Financial System Stability Assessment, including Reports on the Observance of Standards and Codes on the following topics: Banking Supervision, Securities Regulation, Insurance Supervision and Regulation, and Securities Settlement Systems

This paper discusses key findings of the Financial System Stability Assessment (FSSA) and Reports on the Observance of Standards and Codes (ROSC) on Banking Supervision, Securities Regulation, Insurance Supervision and Regulation, and Securities Settlement Systems for Belgium. The assessment reveals that overall, the financial system is generally sound, resilient to potential adverse shocks, and well supervised. Risks both on the international level and domestically appear well within the banks’ capacity to manage them and are well understood by the supervisor and overseer of the system.


This paper discusses key findings of the Financial System Stability Assessment (FSSA) and Reports on the Observance of Standards and Codes (ROSC) on Banking Supervision, Securities Regulation, Insurance Supervision and Regulation, and Securities Settlement Systems for Belgium. The assessment reveals that overall, the financial system is generally sound, resilient to potential adverse shocks, and well supervised. Risks both on the international level and domestically appear well within the banks’ capacity to manage them and are well understood by the supervisor and overseer of the system.

I. Executive Summary

Belgium’s financial system is large and dominated by a few internationally active bancassurance conglomerates. Following a series of mergers and acquisitions, the bancassurance model has become a well-developed feature of the Belgian financial landscape and a potential anchor for stability.

The financial system is resilient and benefits from a number of Belgium-specific features that help stability. These include a traditionally cautious attitude toward risk by banks, large holdings of government securities, extremely low holdings of equity by banks, a stable source of funding benefiting from generous tax incentives, a high standard of banking supervision, and a stable macroeconomic policy framework.

Stress tests confirm the system’s robustness. Indeed, financial institutions withstood an adverse macroeconomic stress scenario well, helped in part by the compensating impacts of interest rate shocks on banking and insurance businesses within the group level, a major benefit of diversification in the bancassurance model. At the same time, the heavy exposure abroad, the open nature of the economy, and the importance of the Euroclear Group globally, make the domestic financial system potentially vulnerable to global economic developments and financial contagion. That said, Belgium’s financial sector has never experienced a systemic crisis and has weathered past business cycles well, although not without some strains in the insurance sector.

Near-term vulnerability appears low. This is mainly the reflection of the soundness of the dominant banking system, the generally benign international financial environment, the strong financial condition of the corporate sector, and the relatively healthy financial position of the household sector. Nevertheless, risks still remain and may increase with a downturn in the business cycle, increased cross-border operations, and deeper links to the global money centers.

While the financial position of the insurance industry has improved, serious challenges remain. The very high exposure to guaranteed rate contracts on life insurers’ books and the low long-term interest rates will keep profitability and solvency margins under pressure for some time to come.

Overall the Belgian supervisor showed a high degree of compliance with international standards, although there were some major weaknesses identified in the insurance and pension fund areas, which are being addressed. The high quality of supervision is manifested in Belgium’s enviable record of financial stability, in the face of a continually changing financial landscape, and real and financial shocks.

The move toward a unified supervisor, while initially posing special challenges, which are being overcome, has helped strengthen overall supervision. Looking ahead, the Banking, Finance, and Insurance Commission (CBFA) needs to build on the recent progress made, take fuller advantage of the synergies with the National Bank of Belgium (NBB), and further enhance its effectiveness. This will help the CBFA position itself to meet new challenges stemming from: (i) the dominant role of bancassurance conglomerates in the domestic market and their increasingly international character; (ii) the demands of Basel II and Solvency II; (iii) the implementation of the Financial Services Action Plan and the ongoing integration within the European market; and (iv) the changes in, and special requirements of, new cross-border financial market infrastructures, such as Euronext and Euroclear.

Maintaining the soundness of the financial system and safeguarding financial stability would, in the short run, call for actions aimd at: (i) addressing identified weaknesses in the supervision of the insurance sector; (ii) establishing an effective mechanism for consolidated supervision of the bancassurance groups; (iii) devoting adequate resources and capacity to the oversight and supervision of the Euroclear Group/Euroclear Bank; (iv) putting in place an overarching corporate governance framework applicable to the financial sector; (v) continuing to place emphasis on liquidity management; and (vi) further enhancing the existing crisis management arrangements.

Over the medium term, the main challenges are to: (i) ensure that the authorities’ capacity to identify and address risks in the financial system keeps pace with the rapidly evolving markets and increased complexity of financial groups against the backdrop of European and global integration; (ii) maintain vigilance over the financial sector’s expansion abroad to prevent such a beneficial move from threatening the stability of the financial system; and (iii) overhaul the supervision of the pension industry.

Box 1 summarizes the main recommendations stemming from the FSAP. More technical recommendations are discussed in the main body of the report and in the Annex on summary assessments, and the companion paper on Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) prepared by the Financial Action Task Force (FATF).

Since the end of the second FSAP mission (March 2005), many of the FSAP recommendations have either been implemented or are in the process of being implemented.

Prioritized Recommendations

Soundness, short-term vulnerabilities, and supervisory issues

  • Establish an effective mechanism for consolidated supervision and organize the supervisory structure and approach so as to meet the special challenges posed by the bancassurance conglomerates, given their systemic importance.

  • Address, as a priority, identified weaknesses in the supervision of the insurance sector by expeditiously upgrading insurance supervision and regulation, and intensifying the monitoring of insurance companies.

  • Establish an overarching corporate governance framework for the financial sector.

  • Perform stress tests in a more systematic and regular way and use the results to inform the Financial Stability Committee (FSC) discussions.

  • Continue to place emphasis on liquidity management at the bank and group level for bancassurance conglomerates, and provide explicit guidelines for banks on liquidity management to complement the current informal discussions.

  • Enhance the resources and capacity focused on the oversight and prudential supervision of the systemically important Euroclear System (ES) and further strengthen cooperation in this area between the NBB and the CBFA.

  • Build on the progress made so far to take fuller advantage of the synergies between the NBB and the CBFA, and make the CBFA work more efficiently and effectively within the existing legal structure.

  • Further refine the existing crisis management arrangements to ensure that there is an effective and tested crisis management mechanism in place.

  • Introduce more flexibility in setting the maximum guaranteed rate in life insurance and de-link the guaranteed rates in insurance and pensions to prevent a further build-up of vulnerabilities.

  • Begin strengthening substantially the prudential supervision of pension funds.

Medium-term challenges

  • Ensure that the capacity to identify and address financial system risks keeps pace with market developments, innovations, and increasing complexity of financial conglomerates.

  • Overhaul the supervision of the pension industry.

  • Revisit a number of features in the supervisory institutional arrangements in light of the experience gained, with the view to further enhancing synergies with the NBB and strengthening the effectiveness of the management boards of the CBFA and the Financial Stability Committee.

  • Streamline and harmonize laws and regulations applicable to the mandate of the CBFA.

  • Meet the challenges of the implementation of the Financial Services Action Plan and reap the benefits of European integration.

