## 1belea2023010

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### Executive summary — overview and recent performance
- Despite shocks (the pandemic, spillovers from Russia’s war in Ukraine, and the energy crisis), the Belgian financial sector has remained resilient and firm evidence for sustained credit or real estate price booms is limited.
- Bank resilience:
  - Profitability, capital adequacy and liquidity of banks have surpassed their pre-pandemic levels and remain comfortably above regulatory thresholds.
  - Large-scale deviations from historical patterns of deposit repricing may have adverse effects on bank profitability.
- Credit and real estate:
  - The credit gap turned positive in late 2017 but did not herald prolonged further widening; private sector borrowing expanded robustly until rapid tightening of financial conditions since 2022 triggered ebbing lending growth.
  - Prices for residential and commercial dwellings have steadily increased since 2014, with market dynamism generally below other euro area countries, keeping valuations in check.
- Household and corporate balance sheets:
  - Mortgage debt of households has been on a secular rise.
  - Households benefit from a sizeable stock of liquid financial assets and prevalence of fixed-rate, fully amortizing housing loans providing some insulation against rising financing costs.
  - The financial position of large parts of the corporate sector is robust and indebtedness is moderate relative to other European economies.
- Exposures and vulnerabilities:
  - Financial sector exposures to commercial real estate (CRE) are large relative to euro area peers, leaving banks and insurers vulnerable to a sharp market correction or worsening debt servicing.
  - The less favorable funding environment following pandemic and energy crisis shocks is an additional burden for private sector balance sheets.

### Assessment of macroprudential framework and institutional issues
- Progress since 2018 FSAP:
  - Implemented: improved NBB communication on financial stability; improved data coverage and analysis of CRE markets; streamlining of EU notification process; strengthened monitoring of non-bank financial sector.
  - Institutional arrangement unchanged: NBB is designated macroprudential authority but power to adopt legally-binding borrower-based tools and to enact by Royal decree activation/modification of other macroprudential instruments remains with government (Ministry of Finance or Council of Ministers).
  - Recommendation to enhance NBB’s ability to implement flexible, risk-sensitive macroprudential tools without Minister/Council approval has not been implemented.
- Consequences of government role:
  - Large government role may hamper NBB’s ability to fulfill financial stability mandate and to act in a timely manner.
  - Government enactment requirements can delay communication and risk measures lapsing if extensions are not enacted.

### Key recommendations (summary)
- Institutional arrangements:
  - Medium term (MT): Align powers of NBB with mandate by giving full discretion over activation and calibration of capital- and borrower-based instruments, without need for government approval. (Government, MT)
  - Near-term (NT): Activation and calibration of capital-based measures under CRD/CRR should be at sole discretion of NBB at national level, without need for government approval. (Government, NT)
  - For instruments requiring government intervention, strengthen accountability by publishing factors weighing on policy considerations and decisions. (NBB, Government, NT)
- Systemic risk monitoring:
  - Strengthen NBB’s systemic risk assessment framework by closing gaps and ensuring stronger integration of data and quantitative tools with instrument design and selection. (NBB, MT)
  - Enhance FSMA’s framework for analysis of structural vulnerabilities of investment funds and integrate it more closely into NBB’s systemic risk assessment. (NBB, FSMA, NT)
- Tools and calibration:
  - Consider introduction of a positive neutral CCyB and modify CCyB framework accordingly. (NBB, NT)
  - Consider introduction of an SSyRB against CRE-related bank lending once additional data are collected to ensure appropriate calibration. (NBB, NT)

### Detailed policy rationales and operational proposals
- Granting full NBB discretion (medium term) would:
  - Facilitate timely adoption of suitable instruments to contain systemic risks.
  - Reduce risk that government involvement hampers or delays necessary macroprudential action.
  - Preserve consultative role for government while transferring activation and calibration powers to NBB.
- Near-term actions on CRD/CRR tools:
  - Giving NBB full powers over CRD/CRR measures aligns with practice in most other European countries and would improve timely mitigation of financial stability risks.
  - Eliminate practice requiring government Royal decree for extension of active CRD/CRR instruments to avoid lapses and unnecessary administrative layers.
- Communication and accountability:
  - Government should publish rationale for macroprudential policy decisions, including cases of inaction where Royal decree is required, to boost accountability and strengthen transmission.
  - Establish a formal protocol for communication about all decisions, including instances where no action is taken.
- Systemic risk assessment improvements:
  - NBB should close gaps and better integrate data and quantitative tools with instrument design and selection to gauge transmission of macro-financial risks to intermediaries and detect spillovers.
  - Explore opportunities to expand, integrate and leverage data sources available to NBB.
- Non-bank financial sector:
  - FSMA should fully exploit granularity of available data on investment fund sector, continue sourcing additional information, and adopt regular stress testing of investment funds.
  - FSMA analysis should be tightly integrated into NBB’s framework to detect systemic risks and identify potential spillovers.
- CRE and sectoral buffers:
  - Given sizeable bank exposures to CRE risk, NBB should consider instituting a Sectoral systemic risk buffer (SSyRB) against CRE-related bank lending once appropriate calibration can be performed using additional data on CRE portfolio characteristics and collateral quality.
- CCyB framework:
  - Consider switching to a positive neutral CCyB to facilitate activation in environments of repeated shocks and high macro-financial uncertainty; this could bolster resilience against sudden strains unrelated to credit cycle and encourage use of released capital buffers in stress.

### EU guardrails, Belgian legal framework and division of powers
- EU framework:
  - CRD/CRR provide harmonized guardrails while leaving room for national measures including capital conservation buffer (CCoB), countercyclical capital buffer (CCyB), G-SII and O-SII buffers, systemic risk buffers (SyRB), and Article 458 provisions for national flexibility.
  - SyRB modalities preserved: general systemic risk buffer (GSyRB) and sectoral systemic risk buffer (SSyRB); can apply to all banks or subset.
- Belgian legal basis:
  - Relevant laws: Banking Law; Organic Law; Macroprudential Law.
  - Organic Law provides basis for macroprudential instruments under Belgian law, including measures not in CRD/CRR (Article 36/34).
  - Macroprudential tools available include setting capital/liquidity buffers, limits on exposures and profit distribution, rules on asset valuation/collateral, and imposing borrower-based measures.
- Division of powers:
  - Macroprudential Law designates NBB as sole macroprudential authority but government retains decision power over borrower-based measures (Article 36/38).
  - Government approval and Royal Decree required for activation/modification of most instruments; practice differs from most ESRB jurisdictions.
  - SSM Regulation Article 5(1)/(2) requires euro area macroprudential authorities to inform ECB prior to decisions and allows ECB to impose more stringent national requirements.

### Accountability, reporting and communication practices
- NBB reporting requirements and publications:
  - NBB reports to parliament (Article 28), including Annual Report and Annual Financial Stability Report (FSR) which includes Macroprudential Policy Report (MPR).
  - FSR and MPR cover developments, risks, overview of macroprudential decisions, rationale, design, and framework development.
  - NBB obliged to report and justify quarterly CCyB decisions (Banking Law, Annex IV, Article 5) and annual G-/O-SII designations (Annex IV, Article 15).
  - NBB publishes ad-hoc background materials and in-depth studies and engages in extensive outreach.
- Government accountability gap:
  - Neither Organic Law nor other legislation give government guidance on considerations when deciding on borrower-based measures under its control (Article 36/38 §2).
  - Proposal: Government should publish factors influencing deliberations for transparency when its approval is required.

### NBB capacity, coordination, and internal organization
- Legal powers and data access:
  - Organic Law grants NBB wide powers to request information (Article 36/33) and to use information from microprudential supervision and private entities (Article 36/33 §2).
  - Cooperation obligation by government and national authorities to provide NBB necessary information (Article 36/33 §3).
  - Protocol between NBB and FSMA allows exchange of confidential information if needed.
- Institutional arrangements and coordination:
  - NBB established Risk Team Macroprudential Policy (RT MPP) feeding into Macro-Financial Committee (MFC) and NBB Board of Directors.
  - FSMA collaborates closely with NBB; FSMA Chairman is a non-voting member of ESRB General Board.
- RT MPP composition:
  - Staff from “Macroprudential Surveillance” and units across Prudential Policy, Prudential Supervision of Banks and Insurance, Surveillance of Financial Market Infrastructures, Legal, Analysis and Research, Financial Markets, Statistics, and Microeconomic Information.

