The National Bank of Belgium is today publishing the new edition of its annual Financial Stability Report. In this Report, it assesses the stability of the Belgian financial system in an environment characterised by tighter monetary policy, turning credit and real estate cycles and turbulence in the US and Swiss banking sectors. Ensuring the financial system’s capacity to withstand these challenges without forfeiting its key roles in the economy is the key mission of the Bank as the Belgian macroprudential authority. The Macroprudential Report, also published today, reviews the macroprudential policy decisions taken to this effect and concludes with a number of recommendations.

Risks that remained below the waterline when interest rates were low could materialise

The environment in which Belgian financial institutions operate changed dramatically in the course of 2022. A key development during the period under review was the significant tightening of monetary policy in response to high inflation, thus ending a long period of very low (and even negative) interest rates. This led in turn to lower demand for credit and a significant cooling of the Belgian residential real estate market after many years of dynamic growth. In this environment, financial institutions may be confronted with losses that remained below the waterline when interest rates were low, credit and liquidity conditions loose and asset prices high.

A resilient Belgian financial sector, but no room for complacency

The Belgian banking sector proved very resilient to the turbulence caused by the failures of Credit Suisse in Switzerland and a number of banks in the US. This resilience primarily reflects the major differences between Belgian banks and these vulnerable institutions, such as the former’s better management of interest rate and liquidity risks (due in part to regulation), stable and more diversified client deposits and robust capital and liquidity buffers to deal with unexpected shocks.  

While the strong financial position of Belgian financial institutions has helped them weather the challenges posed by the new macro-financial context, there is no room for complacency. They must continue to adapt to the new operating environment while conserving their strength. A case in point is the remuneration of savings deposits, which are an essential source of stable funding for loans to Belgian households and non-financial corporations. Banks should support this stability by gradually increasing the remuneration of these deposits while taking into account the development of their interest income, part of which is generated by assets for which the long-term interest rate was set in a low interest rate environment (for example mortgage loans). Another example is the need to hold sufficient credit risk provisions for potential losses that could materialise as a result of the tighter financial conditions and the slowdown in the residential or commercial real estate markets.  

Structural developments related to digitalisation and the transition to a low-carbon economy should also remain points for attention. Digitalisation offers opportunities for financial institutions but also poses a number of risks, particularly cyber risks. Climate change and the transition to a more sustainable, low-carbon economy can also have a major impact on the economy and financial stability. In Belgium, the Bank has paid particular attention to the energy-inefficiency of the financial sector’s sizeable real estate exposures.

Macroprudential policy responsive to the changing cycle but still focused on resilience

In order to avoid procyclical effects that could amplify the tightening of credit conditions already underway, the Bank decided not to reactivate the countercyclical buffer in the current context. However, the macroprudential capital buffer for Belgian mortgage loans (a sectoral systemic risk buffer of 9%) was maintained. The Bank is prepared to release this buffer should signs emerge of a substantial increase in repayment difficulties for mortgage borrowers.

The Bank’s policy decisions also ensured flexibility for mortgage loans, while maintaining sound credit standards. Continued high compliance with the recommendations issued by the Bank in 2019 —mainly related to the share of high loan-to-value (LTV) loans in new mortgages — helped to further reduce the risk profile of loan portfolios. Furthermore, the share of young borrowers in the mortgage loan market remained stable (and even increased). In a rising interest rate environment, however, it is mainly mortgage loan rates — rather than LTV — that limit borrowing capacity. In this context, the Bank welcomes the moderate extension of loan maturities observed since 2022, which has helped to offset the impact of higher interest rates on housing affordability.

Recommendations

The current economic and financial climate once again highlights the role to be played by the financial sector in supporting the economy. In line with its decision to maintain the countercyclical capital buffer at 0%, the Bank counts on the banking sector to maintain lending to households and non-financial corporations and to avoid undue excessive procyclical tightening of credit policies. In particular, an excessive slowdown in mortgage lending to first-time buyers should be avoided. Banks should also use the available capital headroom to proactively offer debt restructuring solutions to customers experiencing repayment difficulties and, where necessary, increase credit risk provisions. Banks and insurance companies must also continue to prudently manage the interest rate and liquidity risks inherent in a period of rising interest rates.

It is also important to maintain a sufficiently high level of supervision and regulation. The Bank, like the ECB and the European Banking Authority, thus continues to call for compliant and timely implementation of the Basel III standards in Europe. Only a credible regulatory framework can ensure financial stability in the future. This framework may also need to be adapted in the light of lessons learned from recent events in the US and Switzerland.