## 1luxea2024003

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### MACROFINANCIAL CONTEXT
- Assessment conducted "against heightened geopolitical uncertainty."
- Financial sector growth and scale:
  - Investment funds sector: "the second largest in the world after the U.S."
  - Investment funds sector size: "77 times GDP."
  - Bank assets: "12 times GDP."
  - Insurance sector: "3 times GDP."
  - OFI sector: sizeable, largely unsupervised/unregulated; over "50,000 entities."
  - About a quarter of gross value added and employment linked to the financial sector.
- Recent developments and outlook:
  - Real GDP fell by "1.1 percent in 2023."
  - Growth projected to rebound to "1¼ percent in 2024."
  - Unemployment: increased to "5.5 percent in December 2023."
  - Resident private sector credit: dropped by "3 percent yoy as of December 2023."
  - Bank loans to nonfinancial corporations: declined by "7¾ percent."
  - House prices: fallen by "15¾ percent from their peak in 2022Q3."
  - House price overvaluation as of 2023Q3: "between 10 and 25 percent" (IMF, BCL, CSSF, ECB estimates).

### SOURCES OF SYSTEMIC RISKS AND VULNERABILITIES
- Broad systemic risk sources identified:
  - Intensification of geopolitical tensions creating "a deep recession with high interest rates" (basis for adverse scenario).
  - Real estate sector vulnerabilities and "high private sector debt service obligations."
  - Bank liquidity risks via intragroup, cross-sectoral, and cross-border channels, including exposure to "potentially weak parent banks" and higher-than-average retail deposit runs or withdrawals from related investment funds.
  - Outward spillovers from investment funds selling foreign assets in large quantities.
  - Increasing cross-border flows unexplained by fundamentals that "may need additional monitoring in case of ML/TF risks."

### STRESS TEST RESULTS — OVERVIEW
- Banking sector solvency and recapitalization:
  - Aggregate CET1 ratio: would drop by "4.1 percentage points, from 21.7 percent as of December 2023, to 17.6 percent in 2024," with gradual recovery from 2025.
  - In the baseline, banks accounting for "8½ percent of assets" were weak.
  - Under the adverse scenario, the share of weak banks "is estimated to double."
  - Three banks in the baseline and six banks in the adverse scenario would breach at least one capital threshold.
  - Recapitalization needs under adverse scenarios: "0.5–1 percent of GDP" (also noted as "½–1 percent of GDP" and fractional glyph usages).
  - If CET1 minimum of "4.5 percent" used, one small bank would breach it.
  - Aggregate CET1 capital depletion drivers: lower noninterest income, loan loss provisions, and losses from bond portfolios.
  - Aggregate CET1 ratio sensitivity: marking HTM to market in adverse scenario would add "€13.1 billion" market losses in 2024 and drop CET1 by "6.5 percentage points"; recapitalization needs up to "8 percent of GDP" in that sensitivity.
- Banking sector liquidity and deposit runs:
  - Weighted average LCR: "229 percent" for stress test sample; "180 percent" in retail/universal bank sample.
  - All banks can sustain retail deposit outflows up to "20 percent."
  - Under a severe 30-day deposit run scenario (Credit Suisse and First Republic episodes), six banks (about "24 percent of total assets in the sample") would fall below the "100 percent LCR" requirement.
  - Funding gap: "15 out of 39 banks" would experience a funding gap over a 30-day horizon in severe scenario.
  - Pledging HTM at assumed penalty of 100bps implies additional funding cost of "€1.1 billion" and further CET1 decline of "1.4 percentage points."
  - Six banks without central bank facility access would sell HTM at market loss of "€88 million," decreasing CET1 by "0.8 ppts"; system-wide additional CET1 decline "0.5 percentage point."
- Investment funds and MMFs:
  - Investment funds’ NAV fall in adverse scenario: "13 percent" (median); equity funds fall "more than 17 percent."
  - GFC-based severe scenario: NAV fall "almost 20 percent overall"; equity funds decline by "28 percent."
  - Net redemptions cumulatively since 2022Q2: "2½ percent of net assets."
  - Investment fund sector could withstand redemptions up to "40 percent."
  - MMF preparedness: majority prepared for shocks up to "300 basis points" (some areas list "200 basis points" for MMFs before NAV conversion thresholds); two CNAV and four LVNAV funds (23 percent of MMF NAV) would breach the 20-basis-point NAV-change conversion threshold in scenarios.
  - Net redemptions estimated at "4 percent on average" in adverse scenario; some funds face low double-digit outflows.
  - Liquidation needs in adverse scenario: funds may need to sell up to "150 billion euros" in liquid securities (breakdown: "Almost €50 billion" sovereign bonds; "€20 billion" corporate bonds; "€70 billion" equities; by country: "U.S. €44 billion, France €16 billion, Germany €13 billion"). GFC scenario liquidation estimate: "€200 billion euros."
  - Six MMFs and four non-MMF funds identified for further monitoring.
  - Cross-border asset sales by funds in severe adverse scenario: "negligible second-round effects" on financial system and economy; nevertheless second-round spillbacks add "an additional one percentage point adverse impact on funds’ NAVs."
- Insurance sector:
  - Life insurers: assets decline by "9.4 percent" in adverse scenario; eligible own funds decline by "22 percent"; median SCR coverage after stress "127 percent" (from 150 percent pre-stress); no life insurer falls below regulatory threshold of "100 percent."
  - Lapse stress: simulated monthly outflow of "EUR 2.4 billion" against total sources of liquidity "EUR 32.5 billion" (coverage "13.6"), composed of cash "1.2 billion", HQLA after haircuts "9.3 billion", and reinsurance recoverables "22 billion."
  - Insurance sector could withstand lapse rates of "more than 40 percent" before needing to tap less liquid assets.
- Real economy and household sector:
  - Household debt: risen to "more than 180 percent of gross disposable income."
  - Two-thirds of mortgages (2018–2022) have DSTI > "40 percent."
  - Half of mortgages have DTI > "9."
  - A quarter have LTV ≥ "90 percent."
  - Share of variable-rate mortgages reduced to "42 percent" from "58 percent in September 2022."
  - Debt-at-risk: in adverse scenario, share of indebted households with debt-at-risk rises to "14 percent of indebted households" and to "30 percent of total debt."
  - Real estate firms: "high leverage and low cash cushions," already showing higher bankruptcy rates and vulnerable under baseline and adverse scenarios.

### SECOND-ROUND, MARKET-IMPACT, AND SENSITIVITIES
- Fire-sale impacts (adverse, seven-day liquidation, waterfall selling liquid securities first):
  - German and French sovereign bond prices fall by "0.4–1.2 percent" (≈ yield changes of "10 to 25 basis points" for five-year bonds).
  - Price impacts smaller in U.S. and U.K.
  - Banking sector second-round loss: "€156 million" aggregate additional loss or "0.1 percentage point" of CET1 for 39 banks.
- Sensitivity analyses:
  - Mark-to-market HTM: "€13.1 billion" additional losses; aggregate CET1 drop "6.5 percentage points"; recapitalization needs equivalent to "8 percent of GDP."
  - Interest rate ±500 bp: +500 bp yields net interest income gain "€5.9 billion" and CET1 up by "3 percentage points"; symmetric decline for -500 bp without additional undercapitalization.
  - Default shocks: default of largest net non-parent exposure leads to capital shortfall "1.8 percent of GDP"; simultaneous default of five largest net non-parent exposures leads fourteen banks to be undercapitalized with shortfall "7.8 percent of GDP."
  - Fund-specific: almost half of high-yield bond funds and six real estate funds would struggle with historically large outflows.

### FINANCIAL SECTOR OVERSIGHT — KEY FINDINGS
- Progress since 2017 FSAP:
  - CSSF and CAA increased resources; BCL and CSSF produced novel systemic risk analyses; macroprudential toolkit extended to borrower-based limits.
  - CSSF strengthened reporting and international collaboration after the UK LDI crisis; new BCL ELA manual is "fit for purpose."
  - Investment funds used multiple liquidity management tools effectively under past acute redemption pressures.
  - CAA implemented Solvency II and increased resources; CAA supervision is risk-based with early warning signals.
- Remaining oversight gaps and legal safeguards:
  - Need to future-proof CSSF and CAA boards from potential government influence via legal amendments or subsidiary legislation.
  - Strengthen inter-agency cooperation and information sharing for bank group entities; finalize BCL/CSSF MoU on liquidity supervision and clarify LSIs selection criteria.
  - Formalize division of responsibilities between CSSF and BCL on liquidity supervision of LSIs.
  - Incorporate group links between depositaries and fund managers in CSSF supervision; review enforcement framework for harmonized powers across fund types.
  - Close data gaps for the large OFI sector to monitor significant connections; nearly "60 percent" of OFI assets are US-based.
  - Operational independence concerns: governance composition of CSSF and CAA boards poses potential risk despite no evidence of current interference.
- Investment funds supervision:
  - Need on-site inspection framework for investment fund delegates outside Luxembourg; continue discussions with foreign supervisors for risk-based inspections.
  - Obtain granular data on credit lines and sharing/commitment/drawdown arrangements.
  - Harmonize enforcement powers across fund-related laws, increase administrative fines, integrate individual accountability, and consider collective action mechanisms for investors.
  - Monitor liquidity mismatches in large AIF strategies, including semi-liquid structures and LDI exposures.

