (LSIs) with a 3 percent market share excluding Euroclear Bank (EB).
  - Top ten insurers account for nearly 70 percent of premium income.
  - Investment funds susceptible to runs: about 28 percent of GDP.
  - Mastercard Europe: operator of a systemically important payment system, accounting for 52 percent of euro-denominated cross-border payments.
  - SWIFT serves customers in 200 countries.
  - Public debt: 104.3 percent of GDP as of Dec-2022.

### Banking sector stress tests — solvency results and scenario risks
- Stress-test design: top-down covering seven SIs (about 90 percent of banking sector assets).
- Baseline results:
  - Aggregate CET1 capital ratio increases from 18.3 to 22.4 percent between 2022–26.
- Adverse scenario results:
  - Aggregate CET1 capital ratio declines by 4.3 percentage points to 14 percent at end-2026.
  - A significant but plausible two-year recession scenario: CET1 ratio declining from 18.3 percent to 14 percent.
  - Banks record weaker profits in first year and losses in last three years of adverse scenario.
  - Decline mainly due to credit impairments on mortgage lending exacerbated by property price shock; market risk losses contribute negatively but are not main drivers.
  - All banks meet minimum capital requirements under the adverse scenario; one bank does not meet its CCoB/O-SIIB.
- Additional adverse risks considered: spillovers from intensified regional conflicts, recurrent energy crisis and supply disruptions, and monetary tightening exacerbating downturn and asset price corrections.

### Sensitivity analysis — conversion of non-term to term deposits (solvency & profitability)
- Scenario design: two additional adverse scenarios converting 20 percent and 50 percent of a bank's non-term deposits to term deposits on top of the adverse macrofinancial scenario.
- 20 percent conversion:
  - CET1 ratio drops to 13.1 percent along a four-year horizon.
  - NII over total assets and ROA decline.
  - One bank fails to meet minimum capital requirements due to higher term deposit rates from year zero persisting.
- 50 percent conversion:
  - CET1 ratio decreases to 11.5 percent at end of year four.
  - One bank fails to meet minimum capital requirements.
- Mechanism and implication:
  - Higher funding costs from increased term deposit rates reduce profitability and capital accumulation despite a surge in NII under the adverse scenario.
  - Changes in depositor behavior and ALM shifts materially affect capital adequacy and profitability; incorporate into stress testing.

### Liquidity stress testing and solvency–liquidity interaction
- Liquidity stress tests (LCR, cash-flow analysis, counterbalancing capacity):
  - Initial LCR positions generally enable banks to withstand shocks; system-wide LCR falls below regulatory threshold when Basel coefficients are doubled.
  - Increasing Basel coefficients by 50 percent raises number of banks with LCR below 100 percent.
  - System maintains adequate counterbalancing capacity even under extreme scenarios; banks are well protected against market-induced stress but some vulnerable to deposit outflows.
  - Two of four banks analyzed face early dollar liquidity shortages; these had lower initial counterbalancing capacity as a share of total assets.
  - Policy recommendations: banks with lower buffers should bolster HQLA; regulators to monitor indicators beyond LCR, conduct regular assessments, develop ALM monitoring, issue liquidity management guidance, and review contingency plans.
- Solvency–liquidity interaction (forced HTM liquidation):
  - HTM constitutes 71 percent of total debt securities in banking sector.
  - Exercise assumes exhaustion of tradable counterbalancing capacity and no ECB liquidity; forced HTM sales realize devaluation from book value and fire-sale haircut.
  - Devaluation losses partly mitigated by RWA reductions and provision releases.
  - Result: forced liquidation reduces CET1 via lower profits but sector-level CET1 remains robust and regulatory capital requirements upheld; impact manageable and diagnostic for liquidity-stress effects on solvency.

### Interconnectedness, contagion, and cross-border vulnerability
- Domestic interbank contagion:
  - Low direct contagion risk: failure of a single domestic bank would not trigger another bank’s failure.
  - No bank falls below regulatory minimum after shocks to interbank exposures.
  - Some institutions contribute disproportionately to vulnerability indexes for certain banks.
- Cross-border contagion:
  - Belgium highly vulnerable to external shock: defaults of exposures in Czech Republic, Netherlands, France, Luxembourg, and the UK would significantly adverse affect Belgian banks' capital.
  - Impact from default of any single foreign financial institution expected to be marginal due to limited cross-border exposure to financial sectors.
- Second-round effects via crossholdings:
  - Losses from crossholdings limited.
  - Decline in equity-to-asset ratio:
    - Banks: from 426.7 bps to 426.6 bps.
    - Insurers: from 591.3 bps to 577.7 bps.
  - Insurers experience relatively larger declines due to revaluation losses on bank-issued debt.
  - Contagion through funds’ shares is weak; funds have minimal exposure to bank-issued debt although insurers hold a relatively large proportion of fund shares.

### NBFI, insurance, and investment fund stress testing and resilience
- Insurance solvency stress test:
  - Median solvency ratio: pre-stress 192 percent; after stress 113 percent; after reactive management actions 142 percent.
  - Insurers’ eligible own funds decreased by 43 percent during stress.
  - Tier 1 capital generally sufficient to cover SCR, but tiering limits constrain reactive management options.
  - Real estate exposures (~10 percent of insurers’ balance sheets) are a significant driver of solvency declines; NBB should monitor real estate exposures and reallocations.
- Insurance liquidity stress test:
  - Low derivative exposures make sector largely resilient to margin calls after steep rate hikes.
  - Cash buffers vary; some insurers could be stretched under narrow cash definitions.
  - Insurers have access to repo facilities and money market funds but these may be unavailable in crises; generally sufficient liquid funds but high dispersion across firms.
- Investment funds liquidity analysis:
  - Sector overall can withstand severe but plausible redemption shocks.
  - Less than 2 percent of funds analyzed (6.7 percent of NAV) would not have enough highly liquid assets to meet redemptions in stress and present liquidity shortfalls.
  - Bond, equity and mixed funds more vulnerable to volatility shocks from other European and global markets than to domestic spillovers.
  - Market-based contagion among domestic funds limited to equity and mixed vehicles, with stronger co-movements and inward spillovers from foreign markets.
- Recommendation: FSMA should develop a stress testing framework and integrate results into NBB’s systemic risk assessment.

### Financial sector oversight, macroprudential governance, and progress since 2018 FSAP
- Progress since 2018 FSAP notable in oversight framework; pending items remain.
- Key governance recommendations:
  - Strengthen NBB’s ability to set macroprudential policy at national level by removing need for government approval; align NBB powers with financial stability mandate and give full discretion over capital- and borrower-based instruments in medium term, retaining consultative role for MoF.
  - Near-term: decisions on capital-based CRD/CRR measures should be sole prerogative of NBB at national level, removing requirement for government approval.
  - Scope for NBB to improve bank corporate governance, monitor banks’ internal capital targets, ensure adequate supervisory staffing, harmonize internal processes across departments.
  - Consumer protection and conduct information should be collected structurally and feed into the SREP.
  - Strengthen regulatory and supervisory framework for insurance: monitor quantity and quality of mortgage loans and issue guidance on prudent valuation.
  - Finalize legal framework for public-private partnership for natural catastrophe risk to strengthen climate resiliency.
  - Enhance conduct supervision by increasing reporting requirements and publishing conduct data.
  - Euroclear Bank (EB) to improve IT and information security risk management and testing of business continuity and default procedures.
  - Increase resources for AML/CFT supervision and strengthen sanctions framework.

### Crisis management, resolution, Emergency Liquidity Assistance (ELA), and Deposit Insurance System (DIS)
- Resolution and crisis preparedness: progress since 2018 FSAP is good but further improvements needed.
- Recommendations and actions:
  - Finalize Rules of Procedure of NBB Resolution Board and national resolution handbook, with attention to resolution tools not part of preferred strategies.
  - Reinforce ELA framework for banks in resolution; seek cooperation arrangements with other national central banks for cross-border banking groups; clarify potential ELA provision to NBFIs.
  - Strengthen NBB internal coordination and cooperation for crisis management; establish interdepartmental cooperation mechanism and bilateral cooperation agreements between Resolution Unit and Financial Stability and Supervisory Departments.
  - Approve draft law to segregate DIS fund from government funds and increase its target size; operationalize public backstop.
  - Once segregated, align DIS fund investment policy with best international practices and operationalize the paybox plus mandate.
  - Ensure operational readiness to meet 7 working days for pay-outs and test with granularity.
- DIS enhancement steps (Table 1, item 20):
  - Ensure operational readiness for pay-outs in 7 working days; segregate DIS fund; increase target level; operationalize public backstop; develop investment policy; begin operationalization of paybox plus mandate.