### Data, indicators and quantitative tools
- Household data:
  - Central Individual Credit Register (CICR) records new and defaulted mortgage and consumer loans by all lenders but lacks interest rate, credit standards (LTV, DSTI), outstanding balances, borrower incomes, or collateral details.
  - NBB’s PHL survey: banks half-yearly since 2012; insurers yearly since 2018; queries characteristics of new and existing loans at aggregate portfolio level.
  - Additional: survey of mortgage purpose, microprudential reporting, and three-yearly Household Finance and Consumption Survey (HFCS).
- Corporate data:
  - Corporate Credit Register (CCR) (AnaCredit-aligned) operational in 2022; monthly granular loan-level data including terms, status, events, and credit protection.
  - Central Balance Sheet Office (CBSO) annual accounts and quarterly VAT returns provide solvency, liquidity and profitability metrics.
- Financial sector and CRE data:
  - Data from EMIR, SFT Regulation, ECB securities holdings statistics, Common Reporting Framework, Scheme A, Solvency II reporting, and quarterly investment/pension fund securities holdings.
  - Improved CRE coverage via MSCI Real Capital Analytics for transactions, prices and property characteristics; exposures from MSCI and prudential reporting.
- Quantitative methods:
  - Color-coded heatmap aggregating macro-financial indicators with calibrated thresholds.
  - Financial conditions index summarizing 17 indicators into five sub-categories.
  - Early warning framework linking financial cycle to crisis probability and projecting NPL ratio.
  - Bank loss projection and margin analysis for six largest banks.
  - Residential real estate valuation model linking real house prices to fundamentals.

### FSMA data analytics and stress testing
- FSMA activities:
  - Surveillance tool detecting potential insider trading using market transaction data.
  - Web scraping for consumer protection issues.
  - Data-driven analyses of retail investor behavior, potential “closet indexing,” and potential greenwashing.
  - Quarterly assessment of risks from leveraged alternative investment funds.
  - Under new data sharing agreement with NBB, took stock of asset positions and conducted pilot liquidity stress test using granular fund portfolio information.
- Recommendations:
  - FSMA should fully exploit granularity of fund portfolio dataset, collect further information on interconnectedness, make regular stress testing of open-ended investment funds part of toolkit, and integrate analysis more tightly into NBB’s systemic risk framework.

### Macroprudential instruments in use and recent calibrations (selected, exact items preserved)
- CCyB:
  - Put in place on January 1st, 2016, with quarterly review of setting.
  - Rise to 0.5 percent planned for July 1st, 2020 was abandoned on April 1st, 2020.
  - CCyB remained at zero percent until NBB announced activation on August 31st, 2023 at rates of 0.5 percent and 1 percent to become effective from April 1st, 2024, and October 1st, 2024, respectively.
- CCoB:
  - Fully phased in at 2.5 percent of risk exposures since January 1st, 2019.
- Leverage ratio:
  - 3 percent of total assets effective on June 28th, 2021.
- IFRS 9:
  - Forward-looking loan loss provisioning adopted on January 1st, 2018.
- Prudential expectations on mortgage origination (effective January 1st, 2020):
  - Owner-occupied properties: 90 percent LTV; 35 percent of mortgages to first-time buyers can have LTV > 90 percent, of which 5 percent may exceed 100 percent LTV.
  - Other buyers of owner-occupied dwellings: 20 percent of mortgages permitted with LTV between 90 and 100 percent.
  - Buy-to-let: 80 percent LTV with max 10 percent between 80 and 90 percent.
  - Only 5 percent of mortgages tolerated to have LTV > 90 percent in combination with DSTI of 50 percent or DTI of 9.
  - Comply-or-explain approach with annual reporting to NBB.
- SSyRB and related measures:
  - Risk weight add-ons introduced October 22nd, 2013; multiplier applied April 30th, 2018.
  - In May 2022, about € 2 billion additional capital cushion converted into a 9 percent SSyRB of equivalent size.
  - Measure extended to April 2024; NBB announced to lower SSyRB beyond April 2024 to a level of 6 percent in combination with CCyB activation.
- Liquidity standards:
  - LCR effective October 1st, 2015 (at least 100 percent); LCR improved from about 140 percent in early 2020 to peak > 210 percent in early 2021; back to 160 percent by end-2022.
  - NSFR effective June 28th, 2021; NSFR declined somewhat but remains higher than European average and above regulatory minimum.
- Liquidity management for open-ended investment funds:
  - Legislative changes adopted October 15th, 2018; by end-2022 nearly all relevant vehicles allowed for anti-dilution levies, swing pricing, redemption gates or combinations.
- O-SII buffers:
  - Since January 1st, 2016 annual designation with buffers: Belfius Bank, BNP Paribas Fortis, ING Belgium, KBC Group at 1.5 percent; Crelan, Euroclear Holding, Investeringsmaatschappij Argenta, The Bank of New York Mellon at 0.75 percent.
  - O-SII buffers together amount to more than € 5 billion.

### Assessment of vulnerabilities — households, housing market, corporate and CRE (key statistics preserved)
- Private sector credit (NBB concept): 69 percent in 2000:Q1 → 83 percent in 2022:Q4.
- Household debt: 39 percent of GDP in 2002:Q1 → 61 percent of GDP in 2022:Q3.
- Corporate indebtedness (including inter-company lending): 97 percent of GDP in 2000:Q1 → 141 percent of GDP in 2022:Q3.
- Corporate debt excluding inter-company and certain non-bank foreign/captive funding: 49 percent of GDP in 2000:Q1 → 59 percent of GDP in 2022:Q3.
- Household debt-to-gross-disposable-income: surpassed 100 percent in recent years.
- HFCS (2021): 16 percent of outstanding mortgage debt with LTV > 80 percent; nearly 3 percent of borrowers account for roughly 7 percent of mortgage volumes and spend more than half their income servicing debt; more than a fifth of households (around a fourth of outstanding mortgage debt) lack liquidity to cover more than six months of debt service.
- Non-performing housing loans: 0.9 percent in 2022:Q4 vs 1.1 percent in 2019:Q4.
- SSyRB: 6 percent (recommended to be maintained until housing outlook clearer).
- CCyB: stepwise lifting to 1 percent (recently announced).
- Combined capital from SSyRB (6 percent) and CCyB (1 percent) once fully phased in by October 1st, 2024: € 3.6 billion.
- SSyRB at 9 percent would have offered € 2 billion in capital (contextual comparison).
- Stress test implied drop in CET1 capital levels: € 5.1 billion below the 2024 baseline; CET1 ratio fall from 20.9 percent to 17.8 percent in the scenario.

### Household and housing-market findings and policy guidance
- House prices estimated approximately 10 percent (NBB) and 15 percent (ECB) above fundamentals; house price increases decelerated since the pandemic and mortgage applications have dropped sharply.
- Resilience factors: prevalence of fixed-rate, fully amortizing mortgages; strong labor markets; excess savings accumulated during pandemic; automatic wage indexation; inflation may have lightened household debt burdens via nominal wage passthrough and erosion of real debt balances.
- Vulnerabilities: another major shock combined with a sharp correction in house prices could expose a non-negligible share of households to debt distress; low income/low-liquid-asset households and variable-rate borrowers are particularly at risk.
- IMF assessment recommendations:
  - Maintain SSyRB at 6 percent until more clarity about housing market prospects is obtained.
  - Keep exemptions from borrower-based measures under review to prevent them becoming a source of vulnerability.
  - Recent CCyB activation (stepwise to 1 percent) should help address potential unexpected losses from tighter financial conditions.