### FINANCIAL SAFETY NET AND CRISIS MANAGEMENT
- Resolution and preparedness:
  - Resolution planning improved since 2017 FSAP; resolution plans prepared for all LSIs; resolvability assessments for banks meeting public interest test.
  - Recommendations: re-assess resolvability of LSI banks earmarked for resolution; prepare for tail-risk scenarios where losses exceed buffers; review cooperation agreements with non-EU counterparts.
- Emergency Liquidity Assistance (ELA) and Deposit Guarantee Fund (FGDL):
  - BCL ELA manual fit for purpose but should be strengthened on "funding-in-resolution and inter-agency cooperation"; run ELA simulation exercises.
  - Undertake liquidity assistance simulation exercises to test banks’ collateral mobilization capabilities.
  - FGDL: improve operational readiness for "7-working-day" payout period; reassess staffing and IT quality; ensure FGDL can file claims in liquidation within same time period as depositors ("10 years") to ensure level playing field.
  - Consider introducing a state-guaranteed backstop if insufficient eligible collateral exists for ELA to a newly resolved bank.
  - Formalize arrangements for BCL–CSSF information exchange in crisis situations.

### POLICY RECOMMENDATIONS — MACROPRUDENTIAL, SUPERVISORY, AND OPERATIONAL
- Reduce inaction bias and address real estate risks:
  - Reduce MoF role in CdRS to uphold financial stability primacy; revoke unanimity requirement or designate MoF as non-voting.
  - Strengthen accountability/transparency: systematically communicate factors underpinning macroprudential decisions, "including where no action is taken."
  - Use banks’ existing capital headroom to introduce sectoral systemic risk buffers targeting real estate exposures.
  - Prepare and introduce income-based measures early in recovery; FSAP suggests calibrating stressed-DSTI "around 45-50 percent"; consider gradually reducing maximum-LTV from "100 percent."
  - Evaluate adoption of a positive neutral CCyB (PNCCyB) in medium term; CCyB kept at "around 0.5 percent" during pandemic acting de facto as PNCCyB.
- Strengthen supervision and legal safeguards:
  - Amend law or issue subsidiary legislation to future-proof CSSF and CAA independence and board protections.
  - Finalize BCL/CSSF MoU on bank liquidity supervision; clarify LSIs selection criteria and periodically review division of responsibilities.
  - Incorporate supervision of depositary–fund manager group links as risk factors; promote EU-level depositary independence reforms.
  - Improve supervisory reporting on investments and derivatives; conduct regular insurance top-down stress tests and sensitivity analyses.
  - Identify OFIs in corporate micro data and analyze investment funds’ interlinkages with OFIs and other funds to quantify redemption patterns.
- Operational readiness and tools:
  - Strengthen BCL manual for ELA: include "funding-in-resolution" provisions and inter-agency cooperation; run ELA simulation exercises.
  - Improve liquidity stress tests: use cash-flow data for key currencies; incorporate liquidity–solvency interactions; integrate depository–fund manager group links.
  - FGDL: improve operational readiness and reassess staffing and asymmetry in time gaps for claims recovery.

### SELECTED PRIORITY RECOMMENDATIONS (HIGHLIGHTS EXCERPT)
- Improve bank liquidity stress tests and integrate depository–fund manager group links (Authorities: CSSF, BCL; Priority: ST).
- Identify OFIs in corporate micro data (Authority: STATEC; Priority: ST).
- Analyze investment funds’ interlinkages with OFIs and with other funds (Authorities: CSSF, BCL; Priority: MT).
- Enhance supervisory reporting and insurance top-down stress tests (Authority: CAA; Priority: ST).
- Monitor liquidity mismatches in large AIF strategies, including semi-liquid structures and LDI (Authority: CSSF; Priority: MT).
- Enhance accountability and transparency of macroprudential decisions and reduce MoF role in CdRS (Authorities: CdRS, MoF; Priorities: I and ST).
- Activate income-based macroprudential measures early and consider reducing maximum-LTV from "100 percent" (Authorities: CdRS, CSSF; Priority: ST).
- Raise capital buffer requirements targeting real estate exposures (Authorities: CdRS, CSSF; Priority: I).
- Future-proof CSSF and CAA independence by legal changes or subsidiary legislation (Authorities: MoF, CSSF, CAA; Priority: MT).
- Finalize BCL/CSSF MoU on bank liquidity supervision and specify LSIs selection criteria (Authorities: BCL, CSSF; Priority: ST).

### AUTHORITIES’ VIEWS AND IMPLEMENTATION NOTES
- Authorities broadly agreed with FSAP recommendations and noted improvements since 2017 FSAP.
- Nuances offered by authorities:
  - Household indebtedness risk perception more nuanced due to high fixed-rate loan share and significant household net wealth.
  - Hedging availability limits practical impact of interest rate risk per authorities.
  - Credit concentration risk primarily with foreign financial institutions with low PDs, mitigating credit risk.
  - Preferences for policy instruments: authorities view maximum-LTV limits effective; consider CSSF-required mortgage interest rate stress tests an alternative to stressed-DSTI limits; prefer flexibility in capital-based measures given high current capital.
- Implementation status of 2017 FSAP recommendations: mixed — several recommendations "Implemented" or "Largely Implemented," while operational independence enshrinement and some institutional reforms remain "Partially implemented" or "No action."

### KEY FINANCIAL-SOUNDNESS INDICATORS AND SELECTED METRICS
- Number of banks: "120."
- Bank assets: "12 times GDP."
- Fund deposits in banks: "close to 220 percent of GDP."
- Domestic banking sector holdings: "20 percent of the domestic sovereign debt"; over "80 percent" of large banks’ sovereign bonds in HTM with modified duration "5."
- Selected indicators (2023 unless noted):
  - Regulatory capital to risk weighted assets: "24.0."
  - Regulatory tier 1 capital to risk weighted assets: "22.0."
  - Capital to assets: "9.0."
  - Return on assets: "1.1."
  - Return on equity: "8.0."
  - Nonperforming loans to total gross loans: "1.9 percent."
  - Household debt to GDP: "72.0."
  - Liquid assets to total assets (All Banks): "33.0 (2022)" and "32.0 (2023)."
- Stress-test framing: Y0=2023, Y1=2024, Y2=2025, Y3=2026. CET1 hurdle: overall capital requirements (Basel III minimum "4.5 percent" plus buffers). Leverage ratio threshold: "3 percent."

*Source: EXECUTIVE SUMMARY and chapters/excerpts, IMF staff report (Luxembourg FSAP excerpt), 1luxea2024003.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 7

### EXECUTIVE SUMMARY

### MACROFINANCIAL CONTEXT
- Assessment occurs "against heightened geopolitical uncertainty."
- Since the "2017 FSAP," the financial sector has continued to grow in both size and complexity, driven by the investment funds sector, "the second largest in the world after the U.S."
- Banks "maintain higher capital and liquidity buffers than their euro area peers."
- The "recession in 2023" accompanied a downturn in bank credit and house price cycles, and redemptions from investment funds.
- High borrowing costs continue to challenge the economy and the financial sector.
- Fiscal measures from a "AAA-rated sovereign" provided short-term relief; "a rebound in output is projected for 2024."

### SOURCES OF SYSTEMIC RISKS AND VULNERABILITIES
- Identified broad sources of systemic risk:
  - Intensification of geopolitical tensions creating "a deep recession with high interest rates" (used as adverse scenario basis).
  - Vulnerabilities in the real estate sector and "high private sector debt service obligations" that could amplify shocks.
  - Bank liquidity risks via intragroup, cross-sectoral, and cross-border channels, including exposure to "potentially weak parent banks" and higher-than-average retail deposit runs or withdrawals from related investment funds.
  - Outward spillovers from investment funds selling foreign assets in large quantities.
  - Increasing cross-border flows unexplained by economic fundamentals that "may need additional monitoring in case of ML/TF risks."

### STRESS TEST RESULTS — OVERVIEW
- Banking sector:
  - In the baseline scenario, the aggregate banking system can sustain the impact of the increase in interest rates experienced to date.
  - Banks accounting for "8½ percent of assets" were considered to be weak in the baseline.
  - Under the adverse scenario, the share of weak banks in total assets "is estimated to double."
  - Recapitalization needs under the adverse scenario estimated at "0.5–1 percent of GDP" and described as manageable.
  - Many banks are sensitive to failure of their largest non-intragroup clients; concentration risks warrant closer scrutiny.
  - Liquidity: all banks can sustain retail deposit outflows of up to "20 percent"; some would need to use liquidity buffers if runs reach levels seen in "March 2023" U.S. and Swiss turmoil or if parent banks are potentially weak.

- Investment funds and insurance:
  - Investment fund sector could withstand redemptions of up to "40 percent."
  - Cross-border asset sales by investment funds in a severe adverse scenario would have "negligible second-round effects" on the financial system and the economy.
  - Majority of money market funds are prepared for shocks on interest rates up to "300 basis points"; higher shocks could expose vulnerabilities in a few funds.
  - Insurance sector could withstand lapse rates of "more than 40 percent" before insurers would need to tap less liquid assets.

- Households and corporates:
  - Separate household-level analysis indicates debt servicing capacity would be constrained under the IMF’s baseline projections, "especially for low-income households."
  - Under the "severe adverse scenario," credit risk could spread to more affluent households, as a material share of these households contracted substantial mortgages in recent years.
  - Real estate companies have "high leverage and low cash cushions," already showing higher bankruptcy rates and vulnerable under both baseline and adverse scenarios, with potential effects on consumption and investment volatility.

### FINANCIAL SECTOR OVERSIGHT — KEY FINDINGS
- Authorities have "made commendable progress in implementing the 2017 FSAP recommendations" with increased resources at the CSSF and CAA.
- BCL and CSSF contributed novel systemic risk analyses over the last five years.
- Macroprudential toolkit extended to borrower-based limits.
- CSSF strengthened reporting and international collaboration after the UK LDI crisis; a new manual for ELA is "fit for purpose."
- Investment funds used multiple liquidity management tools effectively during past acute redemption pressures.
- CAA implemented Solvency II and increased resources.
- Remaining oversight issues:
  - Need to future-proof CSSF and CAA boards from potential government influence via legal amendments or subsidiary legislation.
  - Require stronger inter-agency cooperation and information sharing for bank group entities, onsite supervision of investment fund managers’ foreign delegates, and monitoring cross-border flows for ML/TF risks.
  - The division of responsibilities between CSSF and BCL on liquidity supervision of LSIs needs formalization.
  - CSSF supervision should incorporate group links between depositaries and investment fund managers; review enforcement framework for higher and more harmonized powers across fund types.
  - Closing data gaps for the large OFI sector to monitor its significant connections.