### Selected FSAP key recommendations (addressees and timing preserved; partial selection)
- 1. Strengthen NBB’s Stress Testing Framework by (i) integrating individual models, (ii) incorporating IFRS 9 Approach into Credit Risk Modeling, and (iii) adopting advanced analytical methods to monitor ALM risks. ¶23, 26 — Addressee: NBB — Timing: MT
- 2. NBB and FSMA to establish formal data sharing on investment funds’ holdings; FSMA to develop stress test framework integrated into NBB’s systemic risk assessment. ¶33 — Addressees: FSMA, NBB — Timing: C, MT
- 3. Increase insurers’ resilience: engage industry to reduce dependence on lower tier capital and implement liquidity stress tests and scenario analysis. ¶30 — Addressee: NBB — Timing: MT, NT
- 4. Medium-term: give NBB full discretion over activation/calibration of all capital- and borrower-based instruments without government approval; Near-term: capital-based CRD/CRR measures at sole discretion of NBB. ¶37, 38 — Addressee: Government — Timing: MT, NT
- 7. Strengthen banks’ corporate governance framework, especially supervisory function of the board. ¶44 — Addressee: NBB — Timing: NT
- 17. Finalize Rules of Procedure of NBB Resolution Board and national resolution handbook, including non-preferred resolution tools. ¶58, 59 — Addressee: NBB — Timing: I
- 20. Enhance DIS: operational readiness for 7 working days pay-outs; segregate DIS fund; increase target and operationalize public backstop; develop investment policy; operationalize paybox plus. ¶61 — Addressee: Guarantee Fund — Timing: I, I, NT

### AML/CFT and financial integrity — implementation priorities
- Immediate priorities:
  - Amend regulatory framework to make NBB a member of the national committee on Terrorist Financing. ¶57 — Relevant ministers — Timing: I
  - NBB to increase resources for AML/CFT supervision, enhance sanctions framework and its implementation, and continue enhanced supervision over payment institutions. ¶57 — NBB — Timing: I
- Observations:
  - NBB could only meet 53 percent of the on-site supervisory plan in 2022; resources remain deficient.
  - Sanctions should be effective, proportionate, and deterrent.

### Macrofinancial projections, scenarios and selected indicators
- Table 3 selected projections (percent change unless otherwise indicated):
  - Real GDP: 2020 -5.36, 2021 6.9, 2022 3.0, 2023 1.4, 2024 1.0, 2025 1.2, 2026 1.2, 2027 1.2, 2028 1.3
  - Unemployment rate (percent): 2020 5.6, 2021 6.3, 2022 5.6, 2023 5.6, 2024 5.6, 2025 5.5, 2026 5.5, 2027 5.4, 2028 5.4
  - Consumer prices: 2020 0.4, 2021 3.2, 2022 10.3, 2023 2.5, 2024 4.4, 2025 2.0, 2026 1.8, 2027 1.8, 2028 2.0
  - General government debt (percent of GDP): 2020 111.8, 2021 108.0, 2022 104.3, 2023 105.5, 2024 104.7, 2025 106.4, 2026 108.6, 2027 111.1, 2028 113.4
  - Nominal GDP (in billions of euros): 2020 460., 2021 7507.9, 2022 554.0, 2023 583.7, 2024 609.1, 2025 628.8, 2026 648.0, 2027 667.7, 2028 689.6
- Table 6 macroeconomic scenarios (baseline vs stress) — selected series:
  - Real GDP growth (percentage) Baseline: 2022 3.1; 2023 0.7; 2024 1.1; 2025 1.2; 2026 1.2; 2027 1.2
  - Real GDP growth (percentage) Stress: 2022 3.1; 2023 -3.8; 2024 -2.2; 2025 1.1; 2026 4.4; 2027 1.9
  - Unemployment (percentage) Baseline: 2022 5.5; 2023 6.0; 2024 6.0; 2025 5.6; 2026 5.5; 2027 5.5
  - Unemployment (percentage) Stress: 2022 5.5; 2023 6.4; 2024 9.1; 2025 9.3; 2026 7.1; 2027 5.0
  - Inflation Baseline: 2022 10.3; 2023 4.7; 2024 2.1; 2025 1.7; 2026 1.8; 2027 1.9
  - Inflation Stress: 2022 10.3; 2023 11.4; 2024 3.9; 2025 1.1; 2026 2.6; 2027 -0.2
  - House Price Index (2022=100) Baseline: 2022 100.0; 2023 101.6; 2024 101.4; 2025 99.9; 2026 98.3; 2027 97.1
  - House Price Index (2022=100) Stress: 2022 100.0; 2023 75.6; 2024 71.0; 2025 75.8; 2026 81.7; 2027 84.6
  - Sovereign bond yields (Stress 2023 vs Baseline 2023): 10 year German Sovereign Bond Yield Stress 2023 5.4; Baseline 2023 2.2. Long Term Belgian Sovereign Bond Yield Stress 2023 6.1; Baseline 2023 2.9. Short Term Belgian Sovereign Bond Yield Stress 2023 6.2; Baseline 2023 3.2.

### Supervisory framework, NBB positioning, and authorities’ views
- NBB’s framework for bank supervision well embedded in SSM; FSMA has a well-developed product and conduct supervision framework.
- Areas for supervisory enhancement:
  - Clarify and strengthen supervisory expectations for non-executive boards and corporate governance.
  - Harmonize internal decision-making processes across departments and ensure adequate supervisory staffing for LSIs.
  - Collect consumer protection and conduct data structurally for SREP integration.
  - Strengthen oversight of insurers (emerging risks, Solvency II Review, IRRD, DORA) and assess resource needs.
  - Euroclear Bank (EB) observations: observance of most PFMIs but critical deficiencies in IT/cyber resilience, testing, and transparency of indirect participant clients.
- Authorities’ stance:
  - NBB broadly agreed with recommendation to grant it more macroprudential powers without government approval and noted use of outreach and prudential expectations.
  - Authorities welcomed FSAP engagement, agreed on key risks and strengths, and broadly agreed with systemic risk assessment and recommendations.
  - Authorities prioritized passage of draft DIS Law and operational steps for DIS fiscal backstop and investment policy.

### Implementation status highlights since FSAP 2018 (selected)
- Systemic risk analysis: incorporate bank stress testing into systemic risk toolkit: F.
- Extend horizon of insurance stress tests: P.
- Intensify monitoring of insurers’ mortgage loan portfolios: F.
- Develop shadow banking monitoring framework (with FSMA): F.
- Enhance coverage and quality of CRE data (NBB): F/P.
- Approve macroprudential measures proposed by NBB (MoF): N/P (institutional framework unchanged; MoF still approves measures).
- Strengthen DIS pay-out readiness to seven days (target 2019): N (not implemented by 2019; target by January 2024 noted).
- Segregating Guarantee Fund from government funds: P.

*Source: EXECUTIVE SUMMARY (Belgium FSAP) — IMF PDF content provided.*

### EXECUTIVE SUMMARY _________________________________________________________________________ 8

### EXECUTIVE SUMMARY

### Background and Macrofinancial Context
- The FSAP was conducted against the backdrop of a cooling real estate market, increasing interest rates, and a weaker economic environment.
- Inflationary pressures and a rapid tightening of financial conditions have weakened activity and reined in credit demand.
- GDP growth is projected to slow in 2023 and 2024, before returning to potential over the medium-term.

### Overall Financial-Sector Assessment
- Despite a series of shocks, the financial sector has remained resilient, but systemic risks are rising.
- Bank profitability and capital have surpassed pre-pandemic levels and liquidity buffers remain comfortable.
- The insurance and investment funds sectors have also weathered the pandemic well.
- Main financial stability risks:
  - Large, concentrated, and interconnected banking sector.
  - Private sector indebtedness.
  - Exposure to interest rate risk and the residential and commercial real-estate sectors.
- Strengths:
  - Strong net asset position of households.
  - Relatively low overvaluation in real estate.
  - Strong customer deposit base of banks.

### Banking Sector Stress Tests and Risks
- Bank solvency stress tests indicate that Significant Institutions (SIs) remain resilient under severe adverse conditions.
- Adverse scenario key risks include:
  - Spillovers from an intensification of regional conflicts.
  - Recurrent energy crisis and supply disruptions.
  - Monetary tightening that exacerbates an economic downturn and asset price corrections.
- A significant but plausible scenario: an initial two-year recession resulting in the CET1 ratio declining from 18.3 percent to 14 percent.
- Despite variations, all banks would satisfy the minimum capital criteria under the adverse scenario.

### Liquidity and Interconnectedness
- Liquidity stress tests reveal overall comfortable liquidity levels, but some banks need reinforcement.
- Banks show vulnerability to retail and wholesale deposits stress but are protected against market-driven stress.
- Heavy reliance on deposits protected by the deposit guarantee scheme noted.
- Simulations indicate banks can endure liquidity stress-driven asset sales, keeping CET1 ratios between 15 percent and 15.3 percent.
- Interconnectedness analyses:
  - Domestic interlinkages are relatively modest.
  - Vulnerability to an external shock is high.

### Stress-Testing Framework Enhancements (Banking)
- Scope for further improvements to the authorities’ stress testing framework:
  - (i) Integrate individual models within the stress testing framework to offer a comprehensive impact analysis on banks' profitability and capital adequacy.
  - (ii) Incorporate IFRS 9 Approach into Credit Risk Modeling.
  - (iii) Continue to adopt advanced analytical methods to better monitor ALM risks.

### NBFI, Insurance, and Investment Funds
- NBFI are resilient against adverse shocks.
- Insurance solvency stress test: industry generally resilient to the severe scenario, although improvements in the quality of capital are desirable.
  - Real estate exposures are a significant driver of the drop in insurers’ solvency ratio.
  - Insurers’ liquid assets are sufficient to withstand significant redemptions, but results show high levels of dispersion.
- Investment fund liquidity stress tests: sector largely would be able to withstand severe but plausible redemption shocks.
- Recommendation: FSMA should develop a stress testing framework with the results feeding into the NBB’s systemic risk assessment.