### Corporate, CRE exposures and banking funding — findings and recommendations
- Corporate sector:
  - Debt servicing ratio close to historic lows in 2022; aggregate debt-to-asset ratio from 66 percent in 2008 to 54 percent in 2021.
  - Upper two thirds of companies show robust profitability; lowest tercile show low or negative returns on assets.
  - Concern that surge in wage/cost inflation, dearer funding, and weakening activity may impair profitability and debt servicing for weaker firms.
- CRE:
  - CRE collateralized NFC lending: about 15 percent of GDP or 7 percent of banking sector assets.
  - CRE lending rose from pre-pandemic levels, accounting for > a fourth of total NFC credit at end-2022.
  - LTV distribution (February 2023): nearly three quarters of CRE exposures LTV < 60 percent; > 10 percent have LTV ≥ 80 percent.
  - Insurers increased CRE exposures to 12 percent of total investment portfolios by 2022, up from < 8 percent in 2016.
  - Important data gaps remain for CRE portfolios: probability-of-default (PD) and loss-given-default (LGD) ratios.
- Banking funding and repricing:
  - Deposits by the non-financial sector ≈ three quarters of financing; market-based funding < 10 percent.
  - Retail deposits ≈ two thirds of stable funding; about 60 percent of retail deposits covered by deposit insurance.
  - Loan-to-deposit ratio close to unity and below neighboring economies.
  - One-year favorable-taxed government bond issued August 2023 raised €22 billion, largely from about €300 billion in household savings deposits (around half of private non-financial sector deposits of banks resident in Belgium).
  - LCR and NSFR improved and remain above requirements; central bank liquidity outstanding peaked near € 90 billion in mid-2021, down to € 47 billion by spring 2023.
- Policy recommendations:
  - Consider introducing a positive neutral CCyB and modify CCyB framework accordingly to ease activation and communication challenges and encourage releasable capital usage.
  - Consider instituting SSyRB against CRE-related bank lending once appropriate calibration based on additional data is possible.
  - Continue and expand NBB’s efforts to improve CRE data (PD and LGD) to support calibration of sectoral buffers and stress testing.

*Source: EXECUTIVE SUMMARY and selected chapters from the IMF technical note on Belgium macroprudential framework (content unit 1belea2023010).*

### EXECUTIVE SUMMARY __________________________________________________________________________ 6

### EXECUTIVE SUMMARY

### Overview and recent performance
- Despite a series of shocks (the pandemic, spillovers from Russia’s war in Ukraine, and the energy crisis), the Belgian financial sector has remained resilient and firm evidence for sustained credit or real estate price booms is limited.
- Bank resilience:
  - Profitability, capital adequacy and liquidity of banks have surpassed their pre-pandemic levels, remaining comfortably above regulatory thresholds.
  - Large-scale deviations from historical patterns of deposit repricing may have adverse effects on the profitability of banks.
- Credit and real estate developments:
  - The credit gap turned positive in late 2017 but did not herald a prolonged period of further widening; private sector borrowing expanded at a robust pace until the rapid tightening of financial conditions since 2022 triggered an ebbing of lending growth.
  - Prices for residential and commercial dwellings have steadily increased since 2014, yet market dynamism has been generally below developments seen in other euro area countries, keeping valuations in check.
- Household and corporate balance sheets:
  - Mortgage debt of households has been on a secular rise.
  - Households benefit from a sizeable stock of liquid financial assets and the prevalence of fixed-rate, fully amortizing housing loans provide some insulation against a rise in financing costs.
  - The financial position of large parts of the corporate sector is robust and indebtedness is moderate relative to other European economies.
- Exposures and vulnerabilities:
  - Financial sector exposures to commercial real estate (CRE) are large in comparison to euro area peers, leaving banks and insurers vulnerable to a sharp market correction or worsening debt servicing.
  - The less favorable funding environment following pandemic and energy crisis shocks is an additional burden for private sector balance sheets.

### Assessment of macroprudential framework and institutional issues
- Progress since the 2018 FSAP:
  - Several recommendations from the 2018 FSAP have been implemented (improved NBB communication on financial stability, improved data coverage and analysis of CRE markets, streamlining of EU notification process, strengthened monitoring of non-bank financial sector).
  - The institutional framework for macroprudential policy has remained unchanged: the NBB is the designated macroprudential authority but the power to adopt legally-binding borrower-based tools and to enact by Royal decree the activation or modification of other macroprudential instruments remains with the government (Ministry of Finance or Council of Ministers).
  - The recommendation to enhance the NBB’s ability to implement flexible, risk-sensitive macroprudential tools without Minister of Finance / Council of Ministers approval has not been implemented.
- Consequences:
  - The presently large role of the government in macroprudential policy making may hamper the NBB’s ability to fulfill its financial stability mandate and to act in a timely manner.
  - Government enactment requirements can delay communication and risk measures lapsing if extensions are not enacted.

### Key recommendations (summary)
- Institutional arrangements
  - Over the medium term, align the powers of the NBB to set macroprudential policy at the national level with its current financial stability mandate by giving it full discretion over the activation and calibration of capital- and borrower-based instruments, without the need for government approval. (Government, MT)
  - 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. (Government, NT)
  - 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. (NBB, Government, NT)
- Systemic risk monitoring
  - Strengthen the NBB’s systemic risk assessment framework for setting macroprudential policy by closing gaps and ensuring stronger integration of data and quantitative tools with instrument design and selection. (NBB, MT)
  - Enhance the FSMA’s framework for the analysis of structural vulnerabilities of investment funds and integrate it more closely into the NBB’s systemic risk assessment. (NBB, FSMA, NT)
- Tools and calibration
  - Consider the introduction of a positive neutral CCyB and modify the CCyB framework accordingly. (NBB, NT)
  - Consider the introduction of a SSyRB against CRE-related bank lending once additional data are collected to ensure an appropriate calibration. (NBB, NT)

### Detailed policy rationales and operational proposals
- Granting full NBB discretion (medium term) would:
  - Facilitate timely adoption of suitable instruments to contain systemic risks.
  - Reduce the risk that government involvement hampers or delays necessary macroprudential action.
  - Preserve a consultative role for the government while transferring activation and calibration powers to the NBB.
- Near-term actions on CRD/CRR tools:
  - Giving the NBB full powers over CRD/CRR measures is consistent with practice in most other European countries and would improve its ability to mitigate financial stability risks in a timely fashion.
  - Eliminate the practice requiring government Royal decree for the extension of active CRD/CRR instruments to avoid lapses and unnecessary administrative layers.
- Communication and accountability:
  - The government should publish its rationale for macroprudential policy decisions, including cases of inaction where Royal decree is required, to boost accountability and strengthen transmission of macroprudential policies.
  - Establish a formal protocol for communication about all decisions, including instances where no action is taken.
- Systemic risk assessment improvements:
  - The NBB should close gaps and better integrate data and quantitative tools with instrument design and selection to gauge transmission of macro-financial risks to intermediaries and detect spillovers.
  - Opportunities should be explored to further expand, integrate and leverage the data sources available to the NBB.
- Non-bank financial sector:
  - The FSMA should fully exploit granularity of available data on the investment fund sector, continue sourcing additional information, and adopt regular stress testing of investment funds.
  - FSMA analysis of the non-bank financial sector should be more tightly integrated into the NBB’s framework to detect systemic risks and identify potential spillovers.
- CRE and sectoral buffers:
  - Given sizeable bank exposures to CRE risk, the NBB should consider instituting a Sectoral systemic risk buffer (SSyRB) against CRE-related bank lending once appropriate calibration can be performed using additional data on CRE portfolio characteristics and collateral quality.
- Countercyclical capital buffer (CCyB) framework:
  - Consider switching to a positive neutral CCyB to facilitate activation in environments of repeated shocks and high macro-financial uncertainty; this could bolster resilience against sudden strains unrelated to the credit cycle and encourage use of released capital buffers in stress.