### FINANCIAL SAFETY NET AND CRISIS MANAGEMENT
- Resolution planning improved since the "2017 FSAP."
- The new BCL manual for ELA could be strengthened on "funding-in-resolution and inter-agency cooperation," and ELA simulation exercises are recommended.

### POLICY RECOMMENDATIONS — MACROPRUDENTIAL AND OVERSIGHT
- Reduce inaction bias and address real estate risks:
  - Reduce the MoF’s role in the Systemic Risk Committee (Comité du Risque Systémique-CdRS) to uphold primacy of the financial stability objective.
  - Strengthen accountability and transparency by systematically communicating factors underpinning macroprudential policy decisions, "including where no action is taken."
  - Use banks’ existing capital headroom to introduce sectoral systemic risk buffers.
  - As financial cycle turns positive, introduce a well-calibrated stressed debt-service-to-income threshold and consider gradually reducing the maximum-LTV ratio from "100 percent."

- Strengthen supervision and legal safeguards:
  - Amend law to future-proof CSSF and CAA independence, or issue subsidiary legislation to protect procedural safeguards where legal amendments are not feasible.
  - Enhance cooperation on large cross-border connections and information sharing; finalize BCL/CSSF MoU on bank liquidity supervision and clarify LSIs selection criteria.
  - Incorporate supervision of depositary-fund manager group links as risk factors; promote EU-level depositary independence reforms.
  - Improve supervisory reporting for investments and derivatives; conduct regular insurance sector top-down stress tests and sensitivity analyses.
  - Identify OFIs in corporate micro data and analyze investment funds’ interlinkages with OFIs and other funds to quantify redemption patterns.

- Operational readiness and tools:
  - Strengthen BCL manual for ELA: provisions for funding-in-resolution and inter-agency cooperation; run ELA simulation exercises.
  - Improve liquidity stress tests: use cash-flow data for key currencies; incorporate liquidity-solvency interactions; integrate depository-fund manager group links.

### SELECTED RECOMMENDATIONS FROM FSAP 2024 — PRIORITY HIGHLIGHTS
- Improve bank liquidity stress tests and integrate depository-fund manager group links (Authorities: CSSF, BCL; Priority: ST).
- Identify OFIs in corporate micro data (Authority: STATEC; Priority: ST).
- Analyze investment funds’ interlinkages with OFIs and with other funds (Authorities: CSSF, BCL; Priority: MT).
- Enhance supervisory reporting and insurance top-down stress tests (Authority: CAA; Priority: ST).
- Monitor liquidity mismatches in large AIF strategies, including semi-liquid structures and LDI (Authority: CSSF; Priority: MT).
- Enhance accountability and transparency of macroprudential decisions and reduce MoF role in CdRS (Authorities: CdRS, MoF; Priorities: I and ST respectively).
- Activate income-based macroprudential measures early in recovery and consider reducing maximum-LTV from "100 percent" (Authorities: CdRS, CSSF; Priority: ST).
- Raise capital buffer requirements targeting real estate exposures (Authorities: CdRS, CSSF; Priority: I).
- Future-proof CSSF and CAA independence by legal changes or subsidiary legislation (Authorities: MoF, CSSF, CAA; Priority: MT).
- Finalize BCL/CSSF MoU on bank liquidity supervision and specify LSIs selection criteria (Authorities: BCL, CSSF; Priority: ST).

*Source: EXECUTIVE SUMMARY, 1luxea2024003*

### 15. Continue discussions on initiating an on-site inspection framework of

### 15. Continue discussions on initiating an on-site inspection framework of 

### Key supervisory and crisis-management recommendations (¶46–63)
- 15. Continue discussions on initiating an on-site inspection framework of investment fund delegates outside Luxembourg, with a risk-based approach (¶46).  
  - Responsible: CSSF  
  - Priority: MT
- 16. Strengthen the enforcement framework for the investment fund sector in terms of harmonization of powers, increasing administrative fines, and accountability of individuals (¶47).  
  - Responsible: CSSF  
  - Priority: MT
- 17. Set up an internal audit function to evaluate and enhance CAA risk management, control, and governance (¶56).  
  - Responsible: CAA  
  - Priority: MT
- 18. Use macroeconomic data in the authorities’ analysis of cross-border payments for a more effective management of ML/TF risks (¶59-61).  
  - Responsible: CSSF, FIU  
  - Priority: MT
- 19. Improve operational readiness of the FGDL for timely and reliable payouts; reassess staffing and asymmetry in time gaps for claims recovery (¶64).  
  - Responsible: CSSF, FGDL  
  - Priority: MT
- 20. Continue the work on the operationalization of the resolution tools, expanding its national resolution handbook and by participating in simulation exercises (¶62).  
  - Responsible: CSSF  
  - Priority: MT
- 21. Undertake liquidity assistance simulation exercises to test banks’ capabilities in mobilizing enough collateral (¶63).  
  - Responsible: BCL  
  - Priority: ST

### Macrofinancial context — structure, scale, and recent developments
- Financial sector drivers and scale:
  - Investment funds sector is the second largest in the world after the United States and 77   times GDP.
  - Bank assets are at 12 times GDP.
  - Insurance sector remains at 3 times GDP.
  - Other financial intermediaries (OFI) are sizeable and largely unsupervised/unregulated.
  - About a quarter of the economy’s gross value added and employment is linked to the financial sector.
- Recent macro outcomes and near-term outlook:
  - Real GDP fell by 1.1 percent in 2023.
  - Growth is expected to rebound to 1¼ percent in 2024.
  - Unemployment increased to 5.5 percent in December 2023.
- Credit, housing, and sectoral developments:
  - Resident private sector credit dropped by 3 percent yoy as of December 2023.
  - Bank loans to nonfinancial corporations declined by 7¾ percent.
  - House prices have fallen by 15¾ percent from their peak in 2022Q3.
  - House price overvaluation as of 2023Q3 ranges between 10 and 25 percent (estimates by IMF, BCL, CSSF and ECB).
- Bank resilience and asset-quality:
  - CET1 capital ratio of banks at 22 percent in 2023Q4—standing 6 percentage points above the euro area average.
  - Nonperforming loans (NPLs) rose since 2021Q4 to 1 .9 percent of gross loans.
  - Investment funds saw net redemptions cumulatively reaching 2½ percent of net assets since 2022Q2.
  - Banks maintained average liquidity coverage ratio (LCR) around 157 percent.

### Supervisory progress and remaining gaps
- Progress since the 2017 FSAP:
  - Increased resources in CSSF and CAA; expanded data collection, reporting, and risk analysis.
  - CSSF aligned investment fund regulatory framework with EU standards and increased interaction with foreign authorities (including discussions on on-site inspections for fund delegates outside Luxembourg).
  - Banking supervision: strengthened on-site inspection regime and tightened monitoring of intra-group exposures and waiver compliance.
  - BCL issued new guidelines on emergency liquidity assistance.
- Remaining legal/operational gaps:
  - Operational independence of CSSF and CAA not yet enshrined in legislation.
  - OFI sector largely unsupervised and comprises over 50,000 entities, with substantial US-based representation (nearly 60 percent of OFI assets).

### Systemic risks and vulnerabilities
- Major identified risks:
  - Geopolitical tensions with supply chain disruptions could trigger a deep recession with high interest rates.
  - Real estate vulnerabilities and high private sector debt service obligations.
  - Liquidity risks via intragroup, cross-sectoral, and cross-border channels.
  - Outward spillover risks from investment fund asset sales under redemption pressure.
  - Increasing cross-border flows unexplained by fundamentals, posing elevated ML/TF risks.
- Adverse scenario parameters and impacts:
  - Adverse scenario envisages a 5.9 percent cumulative drop in level of GDP over 2024–25.
  - Residential real estate prices drop by about 30 percent; commercial real estate prices decline on average by 10 percent in various countries.
  - Real GDP is 10 percent lower than the baseline level of output at the trough, corresponding to a 2.3 standard deviation shock from the baseline and a 1.4 standard deviation shock from the mean of the historical distribution.

### Real estate and household sector vulnerabilities
- Household indebtedness and mortgage characteristics:
  - Household debt has risen to more than 180 percent of gross disposable income.
  - Two-thirds of mortgages granted over 2018-2022 have a DSTI ratio higher than 40 percent.
  - Half of mortgages have a DTI higher than 9.
  - A quarter have an LTV of 90 percent and over.
  - Share of variable rate mortgages reduced to 42 percent, from 58 percent in September 2022.
- Policy and supervisory mitigants:
  - Introduction of a differentiated legally binding maximum LTV.
  - CSSF requirement for banks to run a 200-basis point interest rate stress test on new borrowers’ capacity to repay.

### Cross-border exposures, OFIs, and investment fund interconnectedness
- Interconnectedness and market shares:
  - Investment funds hold 2.5 percent of outstanding domestic sovereign debt and close to 15 percent of domestic equities.
  - Funds hold sovereign debt of France, Germany and the U.K. between 1.5 and 2.5 percent of total outstanding amounts; equities shares are 3–5 percent of market capitalization.
  - Increase in exposures to the U.S. since 2015 driven by U.S. nonfinancial corporate equities.
  - Sovereign debt shares from emerging and frontier markets are even higher.
- OFI sector and outlier flows:
  - OFI sector includes mainly captive institutions of multinationals and intragroup holdings, representing over 50,000 entities.
  - US-based companies represent nearly 60 percent of OFI assets.
  - Empirical models show acceleration of “outlier” inflows insufficiently explained by economic fundamentals, especially in 2022—some flows warrant additional supervisory monitoring for ML/TF risks.