II. Financial Environment

1. Belgium has emerged from the slowdown of 2001–02 with a stronger economic performance than many of its European partners. Following two years of lackluster growth, economic activity picked up modestly in 2003 and strengthened in 2004, supported by prudent macroeconomic policies and a more favorable global environment. With weak domestic demand in trading partners, growth slowed down in early 2005 but the recovery has since resumed and is expected to strengthen in 2006.

2. Belgium’s large financial system is dominated by a few internationally active bancassurance conglomerates, which account for over 80 percent of bank assets and nearly 50 percent of total insurance premia (Figure 1, Box 2, and Table 1). Banking is by far the largest component of the financial sector, with assets of over EUR 1.3 trillion in 2005 (over 440 percent of GDP), making the banking sector much larger, in relative terms, than that of the U.S. or the Euro area. The insurance sector, which plays an important role through the bancassurance groups, is somewhat smaller, with assets equivalent to less than 60 percent of GDP. The Belgian stock exchange is relatively small, but it is hoped that its recent integration in Euronext will boost its visibility and potential growth. On the regulatory front, as many other EU countries, Belgium has recently adopted a system of consolidated supervision under the newly established CBFA.


Financial Sector Composition, 2004

(percent share of total assets)

Citation: IMF Staff Country Reports 2006, 075; 10.5089/9781451803242.002.A001

Source: NBB
Figure 1.
Figure 1.

Belgian Banking Structures Compared

Citation: IMF Staff Country Reports 2006, 075; 10.5089/9781451803242.002.A001

3. Belgium’s financial sector has never experienced a systemic crisis, and it has weathered past business cycles well, although not without some strains in the insurance sector. Belgian banks showed great resilience in the face of adverse market conditions and economic developments during the downturn of 2001–02, and have since improved the quality of their loan portfolios, and brought operating costs down. In contrast, insurance companies, which experienced a serious erosion in their safety margins during the slowdown, have continued to perform less satisfactorily in the current low interest rate environment. In part, this is due to the legacy of old contracts with high guaranteed returns and to a lesser extent to the inability of insurers to take full advantage of the recovery in equity prices because of a shift of their assets into fixed income securities.1

Belgian Bancassurance Conglomerates

Bancassurance conglomerates dominate the Belgian financial system. The major banks and insurance companies in Belgium are part of cross-border bancassurance groups. In 2004, the four largest bancassurance groups accounted for 82 percent of deposits and 44 percent of total insurance premia.

Main Bancassurance Conglomerates

(2004, in percent)

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Sources: The NBB and companies’ reports.

Measured by deposits for banks and premia for insurance companies for Belgian banking and insurance activities only.

Shares may not add to 100 percent; a portion of profit/loss may be attributed to holding company.

Source: The NBB and companies’ reports.

The cross-border bancassurance model poses a challenge to supervision. Various Memoranda of Understanding (MOUs) have been concluded between home and host supervisors to facilitate the consolidated supervision of the banking activities of the bancassurance groups, as well as the consolidated supervision of these groups at the holding level.

The bancassurance model has both benefits and risks. On the positive side, the conglomerates are able to offer a full range of financial products—traditional banking, mutual funds, and insurance products—which helps them respond to changes in market conditions, tax rules, as well as client preferences, and stabilizes the funding base. There is also a potential to diversify risk, as confirmed by the stress test exercise. Due to the differences in duration of asset and liabilities in banking and insurance, interest rate risk is likely to have an opposite impact on the economic capital of the banks and insurance subsidiaries. Revenue and cost synergies may be feasible as well. Nevertheless, more complex structures are likely to be less transparent, and the close relationship between two businesses with substantially different regulations creates room for regulatory arbitrage, particularly if the supervision in the two sectors is uneven.

Table 1.

Supervision of Belgium’s Major Bancassurance Conglomerates 1/

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Source: CBFA and NBB’s Financial Stability Review 2005.

Banking activities also include investment services (securities and asset management).

4. Belgium has one of the most concentrated banking sectors in Europe, and a high degree of openness to outward investment, particularly with the rest of Europe. The four largest bancassurance groups together account for 88 percent of banking assets compared with an average of 55 percent for the EU-15, and the Herfindahl Index now exceeds 2,000.2 Despite the high concentration, low overall net interest margins suggest that the system could still be competitive in some segments of the loan and deposit markets. The large number of small and medium-sized banks provide competition in savings deposits and the mortgage market. The markets for savings products and private banking are exposed to foreign competition. However, with its large network of retail branches, the big banks have an advantage over new entrants in retail banking. This does not, however, preclude foreign banks’ entry through mergers and acquisitions.


Market Size and Concentration in Belgium Compared to EU, 2004

Citation: IMF Staff Country Reports 2006, 075; 10.5089/9781451803242.002.A001

Source: ECB

A. Banking Sector

5. Financial soundness indicators point to a healthy, profitable, and relatively efficient banking system. Belgian banks enjoy high ratings. Profitability, as measured by return on assets (ROA), is on the low side in EU-13 comparison. However, Belgium ranks higher when profitability is measured by return on equity (ROE), reflecting the fact that Belgian banks are more leveraged than many of their EU-13 counterparts. Bancassurance groups have tended to follow a low-risk-low-return implicit strategy, with a large portfolio of securities holdings, low-spread interbank positions, and emphasis on relationship lending to small and medium-size enterprises (SMEs). Net interest margins have, therefore, been comparatively low, despite being the main income source for banks. Fee and commission income has been gradually rising due to a shift from bank deposits to bank-based mutual funds (Figure 2). While a great deal of progress has been made in containing operating costs, the large network of retail branches will continue to constrain cost reduction efforts.

Long-term local currency ratings of Belgian banks

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Figure 2.
Figure 2.

Belgian Banking Soundness Compared

Citation: IMF Staff Country Reports 2006, 075; 10.5089/9781451803242.002.A001

Source: The ECB.

B. Insurance

6. The insurance industry, which is of moderate size (9 percent of GDP in annual premia) has been facing a number of serious challenges since the downturn in economic activity in 2001–02. The Belgian insurance market is less concentrated than the banking sector. The bancassurance network is the most important distribution channel for life insurance, while independent agents account for the majority of nonlife premium collected in Belgium. As in many other countries, the insurance industry in Belgium has had to contend in recent years with pressures arising from a major adjustment in equity prices, depressed level of insurance premia in the late 1990s, historically low interest rates, and rising reinsurance costs. These developments led to a substantial erosion in the solvency of many insurers and exposed the risk associated with liability contracts offering guaranteed returns. While the financial position of the insurance industry has markedly improved, serious challenges remain, as the high proportion of guaranteed rate contracts on life insurers’ books and the low long-term interest rates will keep profitability and solvency margins under pressure for some time to come.

C. Pension Funds

7. The Belgian private pension fund industry is relatively small, but it is growing in response to generous tax incentives. The second pension pillar includes all collective private pension plans—organized on a company, sectoral, or occupational level—both in the form of pension funds and group insurance. Total reserves are still modest (EUR 42 billion) and are held mostly in the form of group insurance (75 percent), with only about EUR 11 billion held in the form of pension funds. However, the importance of pension funds is likely to grow over time as a result of recent reforms. Pension funds are heavily exposed to equities, both directly and through investments in mutual funds. Overall, equities account for nearly half of total pension fund investments, but sufficient information about pension fund liabilities is not available to assess whether such exposure is prudent. There are also major weaknesses in the supervision of pension funds, including: (i) the virtual lack of onsite inspections and analysis of offsite reports; (ii) absence of a risk-based supervision system; and (iii) lack of a uniform system for assessing risk exposures, funding levels, and investment strategies.