### Financial Sector Oversight and Progress Since 2018 FSAP
- Authorities achieved notable progress since the 2018 FSAP, especially on the financial sector oversight framework, although some recommendations remain pending.
- Pending areas include strengthening the NBB’s macroprudential powers, regulatory and supervisory powers on SWIFT, and aspects of bank resolution and intra/interagency crisis readiness.
- Specific oversight observations and recommendations:
  - Strengthen the NBB’s ability to set macroprudential policy at the national level by removing the need for government approval; align NBB powers with its financial stability mandate and give full discretion over capital- and borrower-based instruments in the medium term, while retaining a consultative role for the Ministry of Finance.
  - Near-term: decisions on capital-based CRD/CRR measures should be the sole prerogative of the NBB at the national level, removing the requirement for government approval.
  - Scope for the NBB to further improve banks’ corporate governance, monitor banks’ internal capital targets, ensure adequate supervisory staffing, and harmonize internal processes across departments.
  - Consumer protection and conduct information should be collected more structurally and feed into the SREP.
  - Strengthen regulatory and supervisory framework for insurance: closely monitor quantity and quality of mortgage loans and issue guidance on prudent valuation.
  - Finalize legal framework for public-private partnerships for natural catastrophe risk to strengthen climate resiliency.
  - Enhance conduct of business supervision by increasing reporting requirements and publishing conduct data.
  - Euroclear Bank should continue to improve management of IT and information security risks.
  - Increase resources for AML/CFT supervision and strengthen the sanctions framework.

### Crisis Management, Resolution, and Deposit Insurance
- Progress since 2018 FSAP on resolution and crisis preparedness is good, but further improvements are needed.
- Recommendations and actions:
  - Finalize Rules of Procedure of the NBB Resolution Board and the national resolution handbook, with attention to resolution tools not part of preferred strategies.
  - Reinforce the ELA framework for banks in resolution, seek cooperation arrangements with other national central banks for cross-border banking groups, and clarify potential ELA provision to NBFIs.
  - Strengthen NBB’s internal coordination and cooperation for crisis management.
  - Approve draft law to segregate the DIS fund from government funds and increase its target size; operationalize the public backstop.
  - Once segregated, align DIS fund investment policy with best international practices.
  - Ensure operational readiness to meet 7 working days for pay-outs and operationalize the paybox plus mandate.

### FSAP Key Recommendations (selected from Table 1; addressees and timing preserved)
- 1. Further strengthen the NBB’s Stress Testing Framework by (i) integrating individual models within the stress testing framework to offer a comprehensive impact analysis on banks' profitability and capital adequacy, (ii) incorporating the IFRS 9 Approach into Credit Risk Modeling and, (iii) continuing to adopt advanced analytical methods to better monitor ALM risks. ¶23, 26 — Addressee: NBB — Timing: MT
- 2. The NBB and the FSMA to establish a formal agreement for sharing data on investment funds’ portfolio holdings and supervisory data. The FSMA to develop and adapt a stress test framework to assess structural vulnerabilities and risks in the investment funds sector, and to be integrated into the NBB’s systemic risk assessment. ¶33 — Addressees: FSMA, NBB — Timing: C, MT
- 3. Increase insurers’ resilience against macro-financial shocks, by i) engaging with industry to reduce dependence of insurers on lower tier capital and ii) implementing liquidity stress tests and scenario analysis to identify potential sources of stress. ¶30 — Addressee: NBB — Timing: MT, NT
- 4. In the medium-term, align the powers of the NBB to set macroprudential policy at the national level with its financial stability mandate by giving it full discretion over the activation and calibration of all capital- and borrower-based instruments, without the need for government approval. In the near-term, the activation and calibration of capital-based measures under CRD/CRR should be at the sole discretion of the NBB at the national level, without the need for government approval. ¶37, 38 — Addressee: Government — Timing: MT, NT
- 5. For the activation, recalibration and extension of macroprudential policy instruments requiring government intervention, strengthen accountability by publishing the factors weighing on policy considerations and decisions. ¶39 — Addressees: NBB, Government — Timing: NT
- 6. Strengthen the NBB’s systemic risk assessment framework for setting macroprudential policy by closing data gaps and ensuring stronger integration of data and quantitative tools with instrument design and selection. ¶41 — Addressee: NBB — Timing: MT
- 7. Strengthen banks’ corporate governance framework and expectations, in particular the supervisory function of the board. ¶44 — Addressee: NBB — Timing: NT
- 8. Harmonize, taking into account best practices, and ensure risk sensitivity of internal supervisory decision-making processes across departments. ¶45 — Addressee: NBB — Timing: NT
- 9. Maintain adequate prudential supervisory staffing for LSI supervision, structurally collect consumer protection and conduct information to feed into the SREP and monitor banks’ own capital targets systematically. ¶45 — Addressee: NBB — Timing: NT
- 10. Finalise the legal framework of the natural catastrophe public-private partnership to enhance predictability of the natural disaster related insurance cover. ¶48 — Addressee: MoF — Timing: NT
- 11. Provide guidance for the consistent valuation of mortgage loans. ¶50 — Addressee: NBB — Timing: MT
- 12. Contact third country supervisors to assess the basis for sharing and collecting information. ¶47 — Addressee: NBB — Timing: NT
- 13. Engage Government to obtain legal powers to introduce regular complaints reporting by insurers. ¶50 — Addressees: Government/FSMA — Timing: I
- 14. EB should undertake substantial efforts to continue to improve the comprehensiveness and sufficiency of its IT and information security risk management, including cyber security risk, and more clearly and thoroughly defining and steering the management of these risks at the level of the Board as a top priority. ¶52 — Addressee: EB — Timing: NT
- 15. Beyond relying on direct participant disclosure, EB should develop capacity for increasing the transparency with respect to the business of its direct participants’ clients. ¶53 — Addressee: EB — Timing: NT
- 16. EB should put in place more robust testing of procedures related to business continuity and participant default procedures, including through simulation exercises. ¶54 — Addressee: EB — Timing: NT
- 17. Finalize the Rules of Procedure of the NBB Resolution Board, giving also attention to its capacity as a crisis management committee. Finalize the national resolution handbook, with attention also to the resolution tools that are not part of the preferred resolution strategies, as well as the resolution powers. ¶58, 59 — Addressee: NBB — Timing: I
- 18. Strengthen NBB’s internal coordination and cooperation for crisis management by establishing an interdepartmental cooperation mechanism with representatives from relevant departments at technical level for the NBB and prepare two bilateral cooperation agreements between the Resolution Unit and the Financial Stability and Supervisory Departments respectively. ¶58 — Addressee: NBB — Timing: I
- 19. Enhance the ELA framework by: i) Seeking cooperation arrangements with other relevant National Central Banks for ELA involving a cross-border banking group; ii) Developing policies to assess the prospective solvency and document the lines of action and responsibility of each actor in the event of ELA in resolution, subject to a credible resolution strategy; and iii) Preparing internal planning and documenting how the NBB would consider ELA to NBFIs. ¶60 — Addressee: NBB — Timing: NT, I, NT
- 20. Enhance the Deposit Insurance System by: i) Ensuring operational readiness to meet the target of 7 working days for pay-outs; ii) segregating the DIS fund from the national budget, increasing its target level and operationalizing the public backstop. Once segregated, develop an investment policy for the DIS Fund aligned with best international practices; and iii) start working on the operationalization of the paybox plus mandate. ¶61 — Addressee: Guarantee Fund — Timing: I, I, NT

*Source: EXECUTIVE SUMMARY (Belgium FSAP) — IMF PDF content provided.*

### 21. Amend regulatory framework to make the NBB a member of the national committee on

### 21. Amend regulatory framework to make the NBB a member of the national committee on Terrorist Financing

### Key recommendations (items 21–22)
- 21. Amend regulatory framework to make the NBB a member of the national committee on Terrorist Financing. ¶57  
  - Relevant ministers  
  - Timing: I
- 22. NBB to increase resources for AML/CFT supervision, enhance the sanctions framework and its implementation, and continue to exercise enhanced supervision over the payment institutions sector. ¶57  
  - NBB  
  - Timing: I  
  - Note: Timing codes: C = Continuous; I = Immediate (within one year); NT = Near Term (within 1-3 years); MT = Medium Term (within 3– 5 years).

### Context and macrofinancial developments
- Economic activity has slowed; core inflation remains high; fiscal outlook is challenging.
- GDP growth is projected to slow in 2023 and 2024, before returning to potential over the medium-term.
- Inflationary pressures, rapidly tightening financial conditions, waning confidence, and elevated uncertainty have weakened activity and reined in credit demand.
- Wage and benefit indexation, a robust labor market, and government support to households and firms have provided a boost.
- High deficits and rising government debt challenge fiscal sustainability.

### Financial sector landscape — structure and size
- Banks account for 50 percent of financial sector assets (220 percent of GDP).
- Retail deposits: 60 percent insured; retail deposits are the main funding source of banks.
- At end-2022, banks‘ capital adequacy ratio, dominated by CET1, stood at 20.1 percent.
  - Footnote: CET1 ratio is 17.3 percent at year-end 2022.
- Investment funds: assets under management (AuM) of Belgian investment funds susceptible to run risks were approximately €151 billion at end-2022.
- EB assets have risen from €29 billion to €129 billion during 2022, reflecting the accumulation of frozen Russian assets on its balance sheet.
- Outstanding debt securities (mostly government) are approximately 139 percent of GDP.
- Market value of listed shares is about 59 percent of GDP.
- Banks: 30 domestic licensed credit institutions, 46 EEA and five non-EEA branches in Belgium.
  - The four largest banks account for 73 percent of assets.
  - Foreign ownership in the banking sector is 48 percent.
  - Ten banks with 78 percent market share are identified as Significant Institutions (SIs), supervised by the Single Supervisory mechanism (SSM).
  - 16 Less Significant Institutions (LSIs), with a 3 percent market share excluding Euroclear Bank (EB), are supervised by the NBB with ECB oversight.
- Large banks offer insurance products through subsidiaries or within-group insurance companies, with a market share of 17 percent.
- Top ten insurers account for nearly 70 percent of premium income.
- Investment funds with characteristics that make them susceptible to runs have assets of about 28 percent of GDP.
- Mastercard Europe is the operator of a systemically important payment system, accounting for 52 percent of euro-denominated cross-border payments.
- SWIFT provides financial messaging services to customers in 200 countries.