### Stress test summary and resilience findings
- Banking-sector stress tests:
  - All banks can withstand a retail deposit run up to 20 percent.
  - Solvency stress tests used a CET1 threshold of 8 percent on average (comprising Basel III minimum 4.5 percent, Capital Conservation Buffer 2.5 percent, average Pillar 2 requirement 0.5 percent, and average CCyB 0.5 percent).
  - Leverage ratio secondary threshold: 3 percent.
  - Banking system as a whole can sustain a severe stagflationary scenario even when combined with high retail deposit runs.
- Investment funds and MMFs:
  - Investment fund sector can absorb adverse net asset value outcomes and has adequate liquid assets to stem redemptions of up to 40 percent.
  - MMF sector can absorb up to 200 basis points instantaneous shocks to interest rates and spreads (cumulative) before any fund breaks the “20 basis point change in NAV” rule.
- Insurance sector:
  - Insurance sector can withstand lapse rates of more than 40 percent before insurers need to start liquidating less liquid investment assets.

*Source: IMF staff report (Luxembourg FSAP excerpt).*

### 14. The tests identified a weak tail of institutions. Three banks in the baseline and six banks in

### 14–33: Summary of Stress Test Results and Financial Sector Vulnerabilities

### Summary of stress test findings: weak institutions and recapitalization needs
- Three banks in the baseline and six banks in the adverse scenario would breach at least one capital threshold.
- Recapitalization needs of the weak banks are 0.5-1 percent of GDP across versions of the adverse scenarios.
- If the Basel III minimum CET1 ratio of 4.5 percent were used as the threshold, one small bank would breach it.
- On liquidity: six banks (one overlapping with solvency) would need to tap liquidity buffers under extreme liquidity scenarios.
- Six MMFs and four non-MMF funds need further monitoring.
- Funds’ cross-border asset sales in a severe adverse scenario have small second-round effects on the financial system.

### Banking sector solvency and capital dynamics
- Aggregate CET1 ratio would drop by 4.1 percentage points, from 21.7 percent as of December 2023, to 17.6 percent in 2024, before gradual recovery from 2025.
- Three banks (8½ percent of total assets of the sample) would fall below the leverage ratio of 3 percent in the baseline in 2024.
- One bank would see its CET1 ratio fall below the hurdle rate in 2025/2026 due to low initial capitalization and low profitability.
- Five potentially weak banks: capital of four (five) banks making up less than 10 percent of banking sector assets would fall below the CET1 (leverage) hurdle rate in the adverse scenario.
- Recapitalization needs in the adverse scenario are ½–1 percent of GDP (text uses fractional glyphs and spacing).
- Two banks fall below both hurdle rates; allowing use of the capital conservation buffer and countercyclical buffer still leaves two banks below the CET1 hurdle rate.
- Private banks experience largest capital depletion mainly from non-interest income losses; corporate finance banks end with the lowest average level of capitalization.
- Drivers of capital decline in the adverse scenario: lower noninterest income, loan loss provisions, and losses from bond portfolios.

### Liquidity coverage and deposit-run scenarios
- Weighted average Liquidity Coverage Ratio (LCR) is 229 percent for the stress test sample and 180 percent in the sample of retail and universal banks.
- Under a severe 30-day deposit run scenario (based on Credit Suisse and First Republic episodes) with stressed market conditions, six banks (about 24 percent of total assets in the sample) would fall below the 100 percent LCR requirement.
- Added stress from some global parent banks (identified as “weak”) would push a couple more banks under the threshold.
- Currency-specific: 11 banks with GBP liabilities would be short of GBP liquidity.
- Funding gap results: 15 out of 39 banks would experience a funding gap over a 30-day horizon under the severe scenario.
  - Nine banks could pledge HTM securities at an assumed penalty rate of 100bps over the ECB’s main refinancing rate, implying an additional funding cost of €1.1 billion and a further decrease in aggregate CET1 ratio by 1.4 percentage points, pushing one more bank below the leverage ratio hurdle rate in 2024.
  - Six banks without activated access to central bank facilities would have to sell part of HTM securities at market prices and realize a market loss of €88 million, decreasing their CET1 ratio by 0.8 ppts; system-wide impact equivalent to a decline of an additional 0.5 percentage point of the aggregate CET1 ratio.

### Investment funds: NAV shocks, redemptions, and fire sales
- Investment funds’ net asset value (NAV) falls by 13 percent in the adverse scenario.
  - Equity funds fall by more than 17 percent.
  - Funds beyond the fifth percentile of the tail experience NAV declines of 22 percent.
- GFC-based severe scenario: NAV fall almost 20 percent overall; equity funds decline by 28 percent.
- Money Market Funds (MMFs):
  - Two Constant NAV (CNAV) and four Low-Volatility NAV (LVNAV) funds, with 23 percent of total MMF NAV, decline by more than 20 basis points—the threshold beyond which LVNAV MMFs are automatically converted into variable NAV funds.
- Redemptions and liquidity needs:
  - Net redemptions estimated at 4 percent on average in the adverse scenario, with some funds experiencing higher outflow rates in the low double digits.
  - Only four AIFs have a Redemption Coverage Ratio (RCR) below one in the adverse scenario following the initial shock.
  - Investment funds may need to sell up to 150 billion euros in liquid securities to face redemptions in the adverse scenario:
    - Almost €50 billion from sovereign bonds.
    - €20 billion from corporate bonds.
    - €70 billion from equities.
    - By country: U.S. €44 billion, France €16 billion, Germany €13 billion.
  - GFC scenario liquidation estimate: €200 billion euros (same liquidation assumption).

### Interlinkages between funds and banks
- If funds use cash first, deposit withdrawals from funds would amount to roughly 25 percent of aggregate bank deposits of funds—this level is already assumed in banks’ LCR for the baseline and can be absorbed by the banking sector.
- Bank liquidity stress tests indicate the banking sector can withstand much larger deposit runs from investment funds.

### Insurance sector resilience and lapse shocks
- Life insurers:
  - Assets decline by 9.4 percent for the whole sector in the adverse scenario, largely offset by a similar decline in liabilities due to upward interest rate stress.
  - Eligible own funds decline by 22 percent; median life insurer coverage of SCR after stress is 127 percent, down from 150 percent prior to stress.
  - No life insurer falls below the regulatory threshold of 100 percent.
  - Lapse stress: simulated outflow of €2.4 billion compared with total sources of liquidity of EUR 32.5 billion (coverage of 13.6), comprised of cash holdings of 1.2 billion, high-quality liquid assets (after haircuts) of 9.3 billion, and reinsurance recoverables of 22 billion.
- Non-life insurers and reinsurers:
  - Assets decline by 2.8 percent and eligible own funds by 8 percent.
  - Median SCR ratio after stress amounts to 179 percent, down by 17 percentage points.

### Real economy and nonfinancial private sector vulnerabilities
- Households:
  - Share of households with debt-at-risk expected to increase significantly in the baseline and further in the adverse scenario given high (increasing) interest rates.
  - In the adverse scenario, the share of indebted households with debt-at-risk rises to 14 percent of indebted households and to 30 percent of total debt.
  - Lower income quintiles are most vulnerable, but all income groups—including the highest quintile—contribute significantly to debt-at-risk.
- Corporates:
  - Significant share of nonfinancial firms would see borrowing needs increase substantially in both baseline and adverse scenarios.
  - Real estate firms are most at risk given weakest initial financial conditions and larger sectoral shock.

### Second-round and market-impact analysis
- Fire-sale price impacts (adverse scenario, seven-day liquidation assumption, waterfall method selling liquid securities first):
  - German and French sovereign bond prices fall by 0.4–1.2 percent, roughly equivalent to yield changes of 10 to 25 basis points for five-year bonds.
  - Price impacts are smaller in large markets such as the United States and the United Kingdom.
- Second-round effects on domestic financial sector:
  - Spillbacks of price impacts on funds add up to an additional one percentage point adverse impact on funds’ NAVs.
  - Banking sector second-round loss: aggregate additional loss of €156 million or 0.1 percentage point of CET1 ratio for the 39 banks in the stress test.
- GFC scenario implies a much steeper price impact (used only as sensitivity).

### Caveats and modeling limitations
- Tests do not fully capture:
  - Changing nature of the funds sector, rapid rise of alternative investment funds, new strategies, and derivatives use.
  - Rising interconnectedness of OFIs and limited visibility in official statistics—could lead to new redemption patterns.
  - Domestic interbank contagion was not modeled due to falling domestic interbank exposures.
  - Short time series and heterogeneous bank business strategies introduce modeling uncertainty.

*Source: IMF staff estimates (excerpts from the stress testing chapter).*

### 34. For the insurance sector, the price impact of investment fund redemptions would only

### 1luxea2024003 - 34. For the insurance sector, the price impact of investment fund redemptions would only

### Insurance sector: impact of investment fund redemptions
- Assets of life insurers decline by less than 0.5 percent.
- The median SCR ratio for life insurers declines by another 1 percentage point to 126 percent.
- In the non-life sector, the median SCR coverage ends up at 175 percent, 4 percentage points lower than before stress.