D. Capital Markets

8. The dominance of small and medium-size companies and a history of high public debt have shaped the features of the Belgian capital market. The importance of SMEs has not been conducive to the development of an active corporate bond market. A tradition of strong ownership concentration has also limited the attractiveness of the stock market for issuers and investors. The Belgian stock market capitalization, at close to 77 percent of GDP, is in line with the Euro area average. Reflecting the importance of the financial system, close to half of market capitalization consists of bancassurance listings. The integration in 2001 of the Brussels stock exchange into a pan-European structure (Euronext), has offered potential benefits (an increased visibility vis-à-vis institutional and international investors, and the benefit of a large pool of liquidity), which have helped revive it. However, the risk of a marginalization of the bulk of Belgian listed companies remains, given the relatively small size of these enterprises.

III. Sources of Strength and Potential Risk

9. In addition to systemic macroeconomic risks, which are explored more fully in the stress testing scenarios, there are a number of sources of strength and potential risk. These include the large international exposure of the financial system, the financial health of the counterparties, the role played by a global securities and settlement system located in Belgium, and the dominance of guaranteed rates in past insurance contracts.

A. International Exposure

10. Belgian banks are increasingly foreign oriented. Total foreign exposure (including all financial assets) of the banking system nearly doubled since 1999 and at end-June 2005 exceeded EUR 850 billion (over sixteen times system-wide own funds). Major bancassurance groups accounted for the lion’s share (95 percent) of this exposure. Foreign exposure is, however, mostly concentrated in Western Europe and the U.S. (85 percent). In particular, the U.K., The Netherlands, and the U.S. are the largest exposures, accounting for close to 50 percent of total foreign exposure. Exposure to Central and Eastern Europe Countries (CEEC), mostly the Czech Republic, Hungary, and Poland, has been growing very rapidly and currently accounts for 5 percent of total foreign exposure (equivalent to about 61 percent of own funds). Virtually all the exposure in CEEC is concentrated in one major Belgian group. This banking group, draws a quarter of its income from CEEC countries, making it vulnerable to major disturbances in that region.


Euro Area has the largest share of regional exposures of Belgian banks

Citation: IMF Staff Country Reports 2006, 075; 10.5089/9781451803242.002.A001

Source: The NBB.

B. Counterparties: Corporate and Household Sectors

11. The financial condition of the corporate sector is strengthening on the back of the world economic performance and benign financial conditions. The recovery of profits, which started in 2003, gained momentum in 2004, with the median return on equity of large and medium-sized nonfinancial enterprises reaching 9.1 and 7.0 percent, respectively. This translated into higher solvency ratios (own funds as a ratio of the balance sheet total), which increased to a peak of about 30 percent for all companies. While the number of bankruptcies increased in 2004, the number of assets involved fell and both of these indicators were down in early 2005, suggesting a more resilient and credit-worthy corporate sector. Moreover, corporate sector balance sheets are not particularly vulnerable in Belgium since Belgian firms are less leveraged than their Euro area counterparts and the sector’s debt/equity ratio is now 63 percent. Also, banks have lowered their risk profile through relationship lending to SMEs who dominate the corporate sector.

12. Household financial position remains strong, with financial assets hovering around 400 percent of disposable income, and a stable debt/GDP ratio at around 42 percent. Substantial household financial assets reflect the strong savings ratio of Belgian households (12.3 percent of gross disposable income). The aggregate level of indebtedness of Belgian households remains low at 66 percent of disposable income, even as growth of outstanding mortgage loans accelerated. Household loans, comprising 49 percent of the banks’ loan portfolio, have sharply risen in the last few years even as corporate lending decreased, but nearly 75 percent of household borrowing is secured by mortgages. While residential real estate prices have been increasing strongly with some of the pick-up prompted by fiscal measures, the increases have been less than in some neighboring countries.

C. Insurance Industry’s High Exposure to Guaranteed Rates

13. Insurance products with guaranteed minimum returns are popular in Belgium, but the relatively high level of guaranteed returns creates a challenge for insurers in a low interest rate environment. Life insurance policies with guaranteed returns remain the most popular type of contract in Belgium, accounting for over 80 percent of life insurance premium in 2003. Driven by competition, insurance companies offered the maximum allowed guaranteed return of 4.75 percent until 1999 and 3.75 percent thereafter, one of the highest in Europe.3 Long-term interest rates have traditionally been much higher than the average guaranteed rates, but the difference between these has narrowed since 1998 and even became negative at some point. This makes it difficult for insurers to obtain a sufficient investment income to cover their obligations.

D. Global Center for Securities Settlement

14. Belgium has growing importance in the region as a center for securities settlement. Belgium is the home country for a major global securities settlement system (Euroclear Group) that provides settlement and custody services for both international and European domestic securities, and offers associated banking services (Box 3).

Euroclear System: a Major International Central Securities Depository

Importance of the ES. The ES has a network covering 31 domestic markets worldwide and plays the role of investors’ settlement system for many domestic securities. For some of them (e.g., the German bonds market), a significant part of the secondary market is internalized in the ES. Eurobonds and other international securities constitute the core market of the ES. The turnover on a consolidated basis for the Euroclear Group averaged EUR 307 trillion in 2004 and the total value of securities held on behalf of customers hovered around EUR 5.9 trillion at end-2004. (The corresponding figures for the Euroclear Bank are EUR 132 trillion and EUR 3.5 trillion, respectively).

Corporate Structure of the ES. The Euroclear Group has recently undergone a major corporate restructuring that altered the current structure, roles and responsibilities of different entities within Euroclear Group including that of the Euroclear Bank (EB). A new holding company, Euroclear SA/NV (ESA), was set up and it owns directly the EB and the national central securities depositories (CSDs). As a result of the restructuring, EB has relinquished its ownership of the group’s three CSDs—Euroclear France, CrestCo, and Euroclear Nederland and—instead has become a sister company, under the ownership of the ESA.


Until December 31, 2004

Citation: IMF Staff Country Reports 2006, 075; 10.5089/9781451803242.002.A001


Since January 1, 2005

Citation: IMF Staff Country Reports 2006, 075; 10.5089/9781451803242.002.A001

Supervision and oversight. A cooperation framework was laid down in a new multilateral MOU, signed in the beginning of 2005 by the Belgian authorities and the authorities of the countries where the domestic CSD is part of the ES (France, The Netherlands, and the United Kingdom). The NBB and the CBFA cooperate on the basis of their respective responsibilities and have recently enhanced and intensified their coordination of the oversight and prudential supervision of the ES.

Systemic Risk and Stability Issues. Given the size of the operations in this financial infrastructure, its global reach, and the potential for a number of known risks (settlement, operational, credit, and custodian risks), it can have major implications for the stability of the financial system.