### Tabulated recommendations (excerpt)
- Table 1: Belgium: Recommendations on Macroprudential Policy Framework (selection)
  - A. Institutional Arrangements
    - 1. In the medium-term, align the powers of the NBB to set macroprudential policy at the national level with its current financial stability mandate by giving it full discretion over the activation and calibration of 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. (Government, MT, NT)
    - 3. 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. (NBB, Government, NT)
  - B. Systemic Risk Monitoring
    - 4. Strengthen the NBB’s systemic risk assessment framework for setting macroprudential policy by closing gaps and ensuring stronger integration of data and quantitative tools with instrument design and selection. (NBB, MT)
    - 5. Enhance the FSMA’s framework for the analysis of structural vulnerabilities of investment funds and integrate it more closely into the NBB’s systemic risk assessment. (NBB, FSMA, NT)
  - C. Tools and Calibration
    - 6. Consider the introduction of a positive neutral CCyB and modify the CCyB framework accordingly. (NBB, NT)
    - 7. Consider the introduction of a SSyRB against CRE-related bank lending once additional data are collected to ensure an appropriate calibration. (NBB, NT)

*Source: EXECUTIVE SUMMARY, Technical Note on Belgium macroprudential framework (IMF).*

### 6.      Within Europe, macroprudential policy is guided by separate yet interlocking bodies of

### 1belea2023010 - 6.      Within Europe, macroprudential policy is guided by separate yet interlocking bodies of

### EU legislative guardrails for banking-sector macroprudential policy
- Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR) provide harmonized guardrails while leaving room for national concerns.
- CRD delineates framework for setting capital buffers (Title VII, Chapter 4), including:
  - capital conservation buffer (CCoB)
  - countercyclical capital buffer (CCyB)
  - global and other systemically important institutions buffers (G-SII and O-SII buffers)
  - systemic risk buffers (SyRB)
- CRR specifies:
  - capital requirements along various risk dimensions (Part 3)
  - treatment of large exposures (Part 4)
  - liquidity (Part 6) and leverage (Part 7) requirements
  - Article 458 provisions allowing national flexibility if systemic risks are insufficiently addressed by CRD/CRR.
- SyRB modalities preserved exactly as described:
  - general systemic risk buffer (GSyRB) applying to all exposures of a bank
  - sectoral systemic risk buffer (SSyRB) applying only to some exposures (e.g., mortgages collateralized by residential real estate)
  - SyRBs can be applied to all banks or only a subset of them

### Belgian legal framework and instruments
- CRD/CRR provisions are reflected in:
  - Law on the Legal Status and Supervision of Credit Institutions (the Banking Law)
  - Law Establishing the Organic Statute of the National Bank of Belgium (the Organic Law)
  - The Law Establishing the Mechanisms of a Macroprudential Policy and Spelling out the Specific Tasks Devolved to the National Bank of Belgium (the Macroprudential Law)
- Organic Law provides legal basis for macroprudential instruments under Belgian law, including measures not incorporated into CRD/CRR (Organic Law, Article 36/34).
- Macroprudential tools available to authorities include:
  - (i) setting requirements for capital and liquidity buffers as well as for leverage, minimum funding and disclosures
  - (ii) putting limits on exposures and profit distribution
  - (iii) establishing rules for asset valuation and the assessment of collateral
  - (iv) imposing borrower-based measures

### Macroprudential frameworks outside banking
- Solvency II Directive for insurers has a microprudential focus with limited room for systemic targeting; includes provisions requiring review of long-term guarantees measures and measures on equity risk.
- Proposals for Solvency II review foresee incorporation of macroprudential objectives and associated tools.
- EU Directives for investment funds and occupational pension funds provide sparse or no macroprudential levers:
  - UCITS Directive allows suspending redemption of investment fund shares if deemed in the interest of the investors or the public (Article 84).
  - AIFM Directive enables imposition of leverage limits (Article 25).
  - IORP II Directive for occupational pension funds offers no scope for macroprudential policy.

### Division of powers between national and EU authorities; ESRB and ECB roles
- Powers to implement macroprudential measures are a shared competency between national and European authorities; primary responsibility lies at the national level for developing frameworks and activating instruments.
- ESRB provides direction on institutional arrangements, intermediate objectives and instruments; EU Member States face limited constraints as long as CRD/CRR legal provisions are respected.
- Single Supervisory Mechanism (SSM) Regulation, Article 5(1): macroprudential authorities in the euro area must inform the ECB prior to taking any decision to allow ECB review and objection.
- Article 5(2) SSM: ECB may impose more stringent requirements on banks than national authorities for macroprudential instruments falling under CRD/CRR to prevent inaction bias.
- ESRB can issue non-binding warnings and recommendations covering risks across the financial sector; a recommendation triggers a “comply or explain” obligation for the concerned national authority.
- ECB and ESRB compile (non-public) macroprudential (ECB) and country risk assessment (ESRB) reports reviewing systemic financial sector risks and macroeconomic policy stance.
- ESRB develops guidelines, recommendations and opinions about use of particular macroprudential instruments.

### National institutional arrangements and mandates in Belgium
- Macroprudential Law designates the NBB as the sole macroprudential authority; complements NBB’s role as microprudential supervisor of credit institutions, (re-)insurances and other financial service providers.
- NBB powers include making recommendations to national and European authorities if identified systemic risk falls outside its regulatory perimeter (Organic Law, Article 36/35).
- Organic Law requires national authority subject to a recommendation to inform NBB about measures taken in response and to provide justification in case of non-compliance (Organic Law, Articles 36/39-40).
- FSMA has no macroprudential powers but supervises financial markets, occupational pension schemes, financial service providers and intermediaries not under NBB (notably investment funds), and is tasked with consumer protection and business conduct.
- Organic Law endows the government with decision power over borrower-based measures (Organic Law, Article 36/38).

### Legal definition of financial stability and NBB mandate
- Organic Law defines stability of the financial system as “a situation where the probability of discontinuity or disruption in the financial system is low or, if such disruptions should occur, where the consequences for the economy would be limited.” (Article 36/32 §2 1°).
- Organic Law obliges only the NBB to:
  - “detect, assess and monitor [...] factors which may affect the stability of the financial system [...]”
  - “contribute to the stability of the financial system [...] through strengthening [its] robustness [...], preventing the occurrence of systemic risks and limiting the effect of potential disruptions [...]” (Article 12 §1).
- Neither the Organic Law nor other legislation give the government guidance on considerations when deciding on borrower-based measures under its control (Article 36/38 §2).

### Accountability, reporting and communication
- NBB accountability specified in Organic Law; mandated to report to parliament and allows the NBB Governor to testify in parliament (Article 28).
- NBB sends to parliament:
  - Annual Report (key financial stability messages)
  - Annual Financial Stability Report (FSR), which includes Macroprudential Policy Report (MPR)
- FSR and MPR jointly elaborate on financial sector developments and risks, provide overview of macroprudential policy decisions, rationale, design, and report on framework development activities.
- FSMA and NBB compile an annual report on non-bank financial intermediation in Belgium and associated risks.
- Banking Law obliges NBB to report and justify:
  - quarterly CCyB decisions (Banking Law, Annex IV, Article 5)
  - annual designations of G-/O-SIIs and associated buffer requirements (Banking Law, Annex IV, Article 15)
- NBB publishes ad-hoc background materials and in-depth studies (examples cited: NBB (2023) “The Belgian Macroprudential Policy Framework for the Banking Sector”; NBB (2022) “Setting the Countercyclical Buffer Rate in Belgium: A Policy Strategy”).
- NBB engages in extensive outreach: in-person meetings, press releases, press conferences, webinars, blog entries, Q&As, and strengthened exchange with government for early buy-in.

### Ability to act: government influence and decision powers
- Government retains considerable influence; activation/modification of most macroprudential instruments require approval by Minister of Finance or Council of Ministers and enactment by Royal Decree.
- This arrangement differs from most ESRB jurisdictions where central bank, supervisory authority or financial stability committee hold decision powers.
- Government maintains hard powers over borrower-based measures; examples where Government is proposer/approver listed in Table 2 (excerpted instruments and decision powers):
  - CCyB: Proposal NBB; Approval Ministry of Finance
  - CCoB: Proposal NBB via Art. 458 CRR; Approval Council of Ministers
  - Leverage ratio: Proposal NBB via Art. 458 CRR; Approval Council of Ministers
  - SyRB: Proposal NBB; Approval Ministry of Finance
  - G-/O-SII buffers: Proposal NBB; Approval Ministry of Finance
  - National flexibility measures via Art. 458 CRR: Proposal NBB via Art. 458 CRR; Approval Council of Ministers
  - Liquidity coverage ratio: Proposal NBB via Art. 458 CRR; Approval Council of Ministers
  - Net stable funding ratio: Proposal NBB via Art. 458 CRR; Approval Council of Ministers
  - Borrower-based measures (hard powers):
    - Loan-to-value ratio: Government (the King), on NBB advice; Approval Council of Ministers
    - Debt-to-income ratio: Government (the King), on NBB advice; Approval Council of Ministers
- Government relies heavily on NBB expertise when assessing systemic risks and when taking/approving macroprudential decisions.