### G. Sensitivity Analyses — key scenarios and impacts
- Mark-to-market HTM securities:
  - If the entire HTM securities of banks were marked to market under the adverse scenario, additional market losses would amount to €13.1 billion in 2024.
  - This would cause a drop in the aggregate CET1 ratio by a total of 6.5 percentage points.
  - Recapitalization needs (up to the CET1 hurdle rate) equivalent to 8 percent of GDP.
- Interest rate shocks:
  - If interest rate increased by 500 bp, the banking system would gain €5.9 billion in net interest income, with a positive impact on the aggregate CET1 capital ratio by 3 percentage points.
  - A decline in interest rates by 500 bps would cause a symmetric aggregate decline in banks’ net interest income and capital, without undercapitalization of any additional bank.
- Credit default shocks:
  - The default of the largest net non-parent exposure of each of the thirty-nine banks would lead to a capital shortfall of 1.8 percent of GDP based on the CET1 hurdle rate.
  - The simultaneous default of the five largest net non-parent exposures would lead fourteen banks to be undercapitalized with a capital shortfall of 7.8 percent of GDP.
- Fund redemption and asset-specific shocks:
  - Tests based on historical outliers show almost half of high-yield bond funds and six real estate funds would have problems meeting historically large outflows.
  - Life insurers are most sensitive to equity price declines among other shocks; exposures to the banking sector are manageable.
  - If the CRE price declines were to double across countries, compared to the adverse scenario, the fall in NAV of open-ended real estate funds (comprising 3.5 percent of total NAV of the stress test sample) would also be double. These funds have very high passthrough of severe shocks to the NAV, given the very low level of holdings of cash and equivalents.

### A. Cross-Cutting themes in financial sector oversight
- CSSF and CAA governance:
  - The composition of the CSSF and the CAA boards poses a potential risk to operational independence.
  - No evidence of lack of operational independence in practice; executive board deciding on supervisory issues do not have government representatives.
  - Government majority and presence of industry representatives on oversight boards introduce potential for future government or industry interference.
  - FSAP recommends changes in the law; in the interim, establish procedural safeguards through subsidiary legislation.
  - Concerns about CSSF's operational independence extend to its role in resolution.
- Cross-border supervision and liquidity risk:
  - Luxembourg is a small host jurisdiction with many subsidiaries and branches of large international financial groups; adequate inter-agency cooperation arrangements are required.
  - Stress tests show a couple of subsidiaries with funding gaps have potentially weak parents (based on the October 2023 GFSR).
  - Need to ensure effective liquidity risk management and contingency funding plans at group level when subsidiaries in Luxembourg lack separate standing facilities with the BCL.
  - A review of regulation and supervision of euro area Significant Institutions will be conducted in the ongoing euro area FSAP.
- Fund–bank linkages:
  - Custodian banks are generally diversified, but simultaneous funds’ deposit outflows within group entities could give rise to liquidity risks at the depositary bank.
  - The banking system overall would be able to manage 25 percent withdrawals of deposits from funds, but a couple of banks were exposed to funds from the same group that could see higher degrees of withdrawal if the group had problems.
  - Group linkages may create conflict of interest risks regarding oversight responsibilities on funds and managers played by depository banks.
- Real estate and non-financial private sector indebtedness:
  - Real estate prices face downward pressures amid rising lending rates and deteriorating mortgage risk profile characterized by high DSTI ratios.
  - Macroprudential policy challenges include fortifying banks against stock and flow vulnerabilities while avoiding procyclicality.

### B. Macroprudential policy and framework — findings and recommendations
- Institutional setup:
  - CdRS comprises the MoF, CSSF, BCL, and CAA; Minister of Finance serves as chair.
  - CdRS decisions are not legally binding; implemented through the hard powers of member agencies.
  - Decisions require unanimous vote from the four members, and CdRS is accountable to the parliament.
  - Previous FSAP highlighted risk of inaction bias due to unanimity requirement; CSSF and BCL have made progress on systemic risk analysis.
- Recommendations to uphold financial stability primacy:
  - Reduce MoF’s role and strengthen public communication.
  - Revoke the unanimity requirement by lowering the threshold to three out of four votes for a CdRS decision to be passed; alternatively, designate the MoF as a non-voting member.
  - CdRS should publish abridged versions of risk assessments and risk dashboards, including a section on decisions even if no action is taken.
- Operational agility on borrower-based measures (BBMs):
  - Improve operational flexibility to avoid delays due to lengthy legislative processes; CSSF should use semi-hard and soft powers if delays occur.
  - Regularly review law to see whether corridors on borrower-based limits constrain action.
  - Enhance coordination between macroprudential and housing policies; government should evaluate formally consulting CdRS on fiscal and housing policies during planning.
- Short-term macroprudential strategy:
  - Use banks’ existing capital headroom to build targeted sectoral systemic risk buffers (SRB) on the real estate sector.
  - Introduce income-based measures early in the recovery cycle; preparations on calibrations should start immediately.
  - FSAP analysis suggests calibrating stressed-DSTI at around 45-50 percent; possibly tie to current interest rate stress test required by CSSF for mortgages.
  - Consider gradually reducing the maximum LTV limit of 100 percent.
  - Given housing supply rigidity, a sufficiently tight combination of DSTI and LTV could lead to higher affordability and lower household indebtedness in the medium term.
  - Evaluate adoption of a positive neutral CCyB (PNCCyB) in the medium-term; authorities kept the CCyB at around 0.5 percent during the pandemic, de facto serving as a PNCCyB.
  - When calibrating PNCCyB, assess interactions with other instruments, including other capital-based measures.
  - Fiscal support to the real estate sector should be carefully calibrated to reduce moral hazard and allow price adjustment; frontload public investment and reduce supply bottlenecks through higher densification.
  - Over the medium term, rethink help-to-buy policies and phase out mortgage interest payments deductibility.
  - Monitor collateral valuation effects from CRE overvaluation and refinancing risks for real estate firms; support to viable firms could be envisaged under strict conditions.

### C. Investment funds sector — supervisory findings and recommendations
- Supervisory framework and data:
  - CSSF has a robust supervisory framework with substantive improvements since the last FSAP; some areas need strengthening.
  - Given more than half of depositaries in Luxembourg have group links with fund managers, CSSF should consider incorporating such links as key risks in the risk-based approach for both fund managers and depositaries.
  - Significant third-party (white-label) fund managers pose different risks, especially on conflicts of interest; supervision should incorporate differentiated risk sets.
  - CSSF should obtain clear and granular data on credit lines put in place by IFs, including extent of sharing, commitment, and drawdown.
- MMF LVNAV resilience:
  - Stress tests showed majority of the sector is resilient to very large shocks, but prudence is advised for outliers.
  - Provide guidance to market participants employing riskier strategies and continue micro and macro-level supervision of the LVNAV fund sector to align risk management with risk profile.
  - CSSF should remain at the forefront of EU MMF regulatory developments.
- Delegation and on-site inspections:
  - Structural importance of foreign delegation calls for an active on-site inspection framework for delegates.
  - CSSF should continue discussions with foreign supervisors to initiate a risk-based onsite inspection framework, with inspections done by CSSF itself (with consent) or jointly.
- Enforcement framework improvements (four fronts):
  - Harmonize CSSF’s enforcement and investigation powers under different fund-related laws to ensure comprehensive powers to investigate and take enforcement actions.
  - Review laws to enhance the number of fines that can be imposed so the sanctioning regime has deterrent effect.
  - Integrate accountability of relevant individuals and boards in enforcement approaches and take suitable action.
  - Prioritize legislative efforts to introduce a regime for collective action by fund investors, focusing on a mechanism for class action suits.
- Domestic regulatory framework enhancements:
  - Improve rules on winding up, valuation, and approach to indirectly regulated AIFs.
  - Consider whether new regulatory requirements should apply to indirectly regulated AIFs to avoid regulatory arbitrage.
  - Clarify specific situations where deviation from fair valuation by AIFs is permitted.
  - Harmonize winding up provisions in product laws and consider incorporation of IOSCO’s good practices where not covered.
- EU-level engagement:
  - Given Luxembourg’s position as domicile of the EU’s largest IF sector, CSSF should actively promote and contribute to EU level reforms.
  - Take active role in promoting EU reforms on strengthening depositary independence.
  - Continue contributing to ESMA’s guidance on the use of Liquidity Management Tools (LMT) and engage with ESMA and the EU Commission on the proposed revision of the Eligible Assets Directive.

### D. Banking sector supervision of LSIs and third-country branches
- LSIs supervision:
  - No material weaknesses identified in CSSF supervisory processes in focus areas: LSI supervision of liquidity, interest rate risk in the banking book, operational risk, and related-party transactions.
  - CSSF follows SSM’s SREP policies and procedures; comprehensive and sufficiently regular data are collected and risk analysis is detailed with satisfactory IT systems.
  - Horizontal supervision appears embedded effectively.
- Areas for improvement:
  - Ensure CSSF’s operational independence.
  - Since establishment of SSM, BCL has undertaken liquidity supervision of 19 LSIs and prepares their Liquidity SREP to feed into CSSF supervision; clear criteria for selecting the 19 LSIs and regular review of division of responsibilities are needed, including finalizing the MoU between BCL and CSSF regarding liquidity supervision.
- Third-country branches (TCB):
  - Trend toward “branchification” suggests need for formal policies for TCBs to avoid regulatory arbitrage.
  - Currently, no material retail deposits are accepted by TCBs in Luxembourg as per non-written CSSF policy.
  - EU is planning to harmonize framework for TCBs; CSSF is engaged in policy discussions and should consider whether proposed EU thresholds for TCBs to accept retail deposits are appropriate for Luxembourg and codify existing policies.
- Credit register:
  - BCL and other authorities should actively pursue establishment of a credit register with a clear deadline.
  - Progress delayed due to COVID-19; a Working Group chaired by the BCL produced a first draft report.
  - The BCL is part of the ECB AnaCredit initiative scheduled for 2027, which will only cover corporate exposures; dataset will not be publicly available to banks or to the CSSF.

### E. Insurance sector supervision — observations
- Solvency II implementation:
  - Solvency II has been fully implemented in Luxembourg without any significant frictions.
  - Certain national rules continue under the LUX-GAAP accounting regime, adding an additional layer of prudence specifically for liability valuation.
  - Insurance Act requires coverage of insurance liabilities by tied assets.
  - CAA requires full collateralization for reinsurance of life insurance products that include a savings element.
  - The collateral requirement mitigates counterparty default risks and potential concentration risks for some large life insurers which extensively use reinsurance for their guaranteed business.