  • Systemic risk that could impact the CSDs if the EB becomes insolvent has been reduced with the corporate restructuring.

  • The FSAP has analyzed the risks posed by the ES in the context of the CPSS-IOSCO recommendations for settlement systems. The assessment demonstrated that the ES is a safe, sound, efficient, and reliable system. Furthermore, the ES observes almost all CPSS/IOSCO Recommendations for Securities Clearing and Settlement Systems. Nevertheless, it was recommended that: (i) the EB enhance its risk management procedures to establish and manage links to other markets and the ESA put in place procedures to identify and solve potential conflicts between different interests of the users and shareholders; (ii) the authorities in Belgium amend the regulation on settlement finality in order to abolish the zero-hour rule for nonfinancial participants in the ES; and (iii) the CBFA and the NBB increase the effectiveness of their cooperation and strengthen their overall capacity for supervision and oversight.

IV. Soundness and Short-Term Vulnerability

15. Overall, the financial system in Belgium is resilient and appears to benefit from a number of Belgium-specific features that help anchor its stability (Table 2). Nevertheless, the increased complexity and evolving strategies of the bancassurance groups, the system’s openness and related large cross-border activities, the pressure for growth and performance, and the special role played by the Euroclear Group will pose a particular challenge to the authorities as they seek to maintain and strengthen stability.

Table 2.

Belgium: Bottom-Up Stress Testing Results

(Impact in percent of regulatory own funds)

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Sources: The NBB, the CBFA, and participating financial institutions.

Weighted average of participating bancassurance conglomerates for market and credit risk and the macroeconomic scenario, and weighted average of all participating institutions for underwriting results. Weighting by regulatory own funds.

One banassurance did not report results for its insurance subsidiary. However, this impact is suggested to be small and assumed to be zero for the purpose of aggregation.

Weighted average of three of the four participating bancassurances.

PD=probability of default, LGD=loss given default.

Expected losses are defined as PD times LGD times exposures.

Unexpected losses are defined as capital requirements times exposures.

Weighted average excluding one financial institution.

Cumulative impact.

Best, worst and average results are for three reporting bancassurance conglomerates only. One reporting insurance company is not included for reasons of comparability of the results.

Impact of market value for interest rate and other market risk plus impact on operating profit for credit risk.

Impact on operating profit.

16. The banking sector in Belgium has an impressive record of uninterrupted systemic stability. This is largely due to a number of factors, including:

  • A generally cautious attitude toward risk: Banks have generally tended to follow a low-risk, low-yield approach. Their loan portfolio is heavily weighted toward higher-grade corporate borrowers, while risks in the SME and the household sector have been mitigated by their close relationship-lending approach, supplemented, when needed, by appropriate collateral (e.g., mortgage lending).

  • Large holding of government securities: The high level of government securities in banks’ portfolio supports stable returns and systemic liquidity, as these assets can be used as collateral with the NBB. While on a declining trend, these holdings are still quite significant at 17 percent of assets, and higher than the EU average.

  • Extremely low holding of equity: Banks’ holdings of equities have been extremely low (currently less than two percent of their balance sheet). This has partially been the result of legal restrictions that were lifted relatively recently, and the subsequent prudential rules in place. However, it should be noted that the more liberal treatment of equity holdings in insurance companies could lead to regulatory arbitrage within the bancassurance groups.

  • Stable sources of funding: The banks have experienced, and are still experiencing, a steady inflow of large, stable, and relatively inexpensive financial savings, due to the high Belgian savings rate, benefiting from tax incentives (Box 4).

  • A high standard of banking supervision and a stable macroeconomic policy framework.

  • Diversification benefits, cost savings, and other synergies associated with the bancassurance model (although, as noted in Box 2, the bancassurance model could also entail certain risks).

17. The stress tests provided further confirmation of the resilience and stability of the Belgian banking system (Box 5 and Tables 35). They showed that the Belgian banks exhibit considerable resilience against shocks but are vulnerable to interest rate and credit risks.

Fiscal Incentives and Stability of Banks’ Funding Source

Belgian banks have long enjoyed a very stable funding source in the form of savings deposits. Belgian households have traditionally had a high savings rate, in part due to Ricardian effects of a historically high government debt, precautionary savings for old age, and various fiscal incentives. These deposits are subject to important regulations affecting their pricing, remuneration structure, and their fiscal treatment. They represent a significant proportion of banks’ liabilities on an unconsolidated basis and raise important stability issues.

Importance of regulated savings deposits

Regulated savings deposits have more than doubled in the last decade and at end-2004 amounted to EUR150 billion, equivalent to over 50 percent of GDP. Reflecting this, the share of savings deposits represents over 15 percent of banks’ liabilities and a third of funds collected from customers on an unconsolidated basis. The major bancassurance groups attract the lion’s share of these deposits (70 percent), but the smaller banks’ share is increasing in response to their more aggressive stance on pricing.

Fiscal treatment

These deposits are free from the regular 15 percent withholding tax, up to the maximum annual limit of EUR 1,520, if the basic conditions outlined in the law are met. These conditions include the requirement of a tiered remuneration structure, consisting of a base rate and premia, whereby the limits for the base rate and the various premia are set at 4 and 2 percent respectively. The noncumulative premia consist of an accrual premium and a loyalty premium, with the former applying to new inflows into savings books that remain on the account for at least six months, and the latter applying to outstanding savings account balances that remain on the account for at least 12 months. Since banks apply the tax exemption per savings account, and there are no requirements for banks to report taxes on a consolidated basis, taxpayers can completely evade taxes by opening multiple savings accounts. So far, there has been no significant attempt to trace tax evaders.

Stability Implications

Regulated deposits have been fairly stable over time and provided a large pool of stable funding for banks, including for their longer term mortgage financing operation. That said, an accurate assessment of their effective duration will be important in the banks’ risk management models. The use of regulated savings deposits, with a priori an indeterminate maturity to finance long duration assets, including mortgages, creates a significant mismatch making the banks vulnerable to an upward change in the yield curve. The stress tests undertaken in the context of the FSAP indicated that a parallel upward shift in the yield curve of 200 basis points would lead to a large market value loss, equivalent to about 9 percent of regulatory capital in the four major banks. This loss is, however, cushioned when looking at the bancassurance group level, as the insurance component benefits from such a shift. Nevertheless, to mitigate these risks, the duration of the savings book is prudently estimated and a great deal of attention is being paid by both banks and supervisors to liquidity management. The recent joint exercise conducted by the NBB and the CBFA underscores, in this context, the importance increasingly being attached to liquidity management in the system.

A removal of incentives to save in regulated accounts could have significant consequences for banks. Despite continuing popularity of saving books, households are turning toward other instruments, mostly those that offer tax incentives. Banks are quick to offer such products in order to preserve their funding, and to replace the lost interest income by fee income.

Stress Tests

Coverage and scope: The stress tests covered the four bancassurance conglomerates and two stand-alone large insurance companies, which together account for 82 percent in banking and 76 percent in insurance. The stress tests were run by the financial institutions using their internal risk models, based on September 2004 data. The NBB also performed various top-down tests using supervisory data. These latter tests were updated on the basis of June 2005 data and the NBB reports no major changes in the initial FSAP findings.