### Financial sector vulnerabilities and risks
- Rapidly rising interest rates may pose challenges: assets reprice slowly given long-term fixed rate mortgages; deposit rate increases modest so far improving net interest margins.
- Issuance of a one-year, favorably taxed, state bond in August 2023 raised €22 billion, largely originating from the about €300 billion in household savings deposits.
- Debt securities constitute 10 percent of total assets; unrealized losses from HTM bonds correspond to 2 percentage points of the CET1 ratio at end-2022.
- Household debt has risen from less than 40 percent to more than 60 percent of GDP over the past two decades.
  - Residential mortgages: a fifth of total bank assets, 55 percent of GDP.
  - Insurers hold mortgages accounting for 5 percent of investments.
  - According to the 2021 HFCS: about 16 percent of outstanding mortgage loans have an LTV ratio above 80 percent; nearly 3 percent of borrowers, accounting for roughly 7 percent of mortgage volumes, spend more than half of their income on debt service; more than a fifth of households, accounting for around a fourth of outstanding mortgages, lack the liquidity for more than six months of debt service.
- Corporate (NFC) debt: aggregate NFC debt at 136 percent of GDP; company-to-company lending accounts for nearly 60 percent of total.
- CRE exposure: Belgian banks’ loan portfolio is among the most exposed to CRE collateralized NFC lending at 15 percent of GDP or more than a fourth of total NFC credit.
  - Nearly three quarters of outstanding CRE exposures show LTV ratios of less than 60 percent; over a tenth maintain LTV above 80 percent.
  - Among insurers, CRE accounts for 12 percent of the investment portfolio.
- Cross-border exposures: foreign claims of 50 percent of GDP; exposures concentrated in the Czech Republic, the U.K., the Netherlands, France, and Slovakia (over 60 percent).
- Public debt: 104.3 percent of GDP as of Dec-2022.
- EB is highly interconnected and globally systemic; blocking of foreign assets and Russian securities at EB has raised litigation, operational, and reputational risks.
- Cyber risks heightened in context of the war in Ukraine; Centre of Cybersecurity Belgium (CCB) established in 2014; NIS law in effect since 2019 covering finance and digital infrastructure.
- NBB Climate Hub: focuses on prudential policy and supervision of climate and environmental risks, research, statistical indicators, ESG integration; requires financial institutions to report information related to energy efficiency of real-estate exposures.

### Systemic risk assessment and stress-testing
- Stress test exercises used baseline and adverse macroeconomic scenarios aligned with April 2023 World Economic Outlook projections; adverse scenario reflects main risks including Belgium-specific layers.
- Banking sector solvency stress test: top-down exercise covering all seven SIs accounting for 90 percent of banking sector assets; includes credit and market risks (equity, FX, commodities, real-estate, interest rate risk) and income projections.
- Results:
  - Baseline: aggregate CET1 capital ratio increases from 18.3 to 22.4 percent between 2022–26.
  - Adverse: aggregate CET1 capital ratio declines by 4.3 percentage points to 14 percent at end-2026.
  - Banks record weaker profits in the first year on average, and losses in the last three years of the scenario.
  - The decline in the capital ratio is mainly due to credit impairments on mortgage lending, exacerbated by a considerable shock in property prices.
  - Market risk losses contribute negatively but are not the main drivers.
  - All banks meet the minimum capital requirements and one bank does not meet its CCoB/O-SIIB.

### Implementation priorities related to AML/CFT and supervision (connected to recommendation 22)
- Increase NBB resources for AML/CFT supervision.
- Enhance the sanctions framework and its implementation.
- Continue enhanced supervision over the payment institutions sector.
- Immediate timing for action: I (within one year).

*Source: IMF staff compilation from the FSAP background and assessment (selected excerpts).*

### 22.      Sensitivity analysis shows that a significant increase in conversion of bank non-term

### 1belea2023006 - 22.      Sensitivity analysis shows that a significant increase in conversion of bank non-term

### Sensitivity analysis: conversion of non-term to term deposits — solvency and profitability
- Scenario design:
  - Two additional adverse scenarios on top of the adverse macrofinancial scenario: conversion of 20 percent and 50 percent of a bank's non-term deposits to term deposits.
- Key findings:
  - 20 percent conversion scenario:
    - CET1 ratio declines along a four-year horizon, dropping to 13.1 percent.
    - NII over total assets and Return on Assets (ROA) follow a downward trend.
    - One bank fails to meet minimum capital requirements; shortfall attributed to higher term deposit rates in year zero that persist throughout the stress period.
  - 50 percent conversion scenario:
    - CET1 ratio decreases more markedly to 11.5 percent at the end of year four.
    - One bank also fails to meet minimum capital requirements under this scenario.
- Mechanism:
  - Higher funding costs from increased term deposit rates (noted already in year zero) reduce profitability and capital accumulation despite an overall surge in NII under the adverse scenario.
- Implication:
  - Changes in depositor behavior and shifts in banks' ALM structures materially affect capital adequacy and profitability; such risks should be incorporated into stress testing.

### Liquidity: LCR, cash flow analysis, and counterbalancing capacity
- LCR stress-test insights:
  - Initial LCR positions generally enable banks to withstand shocks across scenarios.
  - System-wide LCR falls below the regulatory threshold when Basel coefficients are doubled.
  - Increasing Basel coefficients by 50 percent leads to an increasing number of banks with LCR below 100 percent.
- Cash flow analysis:
  - Even under the most extreme scenario, the system maintains an adequate level of counterbalancing capacity.
  - Consistent with LCR results, banks are well protected against market-induced stress but some are vulnerable to deposit outflows.
  - Two of four banks analyzed face dollar liquidity shortages very early; the other two have sufficient counterbalancing capacity.
  - The two banks facing liquidity shortages had lower initial counterbalancing capacity as a proportion of total assets.
- Policy recommendations:
  - Banks with lower buffers should bolster their stock of high-quality liquid assets.
  - Regulators might enhance supervision and monitoring of liquidity risks by:
    - closely monitoring risk indicators other than LCR,
    - conducting regular assessments,
    - continuing to develop analytical methods to better monitor ALM risks,
    - issuing guidelines to encourage sound liquidity management practices,
    - conducting regular reviews of banks’ liquidity risk management frameworks and contingency plans.

### Solvency–liquidity interaction
- Hypothesis and method:
  - Under acute liquidity stress, banks may be forced to sell assets from HTM portfolios (HTM constitutes 71 percent of total debt securities in the banking sector) at market value, realizing devaluation from book value.
  - Exercise assumes banks exhaust tradable counterbalancing capacity and cannot use collateral or procure liquidity from the ECB.
  - Devaluation losses are partly mitigated by reductions in RWAs and release of credit provisions due to liquidation.
- Result:
  - Forced liquidation reduces CET1 ratios via lower profits, but sector-level CET1 ratios remain robust and regulatory capital requirements are upheld.
  - The impact on solvency from forced HTM liquidation is manageable; exercise serves as a supplementary diagnostic of liquidity stress effects on solvency.

### Insurance sector resilience
- Solvency stress-test outcomes:
  - Median solvency ratio:
    - Pre-stress: 192 percent.
    - After stress: 113 percent.
    - After reactive management actions: 142 percent.
  - Insurers’ eligible own funds decreased by 43 percent during stress.
  - Tier 1 capital generally sufficient to cover the SCR, but tiering limits can constrain reactive management options in stress.
- Concentration and real estate exposures:
  - Real estate investments represent about ten percent of Belgian insurers’ balance sheets (direct property, real estate funds, loans and mortgages, bonds and equity of real estate-related corporations).
  - For several insurers, real estate-related corporations are a significant share of total equity exposure and real estate funds a high share of fund investments.
  - Recommendation: The NBB should monitor insurers’ real estate exposures and any reallocation of real estate investments.
- Liquidity stress-test outcomes:
  - Low derivative exposures for most insurers make the sector largely resilient to margin calls following steep interest rate hikes.
  - Cash buffers vary significantly and can be stretched for some insurers under a narrow definition of cash.
  - Insurers have access to repo facilities and money market funds, but these may be unavailable in a crisis.
  - Generally sufficient liquid funds to withstand significant redemptions, but high dispersion across firms.

### Investment funds
- Redemption and liquidity resilience:
  - The Belgian investment funds sector would be able to withstand severe but plausible redemption shocks overall.
  - Less than 2 percent of the investment funds analyzed (6.7 percent of NAV) would not have enough highly liquid assets to meet redemption requests in a market stress situation and thus present liquidity shortfalls.
- Market interconnectedness:
  - Bond, equity and mixed funds are more vulnerable to volatility shocks originating in other European and global markets than to domestic-market spillovers.
  - Market-based contagion among domestic funds is limited to equity funds and mixed vehicles, which exhibit stronger co-movements and inward spillovers from foreign markets.