*Source: IMF FSAP content (excerpts provided).*

### 55. The CAA’s supervisory approach is risk-based and early warning signals have been

### 1luxea2024003 - 55. The CAA’s supervisory approach is risk-based and early warning signals have been

### CAA supervisory approach and governance
- Supervisory approach is risk-based and early warning signals have been defined.
- Off-site review of reporting files is comprehensive; on-site inspections are scheduled rather frequently according to a minimum engagement plan.
- For internal model users, the CAA monitors model appropriateness on an ongoing basis.
- As a host supervisor, the CAA participates in around forty supervisory colleges and serves as the European lead supervisor for one of the largest reinsurers.
- After the Brexit decision, the CAA licensed twelve UK insurers in close cooperation with the UK authorities.
- A robust enforcement framework is in place based on clear, objective, and consistent criteria.
- Governance and resourcing observations and recommendations:
  - The CAA would benefit from setting up an internal audit function to improve overall governance, including IT projects conducted largely in-house.
  - CAA staff numbers have more than doubled since the last FSAP.
  - The CAA’s independence could be further strengthened by limiting the government’s power to dismiss the CAA’s Executive Committee.
  - The maximum limits to monetary sanctions should be reviewed and potentially aligned with other financial sector regulation, for example by using relative limits based on revenues.
  - Conduct supervision would benefit from the development of risk-based indicators.
  - Resources should continue to be constantly reviewed with expanding tasks.

### Financial Market Infrastructure — Cyber resilience
- Strategic recommendations:
  - Luxembourg would benefit from developing a dedicated cyber strategy for the financial sector given high digitalization and increasing cyber incidents.
  - The CSSF and BCL should develop a cyber strategy for the broader financial system, taking note of the upcoming Digital Operational Resilience Act (DORA).
- Regulatory and supervisory framework:
  - The regulatory, supervisory, and oversight framework for cyber risk is evolving.
  - The CSSF has implemented some regulatory measures to address cyber risk of FMIs.
  - The BCL relies on oversight tools developed by the Eurosystem and has adopted the Eurosystem cyber strategy for FMIs.
  - Recommended actions:
    - The BCL should further strengthen its oversight approach for cybersecurity for FMIs and third-party providers.
    - The CSSF should establish a holistic cyber regulatory and supervision framework, considering its mandate and the EU’s Digital Operational Resilience Act.

### Financial integrity — cross-border flows and ML/TF risks
- Recent developments:
  - The increase in cross-border flows accelerated over the past several years.
  - Authorities enhanced monitoring of money laundering and terrorist financing (ML/TF) risks.
  - Financial sector activities expanded, including payments service providers, investment firms, and large international banks.
  - Banking groups shifted focus to servicing the EU market while continuing to accept more international clients, including from countries with higher ML/TF risks.
- Monitoring and supervisory practice:
  - Authorities monitor cross-border payments through data from a broad array of sources, including an annual survey and other reports obtained from financial institutions.
  - Assessment of ML/TF risk exposures is at the institutional level.
  - Authorities maintain their own list of higher risk jurisdictions and have significantly increased resources dedicated to risk-based AML/CFT supervision.
  - Resources are allocated mostly to the largest and highest risk sectors.
  - Financial institutions satisfactorily apply enhanced measures to higher-risk countries.
- Recommended enhancements:
  - Consider additional measures to manage ML/TF risks related to cross-border flows.
  - Combine monitoring and analysis of cross-border payments data with macro-economic data to highlight standout payment patterns beyond bottom-up entity-level analysis.
  - Strengthen information exchanges with key financial institutions and with foreign and domestic authorities (e.g., tax administration and an anti-corruption agency).
  - Leverage advanced data analytics for macro-level analysis of cross-border flows to identify red flags and patterns warranting further oversight.
  - Continue to ensure the sufficiency of resources available to AML/CFT supervision.

### Financial safety net and crisis management
- Resolution planning:
  - The CSSF has made important progress in resolution planning, covering national arrangements, operational readiness, and interactions within the EU framework.
  - Resolution plans have been prepared for all LSIs and resolvability assessments undertaken for banks meeting the public interest test.
  - Recommendations:
    - Re-assess resolvability of the LSI banks earmarked for resolution.
    - Prepare for tail-risk scenarios where actual losses exceed loss-absorption buffers and available resolution financing.
    - Review cooperation agreements on recovery and resolution planning with non-EU countries like the US, China, Japan, and Switzerland.
    - Enhance operationalization of resolution tools and participate in simulation exercises.
- Emergency Liquidity Assistance (ELA) and central bank preparedness:
  - The new BCL manual for ELA is fit for purpose but can be strengthened on funding-in-resolution and inter-agency cooperation.
  - To ensure operational readiness, the BCL should undertake ELA simulation exercises to test banks’ capabilities to mobilize enough collateral.
  - Some banks that have chosen not to activate standing facilities with the BCL may be exposed to liquidity-solvency interactive risk in a crisis, as seen in the FSAP stress tests.
  - Authorities should assess introducing a state guaranteed backstop if there is insufficient eligible collateral for granting ELA to a newly resolved bank.
  - Arrangements for information exchange between the BCL and CSSF in crisis situations should be formalized.
- Deposit Guarantee Fund operational readiness:
  - Operational readiness and staffing of the Luxembourg Deposit Guarantee Fund (FGDL) need strengthening.
  - The introduction and operationalization of the FGDL backstop mark significant progress.
  - The FGDL should enhance operational readiness to meet the 7-working-day payout period mandated by law.
  - Continuous improvements have been made, but IT system quality and reliability still need improvement.
  - The insolvency framework should allow the FGDL to file its claims in a liquidation process within the same time period as the depositors (10 years) to ensure a level playing field and reduce the risk of inability to recover all claims.
- Cross-border cooperation:
  - Cooperation with EU authorities seems adequate, but further engagement with non-EU foreign authorities should be pursued.
  - Authorities should consider the trend of subsidiaries of EU banks converting into branches and broadly engage relevant authorities to ensure significant branches in Luxembourg are incorporated in recovery and resolution plans.
  - Authorities should sign cooperation agreements on information exchange with non-EU home resolution authorities for branches of foreign banks.

### Authorities’ views on FSAP findings
- General reception:
  - Authorities appreciated new insights from the FSAP and provided important nuances on the team’s findings.
- Specific viewpoints:
  - Household indebtedness risks: authorities had a more nuanced view given the high proportion of fixed-rate loans and households’ significant net wealth.
  - Bank solvency stress tests: authorities noted that availability of hedges limits the impact of interest rate risk in practice.
  - Credit concentration risk sensitivity analysis: largest exposures are mostly foreign financial institutions with very low PDs, including parent entities, mitigating credit risks.
  - Liquidity risks related to real estate companies: authorities invited the team to take a more qualified view citing specific lending practices and micro-structure features.
  - Investment fund stress tests: authorities cautioned on different liquidity risk profiles of AIFs that could have influenced results.
  - Authorities appreciated FSAP insights on second-round effects of securities sales, intersectoral spillovers through market prices, and liquidity-solvency interactions in bank stress tests.
- Differences in policy preferences:
  - Authorities considered the introduction of maximum-LTV limits effective in lowering LTVs among new mortgage borrowers and found the limits appropriate.
  - They deemed CSSF’s requirement for banks to conduct interest rate stress tests on mortgage loans an alternative to the FSAP suggestion of combining this test with a stressed-DSTI limit.
  - Authorities prefer more flexibility in considering specific capital-based measures, emphasizing the high level of capital currently in the system.
  - They considered the current composition and voting rules in the CdRS an important element of consensus-based decision making.

*Source: IMF mission text as provided in the content unit.*

### 68. The authorities broadly agreed with the recommendations on continuing to improve

### 68. The authorities broadly agreed with the recommendations on continuing to improve

### Authorities' assessment and recommendations
- The authorities broadly agreed with the recommendations on continuing to improve supervision.
- They welcomed the FSAP’s conclusions that the oversight framework had improved commendably since the 2017 FSAP.
- The authorities considered the institutional framework for supervision to be appropriate and in line with European and international standards.

### Financial system structure — headline metrics and composition
- Number of banks in the system: 120.
- Assets of the 120 banks amount to 12 times GDP.
- Banking system ownership: dominated by foreign banks (almost half from other EU countries).
- Investment funds: Luxembourg has the second largest open-ended funds industry; share of UCITS has been decreasing as AIF share, especially the unregulated segment, expands.
- Fund deposits in banks: close to 220 percent of GDP.
- Domestic banking sector holds 20 percent of the domestic sovereign debt; over 80 percent of the large Luxembourgish banks’ sovereign bonds are in HTM portfolio with modified duration of 5.

### Key financial-soundness indicators (selected)
- Regulatory capital to risk weighted assets: 24.0 (2023).
- Regulatory tier 1 capital to risk weighted assets: 22.0 (2023).
- Capital to assets: 9.0 (2023).
- Return on assets: 1.1 (2023).
- Return on equity: 8.0 (2023).
- Nonperforming loans to total gross loans: 1.9 (2023).
- Household debt to GDP: 72.0 (2023).
- Liquid assets to total assets (All Banks): 33.0 (2022) and 32.0 (2023) — reflecting a change in underlying data source and calculation methodology (EBA 3) noted in the source.