The stress tests: The tests consisted of a macroeconomic scenario and a series of single factor shocks agreed with the authorities. The macroeconomic scenario envisages a global economic shock which results in low growth combined with shocks to exchange rates, equity prices, and the yield curve. The single factor shocks were run for interest rates, equities, exchange rates, real estate prices, credit risk, and for insurance companies only in underwriting and natural disaster risk. They were complemented with analyses of liquidity risks, concentration risk (large exposures), and contagion risk.

Main findings: Overall the stress scenarios presented no major strain on the financial institutions, confirming their general resiliency and robustness.

  • The bancassurance conglomerates are able to withstand the macroeconomic scenario relatively well. Most experience the largest negative shock in the first year, with impact quickly tailing off. Disaggregating the results, the insurance companies tested seem more vulnerable than the banks, particularly to the negative developments in the equities market. On the other hand, the insurance companies stand to gain from higher interest rates in the scenario which counters the price level shock.

  • Banks’ sensitivity to interest rate risk and credit risks is considerable. A 200 bps upward parallel shift in the yield curve results in average losses of 9 percent of capital. A 50 bps upward shift in credit spread results in losses of 3 percent of capital on average. However, in the case of some banks, the size of the credit spread shock seems very large in relation to the quality of their portfolios, and, moreover, for banking book activities, the increase of the credit spread will have a positive impact on the return of credit activity and thus on profitability and solvency.

  • The impact of other market risks on bank capital is small. Banks’ mortgage exposure does not result in large real estate price risks. In addition, the banks are liquid and the risk of contagion from a domestic source through the interbank credit market seems low, as a shift towards cross-border exposure has taken place, and the structure of the interbank market has evolved into a multiple money center network. However, the failure of a major foreign counterpart might still have significant effects on the Belgian banking system. Exchange rate tests were also conducted but had not major impacts.

  • Insurance companies are most vulnerable to a downward shock to equity prices and a downward shift in the yield curve. A 30 percent price drop results in average losses equal to 30 percent of regulatory own funds (not including hidden buffers, which in some cases are substantial). Meanwhile, a 200bps downward shift in the yield curve results in losses of 35 percent of regulatory own funds at one insurance company. In addition, two insurance companies seem somewhat vulnerable to a large price decline in real estate. The impacts of other market risks, and of stressing underwriting results, are moderate.

  • Compensating impacts of interest rate shocks on banks and insurance companies lead to diversification benefits at the conglomerate level. Diversification benefits also accrue from exposure to different types of risks by the different entities, such as credit risks in banks and equities risks in insurance companies, and exposure originating from different product lines.

Insurance companies proved vulnerable to a downward equity price shock and fall in interest rates, in particular, and displayed moderate vulnerability to a shock in underwriting results. However, financial institutions withstood an adverse macroeconomic scenario relatively well.

18. Operational risk poses an additional concern, which was not addressed in the stress tests. Operational losses have had a significant impact in the recent past. These risks have stemmed from acquisitions (especially from abroad and those that fell outside of banks’ main business lines), from the remoteness of some operations abroad, and from simple fraud. To mitigate operational risk, financial institutions should strengthen their internal controls and supervisors should continue to pay sufficient attention to these issues. The implementation of Basel II, including pillar 2 by the CBFA will also help mitigate concerns in this area.

19. Liquidity management by bancassurance groups deserves the full attention of the supervisor. The development of bancassurance groups and the growth of cross-border activities are leading the banking groups to organize their liquidity management on a more integrated basis and on a pan-European scale. Complex banking groups with both banking and insurance activities now tend to include insurance exposures in their global liquidity risk management. The CBFA and the NBB have, since the FSAP, conducted a survey and interacted with major Belgian financial groups on liquidity and collateral management practices. The CBFA also took a number of measures including: (i) stepping up its supervisory activities with respect to liquidity risks, with the major banking groups having already undergone a formal screening of the group-wide liquidity risk management; (ii) exploring various approaches aimed at reorienting CBFA’s current prudential approach to liquidity risk; and (iii) working out a revised liquidity reporting framework and quantitative guidelines on liquidity risk management, balancing between the need to improve its current scheme and to prevent excessively burdening the banks.

V. The Supervisory Framework

20. Belgium introduced a system of consolidated financial sector supervision in January 2004. Under the new framework, the former Banking and Finance Commission merged with the Insurance Supervision Office (OCA) to create the Banking, Finance, and Insurance Commission (CBFA). The merger was intended to strengthen the supervision of the large financial conglomerates that have come to dominate the Belgian financial landscape.

21. Effective cooperation between the NBB and the CBFA is, by design, a cornerstone of the new institutional framework. To facilitate collaboration, two joint bodies were established: the Financial Services Authority Supervisory Board (FSASB), which consists of the supervisory boards of the two institutions; and the Financial Stability Committee (FSC), which is also chaired by the NBB governor and consists of the management boards of the two institutions. Cooperation is also “institutionalized” at the level of the CBFA’s Management Committee level (through the inclusion of the three members of the NBB’s Board of Directors. In addition, significant synergies were to be exploited between the two institutions, notably in the areas of human resources and IT-related tasks. The NBB continues to have oversight responsibility for the payments systems and has a broad responsibility to promote financial stability.

22. Dealing with the challenges of integration while coping with the intensive preparation for Basel II and the implementation of many EU directives has not been an easy task. The significant and tangible progress made to date in the integration process and the strong desire on the part of the authorities to make the current supervisory arrangement more effective are welcome. The authorities have already embarked on a number of important initiatives, including sharpening CBFA’s mandate and key priorities; aligning resources with well-established priorities; enhancing accountability; developing and putting in place strategic multi-year action plans; and establishing an internal audit function. The CBFA and the NBB have also endeavored to enhance their cooperation on a number of fronts, including most notably in the development of prudential policy, in dealing with Euroclear Group, and in addressing financial stability issues within the context of the FSC. The recent cooperation on liquidity issues is a good illustration of the success of these efforts in ensuring effective safeguards for the stability of the financial system. Building on this progress will be essential in ensuring an efficient and effective supervision and reinforcing the soundness of the system.

23. The importance for the CBFA to move expeditiously in upgrading insurance supervision and establishing an effective mechanism for consolidated supervision of the bancassurance groups cannot be over-emphasized. The increasingly complex nature of these cross-sector, cross-border conglomerates and their systemic nature, as well as the challenges posed by the guaranteed rate in life insurance contracts, call for an enhanced and more sophisticated supervisory approach, at both the solo and the group levels, so as to limit the room for regulatory arbitrage, which may have an adverse impact on financial soundness and stability. The CBFA has reacted swiftly by taking decisive actions in a number of areas. The CBFA has already restructured the Insurance Supervision Department and put in place a “Prudential Committee” in charge of prudential policies for banking and insurance, which should enhance exchange of information and collaboration regarding the supervision of complex financial institutions with cross-sectoral dimensions. Measures are being put in place to strengthen insurers’ asset liability management. The CBFA is also reinforcing its monitoring of insurance companies, and has recently launched an exercise aimed at stress testing the scenario of a persisting low long-term interest rate. These are important first steps that need to be continued and built upon.