### Interconnectedness and contagion analysis
- Domestic interbank exposures:
  - Analysis indicates low direct contagion risk: the failure of a single domestic bank would not trigger another bank’s failure.
  - No bank falls below its regulatory minimum capital requirement after shocks to one or several of its interbank exposures.
  - Some institutions contribute disproportionately to higher vulnerability indexes for certain banks.
- Cross-border contagion:
  - Belgium is highly vulnerable to contagion from an external shock: defaults of all exposures in the Czech Republic, Netherlands, France, Luxembourg, and the UK (aside from the US) would have a significant adverse impact on Belgian banks' capital.
  - However, the impact from a default in any single financial institution is expected to be marginal due to limited cross-border exposure to the financial sectors.
- Second-round effects via crossholdings:
  - Losses from crossholdings are limited.
  - Decline in equity-to-asset ratio:
    - Banks: from 426.7 bps to 426.6 bps.
    - Insurers: from 591.3 bps to 577.7 bps.
  - Insurers see relatively larger declines due to revaluation losses from holding bank-issued debt.
  - Contagion through funds’ shares is weak because funds have minimal exposure to bank-issued debt, despite insurers holding a relatively large proportion of fund shares.

### Macroprudential policy recommendations and assessments
- Institutional powers and governance:
  - Reiteration of 2018 FSAP recommendation: grant the NBB full power to set macroprudential policy without government approval.
  - Current framework: government retains powers (notably over borrower-based measures), weakening NBB’s macroprudential mandate.
  - Near-term recommendation: grant the NBB power to set CRD/CRR tools at the national level without government approval.
- Communication and transparency:
  - NBB communication on CCyB and OSII buffers is strong (quarterly for CCyB, annual for OSII), including when no activation or changes occur.
  - For other tools, communication could improve; establish a formal protocol for communicating all macroprudential decisions, including inaction, and publish factors influencing government decisions with financial stability impact.
- Framework improvements:
  - Strengthen integration of data and quantitative tools with instrument design and selection; link high-level risk identification to scenario analysis and stress testing to guide instrument selection and calibration.
  - Expand data sources (including for CRE) and more closely integrate scenario analysis with stress testing of financial intermediaries.
- Current toolkit use and recent recalibration:
  - NBB has used a sectoral systemic risk buffer (SSyRB) and prudential expectations on borrower-based measures for banks and insurers.
  - Recent recalibration: increase in the CCyB in two steps by October 2024 and lowering of the SSyRB yields a net €1.6 billion increase in the macroprudential capital cushions of banks.
  - NBB also encouraged lengthening mortgage maturities to ease household debt-service burdens.
  - NBB has imposed O-SII buffers on eight banks and can input to the SSM on strategic decisions of SIs with potential financial stability impact.

*Source: IMF staff calculations.*

### 43.      NBB’s framework for bank supervision is well embedded in the SSM framework and

### NBB’s framework for bank supervision is well embedded in the SSM framework and

### Bank supervision: structure and effectiveness
- NBB’s framework for bank supervision is well embedded in the SSM framework and the FSMA has a well-developed framework for product and conduct supervision of banks.
- The NBB has well-established processes for supervisory planning and on- and offsite supervision of LSIs and TCBs.
- NBB has provided evidence of addressing supervisory concerns effectively, including realizing an orderly wind-down of bank activities when warranted.
- Memoranda of Understanding (MOUs) with all home supervisors are in place as well as tailored requirements.
- There are only a limited number of TCBs; liquidity requirements for assets held to meet DGS-eligible deposits “could be strengthened.”
- Current EA proposals to harmonize regulatory/supervisory approach to TCBs “could potentially further strengthen the requirements and help to establish a level-playing field in terms of TCB requirements across EA jurisdictions.”

### Corporate governance: findings and gaps
- Banks have a one-tier Board system of which the majority should be non-executives.
- Following 2018 recommendations, NBB strengthened its supervisory approach to LSI corporate governance and dedicates significant time in off- and onsite supervision to governance and internal control functioning.
- Areas for improvement:
  - Supervisory expectations regarding the role of the non-executives could be further clarified and strengthened.
  - The expectation that independent control functions provide a copy of all their board committee reporting to executive management might limit their ability to communicate freely.
  - The ability of independent non-executives to be independent at different levels within a group (e.g., the parent and the subsidiary) should be reconsidered as this could result in a conflict of loyalty.
  - Unlike the EBA Guidelines and Basel Principles for Corporate Governance, there is no formal requirement to have independent non-executive board members chairing board committees (e.g., audit and risk committee).
- Footnotes/context preserved: The general legal corporate governance framework in Belgium was revised in 2019 and allows in addition to a one-tier also for a two-tier board system; the FSAP reviewed the governance framework for banks only.

### Supervisory framework enhancements and operational issues
- The supervisor discusses and monitors banks’ compliance with their internal capital target; recommendation to include this in the existing internal monitoring tool of the NBB.
- Internal processes across departments:
  - Appear not fully harmonized and could be more risk sensitive (examples: documentation and explanation of internal decision-making considerations for high-impact institutions; weight given to continuing un-remedied issues; use of remedial powers).
- Staffing and resourcing:
  - Given the limited size of the LSI sector, staffing is not very large and staffing changes could affect the work program (example: SREP postponement in 2022).
  - Prioritization led to exclusion of non-HI LSIs in onsite inspection for IT and cyber risk (only covered through an offsite review during the SREP).
  - These issues appeared to result in staffing of LSI supervision below SSM averages.
- Consumer protection and conduct information could be collected more structurally and feed into the SREP.

### Macro/international concerns
- Authorities have concerns regarding potential dilution of the Basel III framework in the Euro-Area and the incompleteness of the banking union.
- Current proposals for EU adoption of Basel III “appear to dilute to some extent the framework.” A concern also expressed by the ECB.
- Increasing EA emphasis on group level capital and liquidity requirements could result in lower capital and liquidity levels at SI subsidiaries (some systemically important in Belgium).
- Authorities view: need to maintain sufficient capital and liquidity in SI subsidiaries until a common deposit insurance scheme, fiscal backstop and burden sharing mechanism for systemic events are in place.

### Insurance oversight: supervisory priorities and risks
- Challenging macro environment, emerging risks, and regulatory changes expected to increase supervisory obligations of the NBB.
- Key regulatory changes expected in short- to medium term: Solvency II Review, Insurance Recovery and Resolution Directive (IRRD), Digital Operational Resilience Act (DORA).
- NBB should assess resource needs to be fit for purpose; further work needed on emerging risks (climate and cyber), macroprudential supervision, and enhanced group supervision via cooperation with third country supervisors.
- Climate and sustainability risks: material losses in 2021 floods highlight importance; finalizing legal framework of the natural catastrophe public-private partnership will enhance predictability of insurance cover.
- Mortgage and real estate exposure:
  - Significant exposure to mortgage loans and real estate should remain a supervisory focus.
  - Address inconsistencies in mortgage valuation across insurers, potential regulatory arbitrage between insurers and banks, and the quantity and quality of mortgage loans (including transfers from affiliated banks).
- Conduct of business supervision:
  - Legislation can be strengthened to enable pre-emptive conduct supervision, including cross-border data sharing (to be done at EU level).
  - Increasing reporting requirements and publishing conduct data including complaints would enhance supervision and assist industry and consumers.
  - Conduct risk should be incorporated into prudential risk assessment by the NBB and FSMA.

### Euroclear Bank (EB): PFMI assessment and operational risks
- EB is in observance of 18 principles and in broad observance of 3 principles (principles 3, 17, and 19) of the CPSS-IOSCO PFMI.
- Strengths: well-established FMI, highly professional and knowledgeable staff, strong legal basis, clear rules and procedures, comprehensive risk management framework.
- Critical deficiencies and recommendations:
  - Inadequacies remain in management of IT-related risks, including cyber resilience, and risks from indirect participants.
  - Gaps in testing of business continuity and default management procedures.
  - EB should focus on effectiveness of fully-embedded security controls, improve asset management and identity and access management.
  - Boards of EB and ESA should step up oversight and steering; address gaps in IT and information asset management as top priority.
  - Improve cooperation and communication between risk management function and relevant management/governance bodies of EB and ESA.
- Transparency and participant client information:
  - EB should develop capacity to increase transparency regarding direct participants’ clients; EB lacks basic information on underlying clients of smaller direct participants which could create default risks.
  - Within data privacy constraints, EB should gather basic information on such clients.
- Business continuity and default management testing:
  - EB lacks simulation exercises in testing and does not conduct joint testing with linked FMIs and relevant intermediaries.
  - EB should implement more robust testing, develop a wide range of scenarios, involve more key stakeholders, share summary test results with entire customer base, and involve participants in regular review of participant default procedures.
- Regulation and oversight:
  - EB is subject to effective regulation, supervision, and oversight; NBB and FSMA observe all five responsibilities of authorities under CSDR.

### Geopolitical/sanctions-related operational risk for EB
- Actions affecting frozen Russian assets and interest earnings should carefully consider financial stability, legal, operational, and reputational implications to ensure EB can continue to provide critical services.
- Consequence of sanctions/countersanctions: EB is exposed to increased operational and litigation risks.
- Any confiscation, loss, misuse, or undue appropriation of these assets or revenues could pose a serious risk to EB’s functioning as an FMI and impact global financial stability and markets.
- Adverse impact on EB’s credit rating or service disruption would spill over to some of the world’s largest financial institutions and linked FMIs.

### Financial integrity: AML/CFT supervision findings and recommendations
- Key recommendations on AML/CFT risk-based supervision of banks and payment institutions:
  - NBB should join the national committee on combating terrorist financing due to its crucial supervisory role.
  - NBB's efforts to bolster resources for AML/CFT supervision are commendable, but they could only meet 53 percent of the on-site supervisory plan in 2022, and remain deficient.
  - NBB should bolster the severity of sanctions imposed on financial institutions violating AML/CFT requirements; sanctions must be effective, proportionate, and deterrent.
  - NBB should maintain heightened risk-based vigilance over the payment institutions sector.