### Stress tests and scenario outcomes — summary results
- FSAP stress-test framing: Y0=2023, Y1=2024, Y2=2025, Y3=2026; Baseline uses October 2023 WEO projections; stress tests include an adverse scenario and a financial shock scenario calibrated by empirical copula Monte Carlo simulation.
- Investment funds: funds experience a first-round impact of 13.1 percent (median fall in NAV) in the adverse scenario, with equity funds experiencing the largest fall.
- Investment Fund Liquidity Stress Test (selected):
  - Mixed funds: in one table, Funds with RCR<1 = 42; % Funds with RCR<1 = 0.3; % NAV with RCR<1 = 42.50.3 (table formatting in source).
  - Real estate funds: % NAV with RCR<1 = 26.1 (adverse/GFC historical first percentile).
- Bank solvency by business model (pre- and post-stress CET1, selected):
  - CET1 ratio before stress: Universal, retail and commercial banking/universal = 20.9%; Private banking = 25.2%; Custodian banking and activities linked to investment funds = 42.2%; Corporate finance = 14.6%; Other = 42.4%.
  - CET1 ratio - adverse (end of 1st year): Universal = 17.0%; Private banking = 16.8%; Custodian = 42.6%; Corporate finance = 13.8%; Other = 46.5%.
  - Capital depletion in the adverse scenario (by business model): Universal = -3.8%; Private banking = -8.5%; Custodian = 0.4%; Corporate finance = -0.9%; Other = 4.1%.
- Insurance sector: The median life insurer’s SCR ratio declines from 150 to 127 percent after stress; assets in the life sector decline by 9.1 percent, almost offset by an 8.8 percent reduction in liabilities (through higher interest rates).

### Macrofinancial scenarios — selected external and domestic paths (baseline vs adverse, selected values)
- Euro area GDP growth rate (Baseline): 1.2 (Y1=2024), 1.8 (Y2=2025), 1.7 (Y3=2026).
- Euro area GDP growth rate (Adverse): -3.0 (Y1=2024), 0.2 (Y2=2025), 1.7 (Y3=2026).
- Luxembourg GDP growth rate (Baseline): -0.4 (Y0=2023), 1.5 (Y1=2024), 2.4 (Y2=2025), 2.5 (Y3=2026).
- Luxembourg GDP growth rate (Adverse): -0.4 (Y0=2023), -4.3 (Y1=2024), -1.7 (Y2=2025), 3.2 (Y3=2026).
- House price index growth (Baseline): -2.3 (Y0=2023), -0.4 (Y1=2024), 2.9 (Y2=2025), 1.9 (Y3=2026).
- House price index growth (Adverse): -2.3 (Y0=2023), -17.0 (Y1=2024), -15.0 (Y2=2025), -1.0 (Y3=2026).
- Credit growth (Baseline): 2.4 (Y1=2024), 4.7 (Y2=2025), 5.4 (Y3=2026).
- Credit growth (Adverse): 2.4 (Y1=2024), 0.0 (Y2=2025), 0.0 (Y3=2026).
- Investment funds' net asset growth (Baseline): 0.0 (Y1=2024 onwards in the table); (Adverse): 0.0 (Y1=2024), -14.1 (Y2=2025), -7.5 (Y3=2026) in one scenario table.

### Key vulnerabilities and risks identified
- Monetary policy miscalibration: Medium likelihood; High/Medium impact if realized — risks include higher inflation feeding into wages via automatic indexation, higher fiscal cost, tighter financial conditions heightening credit risk, and severe effect on banks and non-banks if higher for longer interest rates materialize. FSAP stress test indicates overall financial sector resilience but high nonfinancial private sector debt service risks.
- Commodity price volatility: Medium likelihood.
- Abrupt global slowdown or recession: Medium likelihood; High/Medium impact — Luxembourg export demand could weaken further.
- Systemic financial instability: Medium likelihood; Medium impact — stress tests show the financial sector overall will be able to absorb a reasonable degree of stress, but domestic interbank contagion through confidence channels was not considered in the FSAP exercise.
- Cyber-attacks: Medium likelihood; ST/MT impact; High impact if realized — disruption of payment and financial systems and risks to collateral delivery and margin calls.
- Sharp correction in house prices: Low likelihood; ST/MT impact; Low impact on the financial sector given strong capital and liquidity positions and households’ high income and financial wealth.
- Possible changes in international corporate and personal taxation: Medium likelihood; ST/MT impact; Medium impact — could weaken Luxembourg’s attractiveness for businesses, weakening fiscal revenues and foreign investment.

### Policy-relevant notes and calibrations mentioned in the source
- Authorities have maintained the CCyB at 0.5 percent to support banks’ resilience.
- Risk-weight floor on RRE collateralized loans is at 15 percent.
- Stress-test methodology includes first-round (capital impact of macrofinancial adverse scenario), second-round (market-price impact when investment funds sell international securities to stem redemptions), and third-round (liquidity-to-solvency interactions when banks with funding gaps need to pledge or sell HTM securities).

*Source: IMF staff and Luxembourg authorities (excerpts from the FSAP chapter provided).*

### 3.5 percent in late 2022 and early 2023 and have started

### 1luxea2024003 - 3.5 percent in late 2022 and early 2023 and have started

### Insurance sector liquidity and lapse dynamics
- Lapse rates peaked at "3.5 percent in late 2022 and early 2023 and have started normalizing thereafter."
- A simulated monthly outflow of EUR 2.4bn could be matched with cash, HQLA assets and through reinsurance arrangements, totaling EUR 32.5bn.
- Sources: IMF staff calculations based on CAA data and company submissions.

### Insurance sensitivity analyses (Figure 17)
- Life insurers are most sensitive to changes in the risk-free interest rate (RFR), with an increase benefiting the sector.
- A large decline in stock prices ("Equity -50%") would lead to a large decline in SCR ratios.
- Scenarios and labels shown in the source:
  - pre-stress
  - RFR parallel +200bps
  - RFR parallel -200bps
  - Equity -50%
  - EUR +20%
  - EUR -20%
  - LUX sov. spread +500bps
  - Default largest bank
  - Default 3 largest banks
- Reported metric: "SCR Coverage: Life (in percent)" with interquartile range and median shown in the original figure.

### Banking sector stress test results and sensitivity tests (Figure 15)
- Banking system CET1 capital in percent of RWAs shown for multiple shocks and time points; example values in figure:
  - 20.9%
  - 20.9%
  - 16.5%
  - 10.2%
  - 5.9%
- Sensitivity tests include:
  - 500-bp Sovereign Shock
  - Largest exposure default
  - 5 Largest exposures default
  - 10 Largest exposures default
- Note: Sensitivity of LCRs to deposit run-off rates uses data sources CSSF, ECB, Refinitive, and IMF staff calculations. Timepoints: Y0=2023Q2, Y1=2024, Y2=2025, Y3=2026. Cutoffs for 1 or 2 banks not shown for confidentiality reasons.
- CET1 hurdle rate is equal to the Overall Capital Requirements; national regulatory minima cited include CET1 ratio of 4.5 percent and leverage ratio of 3 percent.

### Investment funds: MMF and fund liquidity stress tests (Figure 16 and STeM)
- MMFs assessed for NAV declines greater than 20 basis points under varying instantaneous shocks to:
  - Interest rates (basis points on x-axis)
  - Corporate spreads (basis points on x-axis)
- For each shock plotted, the other shock is kept constant relative to the baseline value of the main MMF stress test.
- Bottom chart metrics for exogenous redemption shocks (percentage of NAV applied homogeneously to all funds):
  - Blue line: share of number of funds for which HQLA is insufficient to match the net outflow (RCR<1).
  - Green line: share of NAV of funds with RCR below 1 as percentage of total NAV.
  - Red line: cumulative value of the liquidity shortfall of funds with RCR below 1.
- Investment funds STeM institutional perimeter and data:
  - 1,135 largest open-ended funds included.
  - Largest UCITS Investment Funds with total net assets over 1 billion euros, totaling close to 2.7 trillion euros in total net assets.
  - Largest open-ended AIFs with total net assets over 1 billion euros totaling close to 400 million euros in total net assets.
  - Market share: "70 percent of total net assets of UCITS within full reporting scope." and "Roughly 50% of total net assets of open-ended AIFs subject to same reporting standards as UCITS in full reporting scope."
  - Baseline data: March 2023.
- Scenarios:
  - Adverse scenario aligned with IMF’s RAM and external assumptions from GFM.
  - GFC scenario based on changes in asset prices during September and October 2008.
- Sensitivity analysis includes reverse stress test for MMFs based on various levels of exogenous shocks to interest rates and corporate spreads.
- Reporting outputs:
  - For MMFs: deviations between constant NAV and shadow NAV; number of MMFs and share of funds for which the deviation crosses the 20-basis points threshold.
  - For all funds: impact on value of assets and liabilities; no pass/fail threshold applied.

### Banking sector STeM: solvency and liquidity frameworks (Appendix II, Table 1)
- Solvency stress test (Top-Down by IMF):
  - Institutions included: 39 banks; 19 banks subcategorized as SIs; one bank domestically owned; 24 subsidiaries of euro area banks; 14 subsidiaries of non-euro area banks.
  - Market share: "90 percent of the banking sector’s assets." "100 percent of residential mortgage loans." "At least 80 percent of the different business models."
  - Baseline date: October 2023.
  - Stress test horizon: 3-years (2024-2026).
  - Methodology: FSAP team satellite models, balance-sheet regulatory approach, market data-based approaches. Losses for securities portfolios based on duration approach. Provisioning for IRB and STA modeled using IFRS9 transition matrix approach.
  - Tail shocks and scenario analysis: baseline (October 2023 WEO) and adverse scenario; TD analysis covered domestic real estate, exposures to parent companies and investment funds, and sovereign risks.
  - Risks covered: credit (loans and debt securities), market (repricing and credit spread risk), interest rate risk (IRRBB) on the banking book (hedge not considered). Solvency and liquidity risk interactions mainly through funding costs.
  - Behavioral adjustments: quasi-static balance sheet growth in line with nominal GDP with floor at 0 percent; interest income from nonperforming loans not accrued; dividends paid by banks remaining adequately capitalized throughout the stress.
  - Regulatory minima: CET1 ratio of 4.5 percent; leverage ratio of 3 percent.
  - Output presentation: system-wide capital shortfall; number of banks and percentage of banking assets falling below regulatory minima; impact of result drivers including profit components.