24. Insurance regulation also needs to be upgraded, particularly with regards to solvency. While the implementation of the Solvency II project will be helpful, the CBFA should, in the interim, consider further work on enhancing its solvency model. The insurance solvency system in place today is outdated, mainly because it does not take into account the asset-side and mismatch risks. In fact, risk-based capital models suggest that the true capital requirements in the insurance sector are considerably higher.

25. Other issues that deserve attention include:

  • Streamlining and harmonizing various laws and regulations applicable to the mandate of the CBFA. This would enhance supervision and allow for more transparency. It would also provide an opportunity to consolidate and harmonize regulations across sectors (e.g., on fit and proper testing, corporate governance, market conduct, etc.).

  • Establishing an overarching corporate governance framework applicable to the financial sector. The current system of corporate governance applicable to financial institutions (the so-called protocol system) was an innovative instrument of corporate governance at the time of its introduction in Belgium. However, recent developments have prompted the CBFA to review the system in order to: (i) develop a modern framework that will replace the “protocol”; (ii) broaden the scope of application to include all relevant financial institutions; and (iii) establish a flexible framework that, while empowering financial institutions to put in place their own corporate governance structure, sets a regulatory minimum, that provides the CBFA with adequate enforcement tools.

  • Strengthening the prudential supervision of pension funds. The size of the pension fund industry is likely to grow and so will the risks. Sufficient resources are, therefore, needed and the CBFA should explore the synergies that exists with insurance and mutual fund supervision. The implementation into Belgian Law of the EU Directive (Directive 2003/41/EC of June 3, 2003) should provide a good opportunity to effect the necessary changes in this area.

  • Further enhancing the capacity for prudential supervision and oversight of Euroclear and strengthening NBB and CBFA cooperation. Given the importance of Euroclear in the system and the increased complexity involved, upgrading the oversight and supervision of the Euroclear Group/Euroclear Bank is important.

  • Stress testing and stability. Given the insights provided by the FSAP stress tests, the FSC is encouraged to make this exercise a regular feature that informs its discussion of financial stability issues and functions as a tool to ensure a systematic dialogue between the NBB, the CBFA, and the financial sector.

  • Revisiting over the medium term, a number of features in the institutional arrangements. These include streamlining the CBFA’s Management Committee and the FSC Board and reconsidering the joint chairmanship of the CBFA’s Management Committee and Supervisory Board. Since a number of these institutional features are embedded in the legislation and associated Royal decrees, a more thorough review and debate would be desirable in light of the gained experience, international best practices in these areas, and the need for balancing Belgian-specific considerations.

26. Preparations for the introduction of Basel II are on track. Belgium’s major banking groups will adopt the internal ratings based on advanced measurement approaches for credit and operational risk. In fact, institutions representing over 98 percent of the total assets will be opting for the more complex approaches. In the run-up to Basel II, cooperation between the banks and supervisory authorities is intense and frequent. Due to the high quality of assets and the important role played by SMEs, the implementation is not likely to have a negative impact on capital ratios. In addition, as banks have already been using advanced risk assessment tools for individual borrowers for several years, credit extension is unlikely to be influenced in a major way. In terms of resources, the CBFA is aware that the Basel II implementation constitutes a challenge.

27. The assessments of Belgium’s compliance with internationally accepted standards and codes show that Belgian supervisors meet the challenges of supervising a large, internationally active financial system. While supervision in the banking and securities areas were of high standards, a number of weaknesses were identified in the insurance area (Annex). Looking ahead, however, the CBFA, as a new institution, needs to position itself to meet the new challenges posed by the increasingly international character of the bancassurance groups, including their important links to global money centers.

28. Belgium has a sound legislative AML/CFT framework in place.4 It has ratified the relevant international conventions and criminalized money laundering and terrorist financing in line with international standards. The Belgian financial intelligence unit (FIU) is highly effective and professional in carrying out its functions. Belgian mechanisms for responding to mutual legal assistance and extradition requests largely correspond to international standards.

29. The CBFA has generally adequate powers of supervision and inspection for the financial entities under its regulatory authority and the phasing out of bearer shares will align AML/CFT with international standards. It is important, however, that the insurance sector be subject to compliance supervision regarding AML/CFT obligations.

VI. Systemic Liquidity, Safety Nets, and Crisis Management

A. Systemic Liquidity Arrangements

30. Belgian banks enjoy a comfortable liquidity position. This is due to: (i) a large, and stable savings deposit base; (ii) a broad range of eligible collateral, including large portfolios of government bonds; (iii) access to deep markets, and (iv) the Eurosystem’s policy of allowing banks to use required cash reserves for intraday payments. The NBB outlines three main principles under which emergency liquidity assistance can be provided.5 First, assistance can only be provided as a last resort, after having considered and disqualified all other options, including market options and the ability of the deposit insurance scheme to intervene preventively. Second, emergency liquidity assistance should in principle be fully collaterized, although the central bank organic law does not prohibit uncollaterized assistance in “emergency situations.” Finally, it should only be provided in the event of liquidity and not solvency problems, but this distinction is sometimes difficult to make in times of crises.

B. Deposit Insurance and Crisis Management

31. The deposit guarantee scheme provided by the Belgian Protection Fund (BPF) is a core component of the financial safety net. Given the rise in cross-border banking activities and the diversity of national depositor protection systems operated by the EU member states, there is some uncertainty about how well home/host coordination would operate in an actual crisis situation. The review of the EU directive on deposit guarantee schemes that is currently underway should provide an important opportunity to clarify questions.

32. Despite an enviable track record in financial stability, further strengthening of crisis prevention and management tools is warranted. The NBB has assembled a broad-based crisis team and established detailed procedures for financial crisis management, which are regularly tested. Given the cross border structure of the bancassurance groups, the effective management of a crisis would likely require an ex-ante greater coordination among authorities in several countries. The challenge for the NBB and the CBFA going forward is to identify potential sources of systemic risk, appreciate the cross-border dimension, and fine tune their arrangements in light of tests conducted in this area.

VII. Medium-Term Challenges

33. The generation of income growth and further improvements in the cost-income ratio remain two of the main challenges facing Belgian banks. As in nearly all EU banks, net interest margins (NIMs) have continued to remain under pressure. In spite of the growth of interest-bearing assets and liabilities, net interest income for Belgian banks has fallen, reflecting mainly the clear downward trend in NIMs. The NIMs fell from a peak of 1.23 percent to nearly 1.10 percent in 2005 in the context of persistently low interest rates, a flattening of the yield curve, and downward pressures on commercial interest margins (e.g., on mortgage loans and savings deposits, where competition among banks remained strong). At the same time, despite major improvements over the past several years, operating costs have remained relatively high and further significant cuts will be challenging in the Belgian environment. Cost-to-income ratios, while on a declining trend, are high even by European standards, which will pose a challenge, especially with the increasing competitive environment in the European market.