### Financial safety net and crisis management: coordination, readiness, and tools
- Coordination and internal NBB arrangements:
  - Resolution and crisis management framework should further promote coordination and cooperation among relevant agencies and within the NBB.
  - NBB relies on its Resolution Board (including representatives of NBB, Ministry of Finance, Guarantee Fund, and FSMA chair as observer) for resolution decision-making and cooperation among financial safety net functions.
  - Rules of Procedure of this Board should be finalized, with attention to its capacity as a crisis management committee, and its composition should be more balanced.
  - Need to strengthen and formalize internal crisis management frameworks at NBB: prepare bilateral technical-level cooperation agreements between Resolution Unit and Supervisory and Financial Stability Departments; set up interdepartmental cooperation mechanism at technical level.
- Recovery planning and early intervention:
  - Room to further strengthen recovery planning, which mainly relies on simplified recovery plans for domestic LSIs, and operationalization of early intervention powers.
- Resolution operational readiness:
  - NBB should ensure capacity and capability to execute SRB decisions for SIs and cross-border LSIs, and its own decisions for domestic LSIs.
  - Finalize the national resolution handbook, including resolution tools not part of preferred strategies (examples: operationalizing sale of business tool).
  - NBB should be able to swiftly implement alternative resolution strategies instead of liquidation under normal insolvency proceedings.
  - Focus on operationalization of resolution plan for the biggest domestic LSI; start preparing resolution plans for branches of banks headquartered outside the EU.
  - Consider increasing staffing of the resolution unit.
- Emergency Liquidity Assistance (ELA):
  - Framework for granting ELA should be reinforced; provision of ELA remains NBB responsibility subject to Eurosystem framework.
  - NBB has developed a handbook and broadened experience with credit claims as collateral; recommendation to introduce a pre-verification framework for ELA collateral, tested regularly.
  - NBB should specify lines of action and responsibilities for granting ELA to a bank in resolution, subject to a credible resolution strategy.
  - Scope and conditions for ELA access for NBFIs should be clarified given wide scope of the NBB Organic Law.
  - Cooperation arrangements with other relevant national central banks would strengthen preparedness, coordination and information sharing in cross-border ELA scenarios.
- Deposit Insurance System (DIS) improvements:
  - Segregation of the DIS fund from the national budget and increase of its target size were still pending passage of a draft law at time of writing.
  - Once segregated, DIS fund will need an investment policy aligned with best international practices.
  - Public backstop (MoF credit line to DIS if ex-ante contributions exhausted) needs further development in an internal document to be fully operational.
  - DIS should ensure operational readiness to meet target of 7 working days for pay-outs as of 1 January 2024, including regular testing with a higher degree of granularity.
  - DIS should start operationalizing its paybox plus mandate.

### Authorities’ views and agreement with FSAP findings
- Authorities emphasized commitment to strengthen resilience in the financial sector and noted most 2018 FSAP recommendations within national regulators’ competence had been implemented.
- Authorities consider Belgian regulation to be at the forefront of international regulatory developments and welcomed FSAP engagement as an important tool to assess risks and improve oversight frameworks.
- There was agreement on key risks and vulnerabilities: large, concentrated, interconnected banking sector; private sector indebtedness; high exposure to residential and commercial real-estate sectors.
- Policy rate increases: banks’ exposure to interest rate risk is an attention point due to large investment in long-term fixed rate mortgages.
- Agreed key strengths: strong net asset position of households, relatively low overvaluation in real estate, and strong customer deposit base of banks.
- Authorities broadly agreed with systemic risk assessment and related recommendations; shared IMF view that Belgian banking and non-bank sectors are resilient to severe macroeconomic shocks, with some heterogeneity.
- Authorities agreed liquidity levels needed to be monitored closely for some banks.
- Authorities welcomed recommendations to strengthen stress testing framework and to develop/adapt stress testing for investment funds; noted NBB and FSMA have commenced data sharing arrangements.

*Source: IMF Financial Sector Assessment content unit 1belea2023006*

### 65.      The NBB broadly agreed with the recommendation to grant it more powers to set

### 1belea2023006 - 65.      The NBB broadly agreed with the recommendation to grant it more powers to set

### NBB response to macroprudential powers
- "The NBB broadly agreed with the recommendation to grant it more powers to set macroprudential policy without government approval."
- "The NBB considered that strengthened outreach with the Ministry of Finance had enabled it to smoothly introduce macroprudential capital requirements in the recent past."
- "The NBB also successfully used semi-hard powers in the adoption of “prudential expectations” on borrower-based measures."
- "They noted a high level of compliance has helped reduce the risks in mortgage portfolios of banks and insurers."
- "Notwithstanding, they agreed that avoiding future delays to act against financial stability risks could benefit from aligning to a larger extent the NBB’s powers with its mandate, while retaining a consultative role for government."
- "In particular, they saw room to streamline the process of approving capital-based instruments and put it on par with most other European countries."

### Banking and insurance regulation and supervision
- "Regarding banking and insurance regulation and supervision, the authorities welcomed the IMF’s assessment that the oversight framework is sound and has been further enhanced since the previous FSAP, while further improvements can be made."
- "They also noted their efforts to enhance climate data and informed that they are implicated in the preparation of changes to the national legal framework to allow the NBB’s participation in national committee consultations on TF."

### Other risks and vigilance
- "Regarding EB, the authorities emphasized their vigilance on cyber risk as well as the impact of international sanctions on Russia and countermeasures imposed by Russia."

*1belea2023006 - 65.*

### 66.      Regarding the financial safety net and crisis management, the authorities welcomed

### 1belea2023006 - 66.      Regarding the financial safety net and crisis management, the authorities welcomed

### Financial safety net and crisis management — authorities’ stance and immediate priorities
- Authorities welcomed recommendations to strengthen the Deposit Insurance Scheme (DIS) and operational readiness on the resolution front.
- Noted progress since the 2018 FSAP in:
  - Preparation of resolution plans.
  - Minimum requirement for own funds and eligible liabilities (MREL) targets.
- Authorities recognized importance of:
  - Strengthening crisis arrangements and operational readiness of resolution plans.
  - Further reinforcing the Emergency Liquidity Assistance (ELA) framework.
- Authorities’ confirmed priorities and next steps:
  - Passage of the draft DIS Law remains a priority.
  - Further steps needed to, among others, improve the fiscal backstop for the DIS fund operationally and develop an investment policy for it.

### FSAP 2018 recommendations — implementation status highlights (selected)
- Status coding used: “F” = fully implemented, “P” = partially implemented, “N” = No Progress.
- Systemic risk analysis:
  - Incorporate bank stress testing into systemic risk toolkit: F — “Continuing progress. Satisfactory progress is being made on the path to a NII stress test.”
  - Extend horizon of insurance stress tests: P — “Partly implemented. Good progress toward multi-period stress test.”
  - Intensify monitoring of insurers’ mortgage loan portfolios: F — Implemented.
  - Develop shadow banking monitoring framework (with FSMA): F — Implemented.
  - Enhance coverage and quality of commercial real estate data (NBB): F/P — “Partly implemented” with notable progress gathering market and exposure information but still not exhaustive.
- Prudential policy, supervision, and oversight:
  - Approve macroprudential measures proposed by NBB (MoF): N/P — “Partly implemented” and institutional framework unchanged; MoF approves measures but legal structure keeps certain borrower-based measures as government domain.
  - Strengthen bank supervision (internal models, loan classifications): Directed to ECB/SSM for internal models; NBB implemented proactive loan classification assessment (P/F).
  - Insurance sector liquidity and capital quality measures: F — Implemented steps to address liquidity risk, analyze reinsurance, and improve insurers’ capital quality.
  - SWIFT oversight: (i) complement moral suasion with powers — P (Not implemented); (ii) broaden membership — F; (iii) improve information sharing — F.
- Financial safety net specific recommendations:
  - Ensure feasibility of resolution strategies for banking groups with systemic subsidiaries (SSM) and prioritize resolution planning for two LSIs with highest insured deposits: (i) P (out of scope of national FSAP), (ii) F (implemented).
  - Strengthen DIS by:
    - Publicly committing to shortening DIS pay-out period to seven days by 2019: N — “Not implemented.” (Should have been achieved by 2019 instead of by January 2024.)
    - Establish credit lines with the MoF: P — “Partly implemented. There is a credit line from the MoF, but it needs to be operationalized.”
    - Segregating the Guarantee Fund from government funds (MoF): P — “Not implemented.”
- AML/CFT:
  - Ensure adequate transparency of beneficial ownership of legal persons and arrangements (MoF): F — Implemented via national Ultimate Beneficial Owner (UBO) register managed by the Federal Public Service Finance.