- Liquidity stress test (Top-Down by IMF):
  - Institutions included: 39 banks; market share: "90 percent of banking sector’s assets."
  - Latest data: June 2023 for LCR, NSFR and cash flow analysis. Source: supervisory data (COREP, ST exercise). Scope: perimeter of individual banks.
  - Methodology: Basel III-LCR and NSFR type proxies; cash-flow based liquidity stress test using maturity buckets; liquidity test in foreign currencies.
  - Risks: funding liquidity (liquidity outflows, instantaneous shocks); market liquidity (price shocks, instantaneous shocks).
  - Buffers: counterbalancing capacity and central bank facilities.
  - Size of the shock: run-off rates calculated following historical events or IMF expert judgment and LCR/NSFR rates; bank run and dry up of wholesale funding markets considered with haircuts to liquid assets.
  - Regulatory standards referenced: Basel III standards (revision as of January 2013); European Commission Delegated Act.
  - Output presentation: liquidity gap by bank and aggregated; survival period in days by bank; number of banks that can still meet their obligations.

### Implementation status of 2017 FSAP recommendations (Appendix I)
- Assessment structure: Recommendation (Responsible Agency) — Progress — Observations. Selected recommendations and statuses:
  1. Continue resource allocation toward risk-based supervision (BCL, CSSF and CAA) — Largely Implemented. Observation: BCL, CSSF, and CAA increased resources; resource gaps still remain.
  2. Increase engagement with supervision and resolution authorities in countries where Luxembourg’s LSIs and investment funds conduct significant activities (CSSF) — Implemented.
  3. Enshrine in legislation the operational independence of the CSSF and CAA, and introduce or update board member codes of conduct (MoF, BCL, CAA, CSSF) — Partially implemented. Observation: CSSF and CAA have codes of conduct; authorities have not addressed enshrining operational independence in legislation.
  4. Examine merits of a regulatory LCR requirement in FX at the group level and step-up monitoring of related FX liquidity risk (EC, ECB) — Not applicable.
  5. Provide industry guidance on liquidity stress test modalities and liquidity management tools for investment funds, and develop internal liquidity stress testing capacity (CSSF) — Implemented.
  6. Strengthen the institutional framework in order to increase the willingness to act (MoF, CdRS) — No action.
  7. Expand the macroprudential policy toolkit to include borrower-based lending limits (MoF, CdRS) — Implemented. Observation: Law adopted in 2019 with limits on loan-to-value, debt service to income, debt to income and maturity.
  8. Continue to strengthen risk-based monitoring of the residential real estate market and bank-investment fund interlinkages, and close remaining related data gaps (CdRS, BCL, CSSF) — Implemented.
  9. Increase the intensity of supervision over intra-group exposures, with banks required to demonstrate continued eligibility in their use of large exposure limit waivers (CSSF) — Implemented.
 10. Continue monitoring ability of banks to absorb a real estate market price decline (CSSF, ECB) — Implemented.
 11. Increase frequency of on-site inspections of subsidiaries of SIs (CSSF, ECB) — Not applicable.
 12. Harmonize data reporting standards for loan-to-value and debt-to-income ratios (CSSF, ECB) — Implemented.
 13. Strengthen guidance on substance in the context of delegated activities and actively engage with regulators in jurisdictions where such activities are prominent (CSSF) — Implemented.
 14. Issue guidance on the holdings of directorships of funds and their managers (CSSF) — Implemented.
 15. Assess whether safeguards to ensure depositary independence are adequate (CSSF) — Partially implemented.
 16. Implement revised early warning system under Solvency II regime (CAA) — Implemented. Observation: CAA's risk system triggers external verification if a (re)insurer's ratio drops below 110 percent.
 17. Reduce CBL’s exposure to commercial banks vis-à-vis CSDs and central banks (CSSF, BCL) — Implemented.
 18. Require establishment of third data center and conduct a full failover test (CSSF, BCL) — Partially implemented.
 19. Ensure the 2016/2017 national risk assessment focus adequately on Trust and Company Service Provider risks (MoF) — Implemented.
 20. Develop policies on intragroup exposures and the transfer of custodian functions in recovery and resolution (CSSF, SRB, ECB) — Largely implemented.
 21. Agree on the roles and responsibilities in dealing with a system-wide crisis (MoF) — Largely implemented.
 22. Finalize the operational modalities of emergency liquidity assistance provision (BCL) — Partially implemented. Observation: BCL improved its ELA Crisis Manual; areas for improvement include CSSF information exchange and consideration of an ELA testing framework.

*Source: IMF staff calculations, supervisors’ data and assessments as presented in the referenced chapter.*

### 1. Institutional

### 1. Institutional

### Perimeter
- Institutions included
  - 1,085 largest open-ended funds.
  - Largest UCITS Investment Funds covering EM bond funds, HY bond funds, Mixed funds, and Equity funds F with total net assets over 1 billion euros, totaling close to 2.3 trillion euros in total net assets.
  - Largest open-ended AIFs with total net assets over 1 billion euros subject to same reporting standards as UCITS, totaling close to 400 million euros in total net assets.
- Market share
  - 70 percent of total net assets of UCITS within full reporting scope.
  - Roughly 50% of total net assets of open-ended AIFs subject to same reporting standards as UCITS in full reporting scope.
- Data and baseline date
  - Source: Supervisory data
  - Latest data: March 2023

### Channels of Risk Propagation
- Methodology
  - Liquidity measure based on ii) cash and high-quality liquid assets.
  - Flow-performance Model to integrate impact of macro shock on redemptions.
  - Models of market depth to integrate second round effect coming from sales of assets, taking into account illiquidity of assets.
  - Incorporation of intersectoral linkages, especially with Luxembourg banks, to assess liquidity access capacity.

### Risks and Buffers
- Risks
  - Severe redemption shock following asset devaluations.
  - Funding liquidity (liquidity outflows) and inability to sell assets to cope with redemptions.
  - Market liquidity (price shocks) leading to second round effects.
- Buffers
  - Stock of high-quality liquid assets (HQLA).

### Tail shocks
- Size of the shock
  - Initial shock coming from impact of scenarios on Total Net Assets and redemption shock estimated from a model relating funds flows to macrofinancial variables.
  - Second round effects coming from price effect due to sales of assets.
  - Separately, exogenous monthly redemption shock equal to the first percentile of historical net flows.
- Sensitivity analysis
  - Reverse stress test based on exogenous levels of redemptions (as a percentage of NAV) applied homogeneously to all funds in the test sample.

### Reporting Format for Results
- Output presentation
  - Number of funds with a redemption coverage ratio (ratio of highly liquid assets to redemptions) below one.
  - Total net assets of funds with RCR below one, as a percentage of aggregate total net assets.
  - Liquidity shortfall amount for individual funds after redemptions.

### Insurance Sector — Solvency Risk (Top-Down by IMF)
- Institutional perimeter
  - Number of institutions
    - 10 life insurers
    - 12 non-life insurers and reinsurers
  - Market share
    - Life: ~83 percent of investment assets
    - Non-life: 81 percent of gross written premiums
  - Data
    - Supervisory reporting (Solvency II Quantitative Reporting Templates)
  - Reference date
    - 30 June 2023
- Channels of risk propagation
  - Methodology
    - Investment assets: market value changes of assets after price shocks
    - Liabilities: valuation change due to interest rate shock
    - Impact on available capital (net assets as the difference between stressed assets and liabilities)
    - Recalculation of the solvency capital requirement
  - Time horizon
    - Instantaneous shock
- Scenario analysis
  - Adverse scenario: aligned with the scenario used for the investment fund risk analysis, but with additional granularity on market and interest rate risks
  - Single-factor sensitivities
    - Additional interest shocks: EUR Risk-free rate term structure +/-200bps
    - Additional currency shocks: EUR external value +/-20 percent
    - Equity prices shock: -50 percent
    - Domestic sovereign shock: +500bps
    - Default of largest and the three largest banking counterparties
- Risk factors
  - Market risks (equity, property)
  - Interest rate risks
  - Credit risks (credit spread risk, default of largest counterparty)
  - Currency risks
- Buffers and mitigating factors
  - Eligible own funds
  - Loss-absorbing capacity of deferred taxes
  - No management actions
- Regulatory/accounting standards
  - Solvency II
  - National GAAP
- Reporting format for results
  - Impact on value of assets and liabilities
  - Impact on solvency ratio (SCR coverage)
  - Aggregated capital shortfall
  - Dispersion across companies
  - Contribution of individual shocks

### Insurance Sector — Liquidity Risk (Top-Down by IMF)
- Institutional perimeter
  - Number of institutions
    - 8 life insurers
  - Market share
    - Life: ~90 percent of investment assets in non-unit-linked business
  - Data
    - Supervisory reporting (Solvency II Quantitative Reporting Templates)
    - Additional data request to life insurers
  - Reference date
    - 30 June 2023
- Channels of risk propagation
  - Methodology
    - Outflow through surrenders of guaranteed life insurance policies
  - Time horizon
    - One month
- Scenario analysis
  - Simulated monthly outflow which exceeds highest historical outflow by 50 percent
- Risk factors
  - Liquidity risk
- Buffers and mitigating factors
  - Holdings of highly liquid assets
  - Surrender payouts to policyholders according to contractually allowed periods.
  - No management actions
- Regulatory/accounting standards
  - Solvency II
  - National GAAP
- Reporting format for results
  - Cash in- and outflows
  - Coverage of net outflows by liquid assets
  - Distribution across companies

*LUXEMBOURG — INTERNATIONAL MONETARY FUND (1luxea2024003 - 1. Institutional).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1luxea2024003.pdf_