### Past instances of non-enactment and practical constraints
- Instances where NBB recommendations were not enacted by government:
  - April 2017: NBB proposal to strengthen capital buffers against residential mortgage lending (including higher loss-given-default floors) failed to obtain government consent.
  - October 2013 add-ons to risk weights for residential mortgage portfolios expired; NBB asked banks to maintain associated capital cushions until a new measure could be formally put in place in April 2018.
  - 2017–2022: NBB advocated lowering maximum guaranteed rate of return on life insurance products to safeguard insurers; government did not follow non-binding advice as envisaged maximum would have been below minimum rate of return employers were obliged to provide on defined contribution occupational pension schemes.
- Such disagreements demonstrate government influence can complicate NBB’s ability to respond and can delay or avert appropriate policy adoption.

### Use of semi-hard and soft powers by NBB and FSMA
- NBB adopted “prudential expectations” in 2020 (semi-hard powers) to discourage riskier residential mortgage lending, obliging banks and insurance companies to meet maximally permissible:
  - loan-to-value (LTV)
  - debt-service-to-income (DSTI)
  - debt-to-income (DTI) ratios
  - or provide justification for deviations (comply or explain mechanism).
- Prudential expectations helped mitigate vulnerabilities while taking distributional concerns into account (impact on first-time buyers noted).
- NBB used soft powers to influence banks and insurers not to lengthen mortgage maturities during low interest rates; policy later reversed to cushion impact of higher interest rates.
- FSMA guided publicly offered Belgian open-ended investment funds to allow liquidity management tools in contract documentation despite no legal requirement.
- Advantages of semi-hard/soft powers:
  - expand regulatory perimeter to financial sectors lacking established macroprudential frameworks (insurances, investment funds)
  - do not require legislative action to become effective

_Italic Source: 1belea2023010 - 6.      Within Europe, macroprudential policy is guided by separate yet interlocking bodies of_

### 14.      The NBB has sufficient capacity to obtain information enabling it to fulfill its

### 1belea2023010 - 14.      The NBB has sufficient capacity to obtain information enabling it to fulfill its

### NBB capacity to obtain information and legal powers
- The Organic Law gives the NBB wide-ranging powers to request the information required to contain systemic financial sector risks (see Organic Law, Article 36/33).
- The Organic Law allows the NBB to make use of information gained under its statutory tasks, such as microprudential supervision, and to source information from private sector entities outside its regulatory perimeter, either directly or via the authorities responsible for such entities (see Organic Law, Article 36/33 §2).
- The Organic Law stipulates cooperation by the government and other national authorities to provide the NBB with any information and expertise necessary to exercise its tasks (see Organic Law, Article 36/33 §3).
- A protocol between the NBB and FSMA foresees the possibility to exchange confidential information if needed.

### Effective coordination and institutional arrangements
- Tight economic and financial integration in Europe has produced mechanisms to ensure close coordination of macroprudential policies through ECB and ESRB working groups and committees; the ESRB serves as a hub for collecting and communicating policy decisions taken by national macroprudential authorities and to ascertain mutual recognition of macroprudential policy measures across its membership.
- The NBB is the sole designated macroprudential authority in Belgium; internal organization is therefore central to coordination:
  - The NBB established a Risk Team Macroprudential Policy (RT MPP) to combine in-house expertise across functional departments for systemic risk identification and assessment.
  - RT MPP discussions feed into the Macro-Financial Committee (MFC), where heads of departments deliberate on RT MPP risk assessments and recommend policy actions to the NBB’s Board of Directors.
  - These arrangements mirror ECB and ESRB structures, promoting efficient collaboration with supranational institutions.
- The FSMA closely collaborates with the NBB on competencies, notably investment and pension fund sectors:
  - FSMA and the NBB maintain a forum to exchange views on developments and vulnerabilities among non-bank financial institutions.
  - The FSMA participates in NBB internal briefings for ESRB General Board meetings; the FSMA is also taking part in the ESRB’s expert group on non-bank financial intermediation and the FSMA Chairman is a non-voting member of the ESRB General Board.

### Composition and reach of RT MPP (technical staffing)
- Staff from the “Macroprudential Surveillance” unit in NBB’s Financial Stability Department play a key role in the RT MPP.
- The RT MPP also involves staff from:
  - “Prudential Policy and Financial Stability”
  - “Prudential Supervision of Banks and Stockbroking Firms”
  - “Prudential Policy and Inspection Insurance”
  - “Surveillance of Financial Market Infrastructures, Payment Services and Cyber Risks”
  - “Prudential Supervision of Insurance and Reinsurance Companies”
  - “Legal”
  - “Analysis and Research”
  - “Financial Markets”
  - “Statistics”
  - “Microeconomic Information”

### Recommendations on governance and decision-making (numbered as in source)
- Recommendation 17:
  - Reiterate the 2018 FSAP recommendation to grant the NBB, in the medium term, the full power to set macroprudential policy, without the need for government approval.
  - Rationale: Government role in borrower-based measures can be justified by distributional and socio-economic consequences, but the present framework attributes a role to the government that may legally and practically weaken the NBB’s ability to act; vesting full discretion with the NBB while retaining a consultative role for government would improve timely deployment of measures.
- Recommendation 18:
  - In the near-term, grant the NBB the power to set CRD/CRR tools at the national level, without the need for government approval.
  - Rationale: Government influence on CRD/CRR tools is less common in Europe; best practice is to have such powers explicitly in the hands of a ministry or the designated macroprudential authority for transparency and accountability.
- Recommendation 19:
  - Cease the requirement for renewed government approval of unmodified CRD/CRR measures.
  - Rationale: Requiring government re-approval of prolongation of active CRD/CRR instruments, even if calibration is unchanged, risks lapse for political reasons and adds unnecessary administrative layers; EU legislation already requires periodic re-approval for certain CRD/CRR tools (e.g., CRR Article 458 measures have a two-year expiration and need renewal).
- Recommendation 20:
  - Government and NBB should strengthen communication of the rationale for macroprudential policy decisions, including inaction.
  - Observations:
    - NBB communication on the CCyB and O-SII buffers is strong; framework requires quarterly (CCyB) or annual (O-SII buffer) announcements outlining factors underpinning their setting even if no activation or changes occur.
    - For other tools, early communication by the NBB may be hindered by the need to obtain government approval before wider conveyance, creating room for inaction and weakening transparency.
  - Proposal: Establish a formal protocol for communication about all macroprudential policy decisions, including instances of no action, and publish factors influencing government deliberations with financial stability impact to boost accountability and strengthen policy transmission.

### Systemic risk monitoring: objectives reviewed
- Monitoring and evaluating systemic vulnerabilities is crucial for timely calibration of macroprudential policy.
- The review assesses:
  - (i) availability of adequate data and indicators,
  - (ii) use of quantitative methods to detect and analyze systemic risks,
  - (iii) relationship between systemic risk assessment and policy decisions.