### Key macro-financial projections and selected indicators (from tables)
- Table 3 selected real economy and fiscal figures (2020–28 projections; percent change unless otherwise indicated):
  - Real GDP: 2020 -5.36, 2021 6.9, 2022 3.0, 2023 1.4, 2024 1.0, 2025 1.2, 2026 1.2, 2027 1.2, 2028 1.3
  - Unemployment rate (in percent): 2020 5.6, 2021 6.3, 2022 5.6, 2023 5.6, 2024 5.6, 2025 5.5, 2026 5.5, 2027 5.4, 2028 5.4
  - Consumer prices: 2020 0.4, 2021 3.2, 2022 10.3, 2023 2.5, 2024 4.4, 2025 2.0, 2026 1.8, 2027 1.8, 2028 2.0
  - General government debt (percent of GDP): 2020 111.8, 2021 108.0, 2022 104.3, 2023 105.5, 2024 104.7, 2025 106.4, 2026 108.6, 2027 111.1, 2028 113.4
  - Nominal GDP (in billions of euros): 2020 460., 2021 7507.9, 2022 554.0, 2023 583.7, 2024 609.1, 2025 628.8, 2026 648.0, 2027 667.7, 2028 689.6
- Table 6: Macroeconomic scenarios (baseline vs. stress; selected series)
  - Real GDP growth (percentage):
    - Baseline: 2022 3.1; 2023 0.7; 2024 1.1; 2025 1.2; 2026 1.2; 2027 1.2
    - Stress: 2022 3.1; 2023 -3.8; 2024 -2.2; 2025 1.1; 2026 4.4; 2027 1.9
  - Unemployment (percentage):
    - Baseline: 2022 5.5; 2023 6.0; 2024 6.0; 2025 5.6; 2026 5.5; 2027 5.5
    - Stress: 2022 5.5; 2023 6.4; 2024 9.1; 2025 9.3; 2026 7.1; 2027 5.0
  - Inflation (percentage):
    - Baseline: 2022 10.3; 2023 4.7; 2024 2.1; 2025 1.7; 2026 1.8; 2027 1.9
    - Stress: 2022 10.3; 2023 11.4; 2024 3.9; 2025 1.1; 2026 2.6; 2027 -0.2
  - House Price Index (2022=100):
    - Baseline: 2022 100.0; 2023 101.6; 2024 101.4; 2025 99.9; 2026 98.3; 2027 97.1
    - Stress: 2022 100.0; 2023 75.6; 2024 71.0; 2025 75.8; 2026 81.7; 2027 84.6
  - CRE Price Index (2022=100) follows similar baseline and stress paths as House Price Index in the table.
  - Sovereign bond yields (percentage):
    - 10 year German Sovereign Bond Yield (Stress 2023 5.4; Baseline 2023 2.2)
    - Long Term Belgian Sovereign Bond Yield (Stress 2023 6.1; Baseline 2023 2.9)
    - Short Term Belgian Sovereign Bond Yield (Stress 2023 6.2; Baseline 2023 3.2)

### Risk Assessment — key risks and likely impacts (from Table 7)
- Global and regional risks assessed as high likelihood and/or high impact:
  - Intensification of regional conflict(s) (e.g., escalation of Russia’s war in Ukraine): Likelihood High; Expected impact High (indirect growth spillovers, higher commodity prices, frozen assets of Russian entities at Euroclear Bank raise litigation/reputational risks).
  - Deepening geoeconomic fragmentation: Likelihood High; Expected impact Medium (vulnerability due to strong cross-border linkages and large multinational and financial/payment services presence).
- Other medium-likelihood risks with significant potential impacts:
  - Abrupt global slowdown or recession: Likelihood Medium; Expected impact Medium/High (spillovers to trade partners and real estate corrections).
  - Monetary policy miscalibration leading to de-anchored inflation expectations: Likelihood Medium; Expected impact High (due to near-universal automatic wage and benefit indexation).
  - Sovereign debt distress from higher global interest rates or disorderly debt events: Likelihood Medium; Expected impact Medium.
  - Disorderly energy transition: Likelihood Medium; Expected impact Medium.
- Belgium-specific political risk:
  - Political uncertainty and fragmentation ahead of general elections in 2024: Likelihood High; Expected impact High (protracted government formation could delay fiscal consolidation and reforms and raise borrowing costs, undermining fiscal sustainability and financial stability).

### Operational and policy implications highlighted
- Key operational actions needed for the DIS and crisis readiness:
  - Passage of draft DIS Law is a priority.
  - Operationalize the existing credit line from the MoF for the DIS fund.
  - Improve the fiscal backstop arrangements for DIS operationally.
  - Develop an investment policy for the DIS fund.
- Continued emphasis on enhancing data, stress-testing capacity, and supervisor powers to monitor and address emerging liquidity and real estate risks across banks, insurers, and investment funds.

*Source: IMF staff report excerpts and tables as provided in the content unit.*

### 1. Institutional

### 1. Institutional

### Institutional perimeter and data baseline
- Exercise: Top-Down by FSAP team.
- Institutions included:
  - Seven banks subcategorized as SIs.
  - Among the SIs, five are domestic and two are subsidiaries of foreign institutions.
  - All banks are domestically focused, but they have large cross-border exposures.
- Market share: Total coverage is about 89.4 percent of the banking sector.
- Data and baseline date:
  - December 2022 (solvency); Latest data: April 2023 (liquidity and interaction exercises).
  - Supervisory data: Bank balance sheet and supervisory statistics (including FINREP and COREP), information on IRRBB, liquidity risk and market risk sensitivities (including STE templates) provided by the authorities and the ECB.
  - Expected Default Frequency sourced from Moody’s. Further supervisory information: probability of defaults by credit portfolios, bank-specific stage transition matrix by portfolio from FINREP.
  - Market and publicly available data, including ECB statistical data warehouse on funding and lending rates by type of asset and funding portfolios.
  - Scope of consolidation: banking activities of the consolidated banking group for banks having their headquarters in Belgium. Foreign subsidiaries are assessed on the unconsolidated level covering domestic activities only.
  - Coverage of sovereign and non-sovereign securities exposures: debt securities measured through fair value (FVPL and FVOCI) and amortized cost (AC) account.
  - Coverage of lending exposure: credit institutions, nonbank financial institutions, household, and corporate.
- Insurance sector data and baseline:
  - Regulatory reporting December 31, 2022.
  - Insurance sample: 8 composite insurers (76% of total balance sheet assets); 6 composite insurers (63% of total balance sheets assets) for BU exercise.
- Investment funds data:
  - Portfolio reporting date: End of year 2022. Sources: Lipper, NBB and FSMA supervisory data.

### Solvency stress-testing methodology and channels of risk
- Overall approach:
  - FSAP team satellite models and methodologies; balance-sheet regulatory approach.
  - Market risk treated as an add-on component with separate calibration; impacts both capital resources (via P&L or OCI) and capital requirements (RWA).
  - Traded risk impact from revaluation of trading assets (FVPL) and FVOCI securities by counterparty: central government (by country issuers), credit institutions, other financial institutions, and nonfinancial corporates.
  - Credit spreads interpolated using bank-specific residual maturity at the book and issuer level; valuation effects assessed using a modified duration approach. Hedges considered ineffective under stress.
- Credit risk projection:
  - For IRB exposures: projection of PiT and TTC PDs, LGD, EAD and RWA.
  - For STA exposures: projection of new flows of defaulted exposures, coverage ratio for defaulted loans, and risk weight downgrade for performing exposures.
  - Corporate PDs for largest exposures proxied by Moody’s EDFs.
- Provisioning and IFRS9:
  - Provisioning for IRB and STA modeled using IFRS9 transition matrix approach. Transition matrices, PiT PDs, PiT LGDs for loans and securities measured at AC and FVOCI modeled using COREP data.
- Net interest income and funding:
  - Net interest income projection incorporates maturity profile of assets and liabilities. Effective interest rates projected through econometric satellite model with exogenous variables reflecting the interest rate environment.
  - Funding costs projected at the portfolio level using funding structure by product and maturity bucket. Funding projections capture systemic risk and idiosyncratic risk; utilize bank level COREP templates.
  - Lending rates projected at the system level and attached to bank-specific interest rates and outstanding amount at cut-off date.
- RWAs and regulatory charges:
  - Change in RWAs estimated on banking book exposures (credit risk charges – CRC) and market risk exposures (market risk charges – MRC) according to Basel III rules.
  - Additional regulatory risk charges (operational risk charges – ORC and counterparty credit risk charges – CCRC) change according to overall balance-sheet growth assumptions.
  - Balance sheet follows nominal GDP growth when positive, or remains stable when negative.
- Stress test horizon: 2023 Q1–2026 Q4 (4 years).

### Tail scenarios and macroeconomic inputs
- Two Scenarios:
  - Baseline scenario based on the April 2023 WEO macroeconomic projections.
  - Adverse scenario capturing key risks in the RAM; relies on GFM, a structural macroeconometric model of the world economy disaggregated into forty national economies (documented in Vitek (2018)). Scenarios for foreign countries where Belgium has significant exposure extracted from GFM and internally consistent with other FSAPs.

### Behavioral adjustments and constraints
- Quasi-static approach for balance sheet growth: asset allocation and funding composition unchanged; balance sheet grows in line with nominal GDP paths of major geographical exposures and subject to reduced credit demand and FX revaluation effects.
- Floor for balance-sheet change: zero percent to prevent deleveraging (constraint binding in the adverse scenario).
- RWAs projection differentiates standardized and IRB portfolios; standardized RWAs change due to balance sheet growth, new NPL inflows, new provisions, exchange rate movements, and conversion of off-balance sheet items; IRB uses TTC-PDs, downturn LGDs and EAD.
- Interest income from non-performing loans is not accrued.
- Capital actions assumed: banks do not issue new shares or repurchases during horizon. Dividends assumed to be paid at 30 percent of current period net income after taxes (only if net income is positive) by banks that follow supervisory capital requirements.