Income has declined much more than cost

Citation: IMF Staff Country Reports 2006, 075; 10.5089/9781451803242.002.A001

34. The regulated savings deposits, which form a part of the large and stable funding base for banks, are sensitive to changes in the withholding tax. Moreover, the deposit rate cap can create distortions in the deposit market in times of high interest rates, while the withholding tax exemption provides opportunities for tax evasion. Should the authorities decide to rationalize the tax system to eliminate distortions, any change in tax policy should take into account its impact on the stability of the banking sector.

35. Given the inherent risk involved in guaranteed returns, a new build-up of associated vulnerabilities needs to be prevented. As seen in the stress tests and made clear in the most recent downturn, a further downward shift of interest rates would be very costly for insurers, given the existing stock of contracts. The industry has already adapted by lowering the guaranteed return and guaranteeing a given return only for the current premium. From the supervisory point of view, there is a need to exercise more flexibility in setting the maximum guaranteed rate, which plays an important prudential role. However, the rate tends to be sticky due to political considerations, mainly because it is linked to the minimum guaranteed rate in pension arrangements and as such, is not determined with prudential, but rather with social considerations in mind. As these two rates have fundamentally different functions and objectives, they should be de-linked to allow the setting of the maximum guaranteed rate to be adjusted to prudential requirements in the insurance industry.

36. Minimum funding requirements for pension funds are low and a number of funds are underfunded, even compared with these minimum requirements. While these weaknesses need to be addressed, a significant strengthening of prudential supervision of pension funds is important. The authorities should take advantage of the current benign financial environment to: (i) overhaul the supervision of pension funds; (ii) introduce a risk-based approach and focus supervision on core activities; (iii) revisit the issue of externalization of pension obligations with a view to increasing the minimum funding requirements to a more realistic level; and (iv) review governance of pension funds.

Table 3.

Belgium: Structure of the Financial System

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Sources: The CBFA and the NBB.

Data for end September 2005.

Credit institutions governed by Belgian law, including those with Belgian-majority and foreign-majority shareholdings.

Includes corporated funds (SICAV), uncorporated funds, and saving pension funds.

Encouraged set of indicators.

Table 4.

Belgium: Financial Soundness Indicators of the Banking Sector 1/

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Sources : The CBFA and the NBB.

Data on a consolidated basis, unless otherwise stated.

September 2005 data

BIG covers the four main banking groups.

Simple ratio of capital to total assets, without risk weighting.

Territorial data. Excluding government, interbank and non-resident loans.

Unconsolidated (solo/company) data from the Corporate Credit Register.

Non-performing loans refer to loans classified as substandard, doubtful, or loss.

Unconsolidated (solo/company) data.

RIR-survey. Difference between lending rate on loans <= 1 year and deposit rate on term deposits >= 1 month and <= 1 year.

MIR-Survey. Difference between lending rate on loans <= 1 year and deposit rate <= 1 year.

Liquid assets consist of cash, short-term interbank claims (maturity < 1 month) and the total securities portfolio.

Short term liabilities consist of short term interbank debt (< 1 month) and sight, savings and short term deposits (< 1 month) of non-bank clients

Core and encouraged set of indicators

Financial auxiliaries include all resident corporations and quasi-corporations engaged primarily in activities closely related to financial intermediation but which do not themselves perform an intermediation role.

Financial intermediaries are units that incur liabilities on their own account on financial markets by borrowing funds, which they lend on different terms and conditions to other institutional units.

Table 5.

Belgium: Financial Soundness Indicators of the Nonbanking Sectors

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Sources : The CBFA, the NBB, and Stadim.

Projection for the year or latest available (June/September 2005).

Available solvency marging over required solvency margin.

Data for 2004 based on a sample of already available annual accounts in the Central Balance Sheet Register.

Earnings before interest and tax as a percentage of interest and principal expenses

Percent change in house price index (1953=100).

Mortgage loans after deduction of deposits related to mortgage loans; consolidated basis.

Encouraged set of indicators.

Observance of Financial Sector Standards and Codes Summary Assessments

The annex contains summary assessments of seven international standards and codes relevant for the financial sector. The assessments have helped to identify the extent to which the supervisory and regulatory framework is adequate to address the potential risks in the financial system.

The following detailed assessments of financial sector standards were undertaken:

  • The Basel Core Principles for Effective Banking Supervision (BCP), by Michael Andrews (banking expert from Canada) and Toby Fiennes (banking supervision expert, U.K. FSA)

  • The International Association of Insurance Supervisors (IAIS) Insurance Core Principles (ICP), by Wil Dullemond (insurance sector expert, The Netherlands FSA);

  • The Internaltional Organization of Securities Commission (IOSCO) Objectives and Principles for Securities Regulation, by Jennifer Elliot (IMF, MFD);

  • The Securities Settlement Systems CPSS-IOSCO (RSSS): Euroclear System by Elias Kazarian (IMF-MFD); CIK and NBB-SSS by Jeffrey Mooney (payments and settlements expert, U.S. SEC).

The Euroclear Assessment was updated in September 2005 to reflect the corporate restructuring of Euroclear.

The assessments were based on several sources, including:

  • ■ Self-assessments by the supervisory authorities;

  • ■ Reviews of relevant legislation, regulations, policy statements and other documentation;

  • ■ Discussions with the supervisory authorities; and

  • ■ Meetings with financial market participants, users of settlement infrastructures, and financial sector associations.

The FATF 40 Recommendations for Anti-Money Laundering and 9 Special Recommendations Combating the Financing of Terrorism were assessed by the Financial Action Task Force. The Associated Report on the Observance of Standards and Codes (ROSC) is distributed separately.

Report on Observance of Standards and Codes: Basel Core Principles for Effective Banking Supervision


37. The assessment of implementation of the Basel Core Principles (BCP) for Effective Banking Supervision has been completed as part of a Financial Sector Assessment Program (FSAP) in December 2004. It requires a review of the legal framework, both generally and as specifically related to the financial sector, and a detailed examination of the policies and practices of the institution responsible for banking supervision. The assessment team enjoyed excellent cooperation with its counterparts and received all information required.6 As discussed with the authorities, the assessment was completed against the essential and additional criteria, which were viewed as appropriate for a highly developed country even though the FSAP minimum standard is evaluation against the essential criteria only.

Institutional setting

38. The Banking Finance and Insurance Commission (Commission Bancaire, Financière et des Assurances, CBFA) is expressly charged with the oversight of credit institutions. In carrying out its functions, the CBFA cooperates and shares resources with the National Bank of Belgium (NBB) in a number of key areas, including prudential reporting by credit institutions. The NBB has oversight responsibilities for the payment system, and the NBB and the CBFA jointly constitute the Committee for Financial Stability.

General preconditions for effective banking supervision

39. The well developed financial sector in Belgium has benefited from a sound domestic economy which has in recent years enjoyed somewhat higher growth than the Euro area averaged overall. The budget has been in balance or small surplus, but low growth, albeit higher than the European average, has meant that gross public debt has declined only slowly and is still equivalent to nearly 100 percent of GDP.

40. Government infrastructure is well developed, with a substantial body of commercial law and a well respected judiciary. Accounting standards are in transition, with all publicly traded Belgian companies, including banks and insurance companies, required to adopt International Financial Reporting Standards for the fiscal year beginning in 2005.