### Data sources and indicators (availability and gaps)
- The NBB has wide access to micro- and macro-financial data due to its microprudential supervision role and legal powers to request additional information.
- Collaboration with FSMA provides insight into intermediaries outside NBB regulatory perimeter.
- The NBB uses proprietary datasets and a network of formal and informal contacts for intelligence.
- For households:
  - Central Individual Credit Register (CICR) collects detailed information about newly originated and defaulted mortgage and consumer loans by all types of lenders.
  - CICR lacks insight into types and levels of interest charged, credit standards (loan-to-value or debt-service-to-income ratios), outstanding debt balances, debt servicing methods, borrower incomes, or underlying collateral.
  - To address shortcomings, the NBB instituted a PHL (Prêts Hypothécaires / Hypothecaire Leningen) survey:
    - Banks: half-yearly, since 2012.
    - Insurers: yearly, since 2018.
    - Survey queries banks and insurers with significant mortgage lending operations about characteristics of new and existing loans at aggregate portfolio level.
  - Additional sources: survey of purpose of mortgage loans, microprudential reporting, and the three-yearly Household Finance and Consumption Survey (HFCS) which complements microlevel data about household incomes and assets in relation to debt servicing obligations.
- For non-financial corporations:
  - Corporate Credit Register (CCR) reflecting AnaCredit requirements became operational in 2022.
  - CCR collects monthly information about loans granted by credit institutions and leasing companies to legal entities and professional activities of natural persons.
  - CCR offers granular information at individual loan level, including credit terms and conditions, credit status and events, and credit protection.
  - Corporate solvency, liquidity and profitability assessed with annual accounts filed with NBB’s Central Balance Sheet Office (CBSO) and complemented by quarterly value-added tax returns giving insight into corporate turnover, consumption of intermediates and profit margins.
- For financial sector exposures other than loans:
  - NBB relies on data reported under European Market Infrastructure Regulation (derivatives exposures) and Securities Financing Transactions Regulation (securities financing).
  - Uses the ECB’s securities holdings statistics (equity and debt securities and investment fund shares), microprudential reporting by banks under the Common Reporting Framework (large exposures, concentration of funding, counterparty credit risk, securitizations) and Scheme A (securities investments), reporting by insurances under Solvency II (asset holdings), and quarterly data from investment and pension funds on securities holdings.
- For commercial real estate (CRE):
  - NBB improved data coverage by gathering information about transactions, prices and property characteristics using market intelligence and private data providers, most notably MSCI Real Capital Analytics.
  - Exposures by financial intermediaries to CRE-related risk via direct investment in physical property sourced from MSCI Real Capital Analytics (all financial institutions) and from financial (real estate investment trusts) and prudential (insurances) reporting.
  - Indirect exposures gauged from ECB securities holdings statistics, Solvency II reporting by insurances, and banks’ financial reporting standards established by the European Banking Authority.
  - Performance of non-financial corporations active in CRE-related industries based on annual accounts data from NBB’s Central Balance Sheet Office.

### Quantitative methods employed
- A range of quantitative approaches is used to assess the financial cycle and detect systemic risks:
  - Color-coded heatmap:
    - Processes a wide array of macro-financial indicators to identify potential build-up and materialization of systemic risks and provide a basis for further analysis and policy discussion.
    - Thresholds triggering alert degrees are calibrated using statistical distributions from past indicator values in Belgium or representative samples, limits set by legislation, regulatory guidelines, model-based approaches and expert judgement.
  - Financial conditions index:
    - Summarizes 17 indicators into five sub-categories capturing credit and private sector debt, real estate, financial markets and banking sector conditions, while accounting for co-movement of sub-categories.
  - Early warning framework:
    - Connects state of financial cycle with probability of financial crisis.
    - Employs a suite of models predicting financial crises for various permutations of cyclical and structural variables capturing credit and real estate market developments in a sample of countries.
    - Computes country-specific crisis thresholds and sorts model outcomes into risk buckets to assess evolution and intensity of cyclical systemic risk.
    - Model results are also used to project the development of the non-performing loan (NPL) ratio in Belgium.
  - Bank loss projection and margin analysis:
    - Tools project flow of loan loss provisions on domestic credit portfolios of Belgium’s six largest banks based on scenarios applied to a set of six macroeconomic variables, intended to support calibration of capital buffers and assess shifts in yield curves on net interest rate margins.
  - Residential real estate valuation model:
    - Links level of real house prices to fundamental factors including real household disposable incomes, real mortgage interest rates, number of households and dummy variables for tax regime changes.

*Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1belea2023010.pdf*

### 24.      The FSMA has strengthened its   data analytics and stress testing frameworks. For

### 1belea2023010 - 24.      The FSMA has strengthened its   data analytics and stress testing frameworks. For

### FSMA data analytics and stress testing — key activities
- Developed a surveillance tool based on market transaction data to detect potential insider trading.
- Used web scraping techniques to investigate consumer protection issues.
- Performed data-driven analysis of:
  - retail investor behavior,
  - potential “closet indexing” by actively managed investment funds,
  - potential greenwashing by asset managers.
- Executes a quarterly assessment of risks originating from leveraged alternative investment funds.
- Under a new data sharing agreement with the NBB, used granular information about portfolios of investment funds to:
  - take stock of asset positions,
  - conduct a pilot liquidity stress test.

### NBB systemic risk assessment framework (biannual and supplementary work)
- Combines macro-financial indicators and quantitative tools with expert judgment to produce a comprehensive biannual systemic risk assessment.
- Two complementary angles:
  - Bird’s-eye view: detects potential financial stability risks via macro-financial developments impacting solvency, profitability and liquidity of banks, insurances and financial market infrastructures; quantitative tools inform on the financial cycle, loan portfolio quality, and asset valuations.
  - View from below: institution- or sector-specific insights from microprudential supervision.
- Biannual output:
  - Summary used for discussions on potential macroprudential policy measures.
  - Provides qualitative and/or quantitative evaluation of likelihood and materiality of cyclical or structural vulnerabilities for different parts of the financial sector, and whether identified risks have materialized.
- Supplemented by:
  - regular and ad-hoc analyses (example: impact of energy efficiency of buildings on real estate valuations),
  - an annual risk review determining supervisory priorities and resource allocation.

### Operationalization of macroprudential policy — objectives and mapping to instruments
- NBB adopted ESRB-recommended intermediate objectives:
  (i) the mitigation and prevention of excessive credit growth and leverage,
  (ii) the mitigation and prevention of excessive maturity and liquidity transformation,
  (iii) the limitation of direct and indirect exposure concentration,
  (iv) the limitation of the systemic impact of misaligned incentives with a view to reducing moral hazard.
- The NBB grouped its macro-financial indicator heatmap into four buckets associated with each intermediate objective.
- Instruments are linked to their chief intermediate objective (a measure can also contribute to other objectives).

- Main instruments at NBB disposal (mapped to intermediate objectives):
  - Mitigation and prevention of excessive credit growth and leverage:
    - Capital requirement: Countercyclical capital buffer; Systemic risk buffer; Sectoral capital requirements; Leverage ratio.
    - Lending limit: Borrower-based measures (recommendations or prudential expectations); Large exposure limits.
  - Mitigation and prevention of excessive maturity and liquidity transformation:
    - Liquidity requirement: Net stable funding ratio; Liquidity coverage ratio.
  - Limitation of direct and indirect exposure concentration:
    - Capital requirement: Sectoral capital requirements; Systemic risk buffer; Leverage ratio.
    - Lending limit: Borrower-based measures (recommendations or prudential expectations); Large exposure limits.
  - Limitation of the systemic impact of misaligned incentives (reducing moral hazard):
    - Capital requirement: Global systemically important institutions buffer; Other systemically important institutions buffer; Systemic risk buffer; Leverage ratio.
    - Liquidity requirement: Net stable funding ratio; Liquidity coverage ratio.

### Recommendations to strengthen data use and systemic assessment
- Further integrate and leverage NBB data sources to enrich systemic risk analysis:
  - Expand cross-fertilization of work (examples cited: wage and energy price pressures on corporate profitability; banking sector exposures to energy-intensive industries; impact of energy efficiency on house prices and mortgage portfolio risks).
  - Use data from CBSO for firm liquidity/leverage and HFCS for household income and wealth characteristics to better assess resilience of household and corporate balance sheets and associated risks to financial sector exposures.
  - Maximize use of data to understand interconnectedness of financial intermediaries domestically and abroad to identify channels of spillovers and contagion.
  - Integrate the large pool of data on commercial real estate markets to form a holistic view of potential vulnerabilities and detect remaining gaps.

- Strengthen NBB’s systemic risk framework with additional quantitative tools:
  - Complement current risk-by-risk approach by placing more emphasis on materiality as well as probability.
  - Introduce scenario analysis and link it more closely to stress testing of financial intermediaries to gauge repercussions on the most systemically relevant institutions and enhance microprudential insights.
  - Model channels of contagion with available data to estimate aggregate financial sector losses; use results to select and calibrate macroprudential instruments.

- Enhance FSMA’s framework on investment funds and integration with NBB:
  - Fully exploit granularity of recent dataset on portfolio structure of investment funds.
  - Collect further information to better evaluate interconnectedness risks from investment funds with the financial system.
  - Make regular stress testing of open-ended investment funds part of the toolkit (build on successful pilot).
  - Integrate FSMA’s analysis of the non-bank financial sector more tightly into the NBB’s systemic risk framework to regularly assess vulnerabilities and identify potential spillovers.

