In 2017, the FSMA and the NBB published an initial, extensive report on asset management and shadow banking in Belgium. The study was prepared for the Minister of Finance, Johan Van Overtveldt, in response to the recommendations of the High Level Expert Group on the Future of the Belgian Financial Sector. An update to that initial report, with recent figures and an analysis of national and international developments, is now available.

The initial report and the update address the trend toward a more market-based financial system, where financial intermediation also takes place outside the banking sector. In international fora, the term ‘shadow banking’ is in fact no longer used, but has been replaced by the preferred term ‘non-bank financial intermediation’.

This type of financing offers an alternative to borrowing from banks and helps to support the real economy. It fits in well with the argument, put forward in Europe, that the economy should become less dependent on banks for financing. But non-bank financial intermediation can – like any other financial activity – also give rise to systemic risks that could threaten the stability of the financial system.

Non-bank financial intermediation can take many forms. At the request of the High Level Expert Group, the supervisory authorities’ reports analyse asset management and non-bank financial intermediation. The expert group had recommended that the risks associated with these activities and their interconnectedness with other sectors be more closely monitored.

The FSMA and the NBB have calculated the scale of non-bank financial intermediation in Belgium based on the definition given by the Financial Stability Board, the organisation which on behalf of the G20 oversees reforms of the financial sector at a worldwide level. The total financial assets in this category amounted to € 147 billion at the end of last year. These assets consist mainly of money market funds and non-equity investment funds. The vast majority of these funds are under the supervision of the Belgian authorities.

As things stand currently, no substantial systemic risks have been identified in relation to asset management and non-bank financial intermediation. The developments in both areas of activity and the links with other sectors of the economy do, however, require careful monitoring, including for potential reputational risks to financial service groups.

The latter include the so-called ‘step-in’ risk, namely, the risk that these groups may de facto feel obliged to compensate clients for the risks associated, for example, with the investment funds sold by these groups, even where they are not contractually bound to do so.

The FSMA and the NBB consider it very important to collect hitherto unavailable data on asset management and non-bank financial intermediation. It is for this reason that the FSMA has adjusted and expanded the statistical information which investment funds are required to submit. Soon a royal decree will be published that equips investment funds with tools that can be used in the event of liquidity problems.

As the Minister of Finance, Johan Van Overtveldt, observes with regard to the updated study: ‘The report illustrates the important progress observed in the development of capital markets in Belgium and Europe, which should better shield taxpayers’ money from financial calamities, while at the same time providing more direct funding to the Belgian economy. It also helps to satisfy my concerns over the lack of transparency and supervision of these non-bank funding channels. Regarding the evolution in “shadow banking” we must remain vigilant. There is still a lot of work to be done.’

According to the Governor of the NBB, Jan Smets: ‘The risks associated with these activities are a priority for the NBB from the perspective of financial stability. In this regard, international developments also have to be closely monitored.’

In the view of Jean-Paul Servais, Chairman of the FSMA: ‘Non-bank financial intermediation is a useful supplementary source of funds for the real economy. But it is certainly important to continue gathering data with a view to effective monitoring, which is one of the FSMA’s tasks.’

Brussels, 25 October 2018