### Risks covered and concentration
- Risks included: credit (loans and debt securities), market (debt instrument valuation via repricing and credit spread risk, P&L impact of net open positions and FX), and interest rate risk (IRRBB) on the banking book.
- Concentration risk assessed via sensitivity analysis.
- Solvency-liquidity interactions considered, mainly through asset haircut.

### Regulatory standards and hurdle rates
- National regulatory framework: Basel III regulatory minima on CET1 (4.5 percent) and include any requirements due to systemic buffers for O-SII.
- Team evaluates:
  - Total banking capital adequacy ratio against the 8 percent level.
  - Tier 1 capital ratio against the 6 percent benchmark.
  - Leverage ratio against the 3 percent Basel III minimum requirement.
- Same hurdle rates used for baseline and adverse scenarios.
- Hurdle rates for CET1, T1 and total capital adequacy exclude capital conservation, capital countercyclical buffers and pillar 2 requirement.
- Banks ending the horizon below relevant hurdle rates are considered to have failed the test.

### Output reporting (solvency)
- Results reported via charts and tables including:
  - Evolution of capital ratios system-wide and by bank groups (retail banks and large international banks).
  - Impact decomposition of result drivers including profit components, losses by risk factor.
  - Capital shortfall as sum of individual shortfalls; reported in euros and as percent of nominal annual GDP.
  - Number of banks and corresponding percentage of assets below regulatory minimum or below minimum leverage ratio.

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### Banking Sector: Liquidity Stress Test

### Institutional perimeter and data
- Exercise: Top-Down by FSAP team.
- Institutions: Seven banks subcategorized as SIs (same sample as solvency stress test).
- Market share: Total coverage is about 89.4 percent of the banking sector.
- Data and baseline date: Latest data April 2023. Source: supervisory data (LCR, NSFR, and ALMM Maturity Ladder template).
- Scope of consolidation: same as solvency exercise (consolidated for Belgium-headquartered groups; foreign subsidiaries unconsolidated covering domestic activities only).

### Channels of risk propagation and methodology
- Basel III LCR and cash-flow based liquidity stress tests using maturity buckets by bank.
- Incorporate both contractual and behavioral flows (where available).
- Assume combined interaction of funding and market liquidity and different levels of central bank support.
- Liquidity test conducted in EUR and foreign currencies (USD, pound sterling, Czech koruna).

### Risks and buffers
- Risks:
  - Funding liquidity.
  - Market liquidity.
- Buffers:
  - Counterbalancing capacity including liquidity from markets and/or central bank facilities.
  - Expected cash inflows included in cash-flow based and LCR analyses.

### Tail shocks and scenarios
- Run-off rates calibrated to reflect system-wide deposit runs and dry-up of unsecured wholesale and retail funding; additional run-off for non-resident deposits calibrated using historical events, recent international experience and IMF expert judgment.
- Liquidity shocks simulated:
  - 1-month for LCR.
  - 5-days, 1-month, 3-months, and 1-year for cash-flow based approach.
- Haircuts of HQLA calibrated against ECB haircuts, past Euro Area FSAPs, and market shock used in solvency stress test.
- Six cashflow analysis scenarios:
  - First three: stress in retail and wholesale segments leading to deposit outflows and lower inflows from loan losses; modest asset value effects.
  - Fourth: wholesale market funding stress with more aggressive asset haircuts.
  - Fifth: combines wholesale market funding stress with wholesale deposits and loan stress.
  - Sixth: combination of all previous five.
- Sensitivity analysis on outflow rates for uninsured deposits to identify liquidity breaking point.
- Three cashflow stress scenarios described:
  - Scenario A: deposits funding stress (household and corporates face strong liquidity strain, net deposit outflows, mild increase in counterbalancing haircuts).
  - Scenario B: market liquidity stress (outflows from wholesale borrowers, collapse in market prices, significant increase in CBC haircuts).
  - Scenario C: combined stress aligned with recent market turmoil / GFC.

### Reporting (liquidity)
- Output: liquidity ratio or shortfall by groups of banks and aggregated system-wide; number of banks able to meet or failing obligations.

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### Solvency-Liquidity Interaction

### Institutional perimeter and data
- Exercise: Top-Down by FSAP team.
- Institutions: Seven banks subcategorized as SIs (same sample).
- Market share: Total coverage about 89.4 percent.
- Latest data: April 2023.
- Source: Top-down solvency and cashflow analysis output.

### Methodology for interaction channels
- Estimate proportion of HTM debt portfolio sold to cover net outflows under three cash-flow analysis scenarios.
- Estimate unrealized losses from revaluation of these securities over the scenario.
- Assign additional fire-sales haircut and apply total fire-sales losses to profitability and capital depreciation over the scenario.

### Risks and tail shocks
- Risks: Funding liquidity and market risk.
- Size of shock:
  - Total liquidity shocks over a period of 1-year for the cash-flow based approach.
  - HQLA haircuts calibrated against ECB haircuts, past Euro Area FSAPs, and market shock used in solvency test.
  - HTM unrealized losses estimated using historical increase of the risk rate in 2022 and the risk-free rate path of the macroeconomic scenarios.

### Reporting (interaction)
- Output: losses from HTM fire-sales (system wide); new profitability and capital adequacy ratios.

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### Insurance sector stress testing (solvency and liquidity)

### Solvency analysis methodology and shocks
- Exercise: Top-down by IMF / Bottom-up by insurance undertakings.
- Channels:
  - Investment assets: market value changes after price shocks affecting solvency.
  - Insurance liabilities: impact on best estimate via changes in discount rate of future cash flows.
  - Sensitivity: corporate bond rating migration and sovereign downgrade effects on available capital and solvency.
- Tail shocks (instantaneous):
  - Market shocks front-loaded to realize maximum drawdown immediately after reference date (end 2022).
  - Risk-free interest rates (without volatility adjustment): 447 bps (1y EUR), 455 bps (10y EUR).
  - Sovereign bond spreads: 90 bps domestic, 55 bps low spread EA countries, 120 bps high spread EA countries, 70 bps other advanced economies, 120 bps emerging and developing countries.
  - Stock prices: -33.6 percent European Union, 33 percent other advanced economies, 32 percent emerging and developing economies.
  - Property prices: 25 percent (commercial), 20 percent (residential).
  - Corporate bond spreads: between 60 bps (AAA financials) and 355 bps (B and lower financials), and between 50 bps (AAA non-financials) and 325 bps (B and lower non-financials).
  - Mortgage default increase: two percent domestic, three percent non-domestic.
  - A 30 percent lapse shock for non-mandatory insurance on insurers’ in-force life portfolio (term insurance, endowments, unit linked products, and disability).

### Solvency reporting outputs
- Impact on solvency ratios.
- Contribution of individual shocks to changes of eligible own funds.
- Impact of reactive management actions (bottom-up only).
- Dispersion measures of solvency ratios.

### Liquidity analysis for insurers
- Exercise: Top-down by FSAP team.
- Institutions: 8 composite insurers, 2 life insurers with significant IRS exposure (84% of total balance sheet assets).
- Data and baseline date: Regulatory reporting, December 31, 2022.
- Channels: revaluation of derivative positions after interest rate shock (top-down); mass lapse shock and shock to liquid assets.
- Tail shocks: sensitivity analysis via parallel shift of the interest rate term structure.
- Reporting outputs: variation margin as percent of cash holdings; variation margin as percent of cash holdings plus HQLA; stressed liquidity ratios.

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### Investment fund sector liquidity analysis

### Institutional perimeter and data
- Exercise: Top-Down by FSAP team.
- Institutions: Bond and mixed investment funds.
- Market share: Varies by type of fund.
- Data: Lipper, NBB and FSMA supervisory data; portfolio reporting date end-2022.

### Methodology and assumptions
- Redemption shocks at various levels compared with highly liquid assets at fund category level.
- Redemption shocks calculated from historical redemptions using VaR and Expected Shortfall.
- Methodologies with multiple thresholds and historical monthly time series.
- Liquidation strategies considered: vertical vs. horizontal slicing.
- A first set of redemption shocks calibrated on funds’ historical flows; another set calibrated in line with adverse scenario using estimated funds’ returns to assess price impact of asset sales.
- Time horizon: Instantaneous shock.

### Risks, buffers and reporting
- Risk: severe but plausible redemption shock.
- Buffer: level of highly liquid assets.
- Tail scenario: pure redemption shock based on historical distribution.
- Outputs: number of funds with redemption coverage ratio (HLA to redemptions) below one; liquidity shortfall amount for individual funds after redemptions.

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### Interconnectedness analysis

### Institutional perimeter and data
- Exercise: Top-Down by FSAP team.
- Institutions included:
  - Exercise A: Seven banks subcategorized as SIs (institution specific analysis).
  - Exercise B: Cross-border contagion via country-pair bilateral exposures across the world.
  - Exercise C: Aggregate domestic banking sector, insurance sector, and investment funds sector (sector-wide analysis).
- Data sources:
  - Exercise A: Supervisory data: Bank balance sheet and supervisory statistics (COREP – Large exposures).
  - Exercise B: BIS consolidated banking statistics.
  - Exercise C: ECB data warehouse cross-sectoral exposures.

### Methodology and tail shocks
- Methodologies:
  - Balance-sheet network model by Espinosa-Vega and Solé (2010) for Exercises A and B.
  - Satellite models on yields and share prices projections for Exercise C.
- Tail shocks:
  - Default threshold: banks default if their capital falls below regulatory minimum (Exercise A).
  - Pure contagion: financial distress in foreign countries (Exercise B).
  - Market contagion: devaluation of assets (Exercise C).

*Source: 1belea2023006 - 1. Institutional*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1belea2023006.pdf_