### Macroprudential tools in use and key calibrations/actions (selected)
- CCyB framework:
  - Put in place on January 1st, 2016, with quarterly review of CCyB setting.
  - A rise to 0.5 percent planned for July 1st, 2020 was abandoned on April 1st, 2020.
  - CCyB remained at zero percent amid macro-financial uncertainties until NBB announced activation on August 31st, 2023 at rates of 0.5 percent and 1 percent to become effective from April 1st, 2024, and October 1st, 2024, respectively.
- CCoB:
  - Fully phased in at a rate of 2.5 percent of risk exposures since January 1st, 2019.
- Leverage ratio (LR):
  - 3 percent of total assets effective on June 28th, 2021.
- IFRS 9 forward-looking loan loss provisioning:
  - Adopted on January 1st, 2018.
- Prudential expectations on mortgage origination (effective January 1st, 2020):
  - Owner-occupied properties: 90 percent loan-to-value (LTV) ratio; 35 percent of mortgages to first-time buyers can have LTV > 90 percent, of which 5 percent may exceed 100 percent LTV.
  - Other buyers of owner-occupied dwellings: 20 percent of mortgages permitted with LTV between 90 and 100 percent.
  - Buy-to-let: 80 percent LTV with max 10 percent between 80 and 90 percent.
  - Only 5 percent of mortgages tolerated to have LTV > 90 percent in combination with DSTI of 50 percent or DTI of 9.
  - Comply-or-explain approach with annual reporting to NBB.
- Additional capital charge / SSyRB for banks using internal risk models on residential mortgages:
  - Risk weight add-ons introduced on October 22nd, 2013; multiplier applied on April 30th, 2018.
  - In May 2022, about € 2 billion additional capital cushion converted into a 9 percent SSyRB of equivalent size.
  - Measure extended to April 2024; NBB announced to lower the SSyRB beyond April 2024 to a level of 6 percent in combination with CCyB activation.
- Energy-performance expectations:
  - Issued December 1st, 2020 to gather information on energy performance of properties and ask banks/insurers to incorporate vulnerabilities into risk management.
- Liquidity standards:
  - Liquidity coverage ratio (LCR) effective October 1st, 2015: at least 100 percent coverage of simulated net cash outflows in a 30-day stress scenario.
  - Net stable funding ratio (NSFR) effective June 28th, 2021.
- Liquidity management tools for open-ended investment funds:
  - Legislative changes adopted October 15th, 2018; by end-2022 nearly all relevant vehicles allowed for anti-dilution levies, swing pricing, redemption gates or combinations.
- O-SII buffers and systemic interconnectedness:
  - Since January 1st, 2016, annual designation of domestic systemically important institutions with O-SII buffers.
  - Eight banks subject to additional capital: Belfius Bank, BNP Paribas Fortis, ING Belgium, KBC Group at 1.5 percent; Crelan, Euroclear Holding, Investeringsmaatschappij Argenta, The Bank of New York Mellon at 0.75 percent.
  - O-SII buffers together amount to more than € 5 billion.
  - Limits on intragroup exposures between Belgian banks and their parent/sister companies in force since March 4th, 2014.
  - NBB can provide input into SSM’s authorization of strategic decisions of Belgian SIs.

*Source: IMF staff compilation from the provided chapter text.*

### 32.      Next to making use of its hard and semi-hard powers, the NBB is also employing

### Next to making use of its hard and semi-hard powers, the NBB is also employing softer forms of influence

### NBB supervisory actions and soft powers
- The NBB benchmarks lending standards as well as loan pricing and margins of banks and insurances against each other, provides systematic feedback to individual institutions and has arranged meetings of outliers with the NBB Board, establishing an effective peer mechanism to contain mortgage vulnerabilities.
- The NBB has encouraged the prudent lengthening of mortgage maturities by lenders to cushion the impact of higher interest rates on the debt servicing burden (principal and interest) of borrowers, reversing a prior policy with opposite effect.
- The NBB has repeatedly given guidance to the banking sector to exploit the space opened by its decisions to suspend a tightening of the CCyB rate to sustain the provision of credit and/or to proactively engage with borrowers in need of debt restructuring.
- Before recent CCyB activation, the NBB relied on the SSyRB as the single releasable buffer and on soft powers to encourage use of banks’ capital cushions to sustain credit provision and engage with distressed borrowers.

### Assessment of broad-based vulnerabilities
- Private sector credit (NBB’s preferred debt concept): grew from 69 percent in 2000:Q1 to 83 percent in 2022:Q4.
- Credit growth exhibited prolonged phases of subdued developments after the dotcom bubble and the global financial crisis; exceptional easing starting in 2014 re-ignited credit expansion.
- Household debt: rose from 39 percent of GDP in 2002:Q1 to 61 percent of GDP in 2022:Q3.
  - Residential mortgages account for the bulk of household debt and have been the sole driver of its rise.
- Corporate indebtedness (including inter-company lending): rose from 97 percent of GDP in 2000:Q1 to 141 percent of GDP in 2022:Q3.
  - Excluding inter-company lending and certain non-bank foreign and captive funding, corporate debt reached 59 percent of GDP in 2022:Q3 after 49 percent of GDP in 2000:Q1.
- Credit cycle turning: re-opening, energy crisis, and swift monetary tightening increased borrowing costs and tightened lending conditions; the credit gap swung from positive since 2017:Q4 into negative territory, though signaling quality is marred by nominal GDP fluctuations.

### Household and housing market vulnerabilities
- Household debt as a percentage of gross disposable income has surpassed 100 percent in recent years.
- Debt servicing ratio has stayed broadly constant since 2014.
- HFCS (2021 vintage) indicators:
  - About 16 percent of outstanding mortgage debt constitutes loans with 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 servicing their debt.
  - More than a fifth of households, accounting for around a fourth of outstanding mortgage debt, lack the liquidity to cover more than six months of debt service.
  - Nearly a tenth of the mortgages with LTV above 80 percent are referenced in a footnote (context retained in source).
- Housing market developments:
  - Model-based estimates indicate house prices approximately 10 percent (NBB) and 15 percent (ECB) above fundamentals.
  - House price increases have decelerated since the pandemic; mortgage applications have dropped sharply.
- Resilience factors:
  - Prevalence of fixed-rate, fully amortizing mortgages.
  - Strong labor markets, excess savings accumulated during the pandemic, and automatic wage indexation.
  - Inflation episode may have lightened household debt burdens via nominal wage passthrough and erosion of real debt balances.
- Vulnerabilities and risks:
  - Another major economic and/or financial shock, particularly combined with a sharp correction in house prices, could expose a non-negligible share of households to debt distress and weaken mortgage portfolio quality.
  - Low income and/or low-liquid-asset households and borrowers with variable-rate debt are particularly at risk.
  - A precipitous fall in house prices far beyond currently estimated overvaluation could undermine collateral values and lead households to prioritize debt servicing over consumption, generating negative spillovers.

### Policy assessment and recommendations on housing-related buffers and measures
- Evidence indicates Article 458 CRR measures, their successor the SSyRB, and non-legally binding borrower-based measures have discouraged riskier mortgage lending; share of high LTV ratios in new originations and the stock of outstanding mortgages has decreased since NBB’s “prudential expectations.”
- Recent CCyB activation (stepwise lifting to 1 percent) should help address potential unexpected losses from tighter financial conditions affecting credit portfolios, including outside mortgage lending.
- IMF assessment recommendations:
  - Maintain the SSyRB at its 6 percent rate until more clarity about housing market prospects is obtained.
  - Keep exemptions from borrower-based measures under review to prevent them becoming a source of vulnerability.
- Context on buffers:
  - The combined € 3.6 billion of capital provided by the SSyRB at a 6 percent rate and the CCyB at a 1 percent rate once fully phased in by October 1st, 2024, is higher than the € 2 billion offered by only the SSyRB at a 9 percent rate.
  - In a stress scenario simulating a decline in residential real estate values in line with the FSAP banking sector stress test, both buffers would compensate for part of the € 5.1 billion drop in CET1 capital levels below the 2024 baseline (equivalent to a fall in the CET1 ratio from 20.9 percent to 17.8 percent).

### Corporate and CRE vulnerabilities
- Corporate borrowing: overall credit growth mostly in the 0-5 percent range since post-global financial crisis period; corporate debt as percent of GDP mostly on a declining trend since 2016:Q4.
- Credit quality:
  - Corporate loan portfolio quality is worse than aggregate portfolio (aggregate benefits from low NPL ratios of residential mortgages) but somewhat more favorable than in some euro area comparators.
  - NPL ratios in most NFC sectors have decreased since end-2019; deteriorations observed in utilities (D), logistics (H), and information and communication technology (J).
- Corporate sector composition:
  - After excluding inter-company lending and certain foreign/captive funding (accounting for respective 27 percent and 30 percent of the total), banks are the primary source of funding for Belgian firms; bond issuance share increased but remains small.

### Key statistics and indicators (exact values preserved)
- Private sector credit (NBB concept): 69 percent in 2000:Q1 → 83 percent in 2022:Q4.
- Household debt: 39 percent of GDP in 2002:Q1 → 61 percent of GDP in 2022:Q3.
- Corporate indebtedness (including inter-company lending): 97 percent of GDP in 2000:Q1 → 141 percent of GDP in 2022:Q3.
- Corporate debt excluding inter-company and certain non-bank foreign/captive funding: 49 percent of GDP in 2000:Q1 → 59 percent of GDP in 2022:Q3.
- Household debt-to-gross-disposable-income: surpassed 100 percent in recent years.
- HFCS (2021): 16 percent of outstanding mortgage debt with LTV > 80 percent; nearly 3 percent of borrowers account for roughly 7 percent of mortgage volumes and spend more than half their income servicing debt; more than a fifth of households (around a fourth of outstanding mortgage debt) lack liquidity to cover more than six months of debt service.
- Non-performing housing loans: 0.9 percent in 2022:Q4 vs 1.1 percent in 2019:Q4.
- SSyRB: 6 percent (recommended to be maintained until housing outlook clearer).
- CCyB: stepwise lifting to 1 percent (recently announced).
- Combined capital from SSyRB (6 percent) and CCyB (1 percent) once fully phased in by October 1st, 2024: € 3.6 billion.
- SSyRB at 9 percent would have offered € 2 billion in capital (comparison context in source).
- Stress test implied drop in CET1 capital levels: € 5.1 billion below the 2024 baseline; CET1 ratio fall from 20.9 percent to 17.8 percent in the scenario.

*Source: IMF staff compilation of material in the provided content unit.*

### 43.      A surge of wage and cost inflation, dearer funding and weakening economic activity

### A surge of wage and cost inflation, dearer funding and weakening economic activity

### Corporate profitability, leverage, and debt servicing
- Debt servicing ratio came close to its historic lows in 2022.
- Aggregate debt-to-asset ratio: from 66 percent in 2008 to 54 percent in 2021.
- Corporate accounts for 2021:
  - Upper two thirds of companies: robust profitability.
  - Lowest tercile of companies: low or negative returns on assets across the large majority of sectors.
- Interest coverage ratios (ICRs) were generally above the level commonly perceived as critical; only sectors with comparatively limited bank loan exposures recorded ICRs below the threshold of 2.
- Concern: a surge in wage and cost inflation, dearer funding, and weakening economic activity may weigh on profitability and debt servicing capacity, particularly for operationally challenged firms.

### Commercial real estate (CRE) exposures and market conditions
- CRE collateralized NFC lending: about 15 percent of GDP or 7 percent of banking sector assets.
- CRE lending has risen from pre-pandemic levels, accounting for more than a fourth of total NFC credit at the end-2022.
- CRE loans concentrated across sectors: real estate activities (L), construction (F), professions (M), health care (Q), and trade (G).
- LTV distribution (February 2023):
  - Nearly three quarters of CRE exposures show an LTV ratio of less than 60 percent.
  - More than 10 percent have LTV ratios of 80 percent and beyond.
- CRE prices and yields:
  - Belgian CRE prices have shown cyclicality yet less volatile compared to European average and have stayed below their 2007 peak.
  - Net initial yields in 2022 still offer a relatively attractive pick-up compared to safer assets.
- Insurers:
  - Increased CRE exposures, bringing their share in total investment portfolios to 12 percent by 2022, after less than 8 percent in 2016.
  - CRE exposures include direct property investments, holdings of investment funds with a CRE focus, CRE-related loans, and bonds/equity of firms active in CRE.

### Banking funding, repricing, and liquidity
- Funding structure:
  - Deposits by the non-financial sector account for around three quarters of financing.
  - Reliance on market-based funding: less than 10 percent.
  - Retail deposits represent approximately two thirds of available stable funding; about 60 percent of retail deposits are covered by deposit insurance.
  - Loan-to-deposit ratio: close to unity and below levels in neighboring economies.
- Repricing environment and market developments:
  - Following ECB monetary policy rate increases, bank assets have begun to reprice while deposit rates increases have remained modest to date, improving net interest margins.
  - Issuance of a one-year, favorably taxed, government bond in August 2023 raised €22 billion, largely originating from the about €300 billion in household savings deposits which are constituting around half of the private non-financial sector deposits of banks resident in Belgium.
  - Past legislative proposals considered linking the pricing of regulated savings deposits to ECB policy rates or Belgian sovereign yields but gained little traction.
  - Phase-out of the ECB’s favorably priced liquidity facilities has affected banks’ funding costs.
- Liquidity ratios and central bank liquidity:
  - LCR: improved from about 140 percent in early 2020 to a peak of more than 210 percent at the beginning of 2021; back to 160 percent by end-2022.
  - NSFR: declined somewhat but remains higher than the European average and above the regulatory minimum.
  - Central bank liquidity outstanding to Belgian banks: nearly € 90 billion at its high in mid-2021, up from € 19 billion at the end of 2019; by the spring of 2023 the amount had dwindled to € 47 billion.
  - Recent government bond issuance created temporary liquidity pressures among some banks.
- Risks:
  - Large-scale deviations from historical asset-liability repricing patterns could create mismatches and adversely affect bank profitability.
  - Liquidity buffers provide some space to meet possible deposit outflows from customers seeking higher yields, but pressures are mounting to raise deposit remuneration.

### Structural vulnerabilities of the financial sector
- Size and concentration:
  - Financial sector is large and banking-dominated: banks represent over half of financial assets, accounting for 210 percent of GDP.
  - Four major banks (BNP Paribas Fortis, KBC bank, Belfius bank, ING Belgium) constitute more than 73 percent of banking sector assets.
  - Remaining 16 LSIs contribute 3 percent of the market share.
  - Nearly half of banking sector assets are owned by foreign entities, implying potential risks of capital/liquidity withdrawals by foreign parents during turmoil.
- Asset composition and exposures:
  - Loans financing residential dwellings by households and credit linked to CRE markets account for about a third of total assets of banks.
  - Insurers increased their lending business, including provision of mortgages, but this share remains less than 15 percent of total investments held outside of index- and unit-linked business contracts.
  - Banks and insurers have reduced investments in sovereign debt over the past decade, lowering public–financial interlinkages, but exposures remain sizeable.
- Vulnerabilities from CRE:
  - A significant worsening of CRE market conditions, substantial weakening of economic activity, falling office occupancies, or obsolescence of energy-inefficient properties could reduce operating incomes, impair debt-servicing capacity, and erode recoverable collateral values.

### Policy recommendations and data needs
- Countercyclical Capital Buffer (CCyB):
  - The NBB should consider introducing a positive neutral CCyB and modify its CCyB framework accordingly if the introduction of such a buffer is deemed beneficial.
  - Rationale: switching to a positive neutral rate can ease activation and communication challenges, support capital build-up when risks are not yet elevated, and make banks more willing to use capital to support lending if it was explicitly maintained and releasable.
- Sectoral Systemic Risk Buffer (SSyRB) for CRE:
  - The NBB should consider instituting a SSyRB against CRE-related bank lending once appropriate calibration, based on additional data to be collected, can be performed.
  - Rationale: Belgian banks’ exposure to CRE risk is comparatively large in a European context, warranting a dedicated buffer to absorb potential losses from the more volatile CRE segment.
- Data improvements for CRE risk assessment:
  - Important data elements still missing for CRE portfolios include probability-of-default (PD) and loss-given-default (LGD) ratios of CRE loans.
  - The NBB’s efforts to improve the data basis for CRE should continue and, once sufficiently advanced, support establishment of an appropriately calibrated SSyRB.

*Source: IMF staff report chapter "A surge of wage and cost inflation, dearer funding and weakening economic activity."*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1belea2023010.pdf_