41. Overall responsibility for the public safety-net lies with the Committee for Financial Stability, which is charged, among other things, with coordination of crisis management, oversight of deposit insurance, and the protection of investors. Liquidity support, if required, may be provided by the NBB in its capacity of lender-of-last-resort, within the broader European Central Bank system.

42. Deposit insurance to a limit of EUR 20,000 is provided by the Fund for the Protection of Deposits and Financial Instruments (FIF), which has broad powers to participate in the winding-up, reorganization, or take-over of a credit institution likely to become insolvent. Participation in the FIF is mandatory for Belgian institutions and foreign institutions from non-EU member states, and optional for institutions from other EU states that participate in their home country’s fund. The CBFA has a wide range of remedial powers, and these have been generally used as required, with supervisory action matching the seriousness of the problems detected.

Main findings

43. Belgium has a high overall level of compliance with the essential and additional criteria of the Core Principles. The legal framework is well developed, and practical implementation is strong. The bank supervision staff of the CBFA enjoy a strong reputation for professional skill and integrity, and various projects already underway at the CBFA would address almost all issues noted by the assessment team.

Objectives, autonomy, powers, and resources (CP 1)

44. The CBFA has appropriate autonomy and powers for banking supervision. However, in the context of managing banking supervision within an integrated supervisory agency, it could be helpful to establish a clear, broader mandate for the CBFA to reflect its responsibility to contribute to financial stability and protect consumers through its oversight of banking, capital markets activity, and insurance. This could facilitate assessing risk arising from each area of activity, which could be helpful in dealing with the allocation of resources within the CBFA, and if required, in making a case to increase the total resources of the CBFA.

45. The overall effectiveness of bank supervision has not yet been compromised, but the assessment team is concerned that the need to upgrade capacity in the nonbank areas of the CBFA and to invest in upgrading systems and staff to keep current with evolving best practices such as Basel II, could lead to diversion of resources from the existing sound risk-focused system of bank supervision. While recognizing the need to balance autonomy with accountability and to minimize the costs borne by the industry for the CBFA’s operating expenses, there may be a need to revisit the constraints placed on the total resource envelope of the CBFA to ensure that bank supervision is not weakened.

46. The assessment team also notes that the management structure of the CBFA, with three members of the management committee also having senior responsibilities at the NBB, may present some challenges as well as the benefits of ensuring close working relationships between the two organizations. The authorities will find it useful to assess its practical success in meeting the various supervision mandates of the CBFA after some initial experience is gained with this new management structure.

Licensing and structure (CPs 2–5)

47. Belgium has a high level of compliance with this group of principles. One area for strengthening relates to initial licensing. Consistent with recommendations made for ongoing supervision, there is a need to ensure there are sufficiently knowledgeable and skilled non-executive directors to effectively oversee management. This is achieved in practice for the large banking groups, but should be extended more uniformly to smaller banks. Consideration should be given to vetting directors not only for their probity, as is currently done, but also to more formally consider their skills and experience, and the balance of the board as a whole.

Prudential regulations and requirements (CPs 6–15)

48. The body of prudential regulations and requirements is generally appropriate and well enforced in practice. It would be beneficial, and the CBFA has already begun work in this regard, to expand on the provisions of Article 20 of the banking law to provide more explicit legal foundation for the various areas of internal governance and control. A number of these important areas are addressed in the “protocols” signed by most banks or in circular letters of the CBFA, but it would be better to have these governance principles more firmly rooted in the law or regulations. The common practice of issuance of bearer shares by Belgian companies could undermine an otherwise comprehensive approach to anti-money laundering and countering the financing of terrorism, as it is possible for the beneficial owners of accounts held by such companies to change without the knowledge of the bank.

Methods of ongoing supervision (CPs16–21)

49. Belgium has a well developed and effective system of supervision incorporating onsite and offsite work by integrated teams. There is a good risk-focused approach, with larger amounts of supervisory resources devoted to the institutions presenting the greatest systemic risk. Consolidated supervision is effective in practice for the large conglomerate groups due to the existence of specific memoranda of understanding (MOUs) with the other supervisory authorities and the established practices of the bank supervision function. However, there is a need to establish a more formal process within the CBFA to ensure a consistent level of coordination and cooperation between banking and insurance supervision.

Formal powers of supervisors (CP 22)

50. The broad provisions of Article 57 of the banking law permit the CBFA to act quickly, without the need for possibly time-consuming legal proceedings. A wide range of remedial measures is available, and although the CBFA has preferred to use moral suasion backed by the threat of action under the sweeping powers of Article 57, there have been three instances over the last ten years when a special inspector has been appointed to supersede the control of management and directors of a bank.

Home-host supervision (CPs 23–25)

51. Belgium has a strong home-host regime, particularly with respect to the largest banking groups where specific MOUs are in place. There are also MOUs in place or in the final stages of negotiation with the supervisory authorities in most countries where Belgian banks have significant foreign establishments. CBFA staff routinely conduct onsite work in the significant foreign establishments of their banks, and there is evidence in practice of good information exchange and coordination with foreign supervisory authorities.


52. The recommendations to further enhance the practice of supervision build on a very strong foundation. Most of the recommendations in Table 6 are intended to further strengthen practices which currently meet the minimum standard of the Core Principles, and in most cases, work is already in progress to address the outstanding issues.

Table 6.

Recommended Action Plan

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Authorities’ response

53. The CBFA can globally subscribe to the main findings laid down in the report. The CBFA is satisfied with the overall conclusion of the assessment team that banking supervision has a high overall level of compliance with the Basel Core Principles and that the CBFA’s bank supervision team enjoys a strong reputation for professional skill and integrity.

54. As stated by the assessment team, work is already underway to address almost all issues raised, either at the CBFA’s own initiative or within the context of the EU-supervisory framework (Committee of European Bank Supervisors—CEBS).

Objectives, autonomy, powers and resources (CP1)

55. As an introductory remark, we would like to point out that the current governance structure of the CBFA has been laid down in the law of August 2, 2002. As a result of the integration of the Insurance Supervisory Authority into the Banking and Finance Commission, the CBFA is since January 2004 the single supervisory authority for the Belgian financial sector. The integration of the different supervisory activities constitutes an important challenge for this new organization. The move into one building at the end of September 2004 contributed to a more in-depth collaboration.

56. Various steps have been taken in the meantime in order to enhance the effectiveness of the CBFA: the internal rules regarding the functioning of the Management Committee have been completed, an internal audit function has been set up, and the public communication policy has been enhanced. The CBFA is aware of the importance of an integrated methodology for the supervision of complex groups and, with regard to financial stability, of close collaboration with the central bank (NBB).

57. Within the constraints of the CBFA’s budget, new staff is being recruited in order to upgrade the capacity in nonbank supervisory functions. The CBFA is aware that the Basel II implementation constitutes a challenge in terms of appropriate supervisory resources.

Licensing and structure (CPs 2–5)

58. Concerning the skills and experience of non-executive directors of supervised firms to effectively oversee management (BCP 3—licensing criteria), the CBFA is currently undertaking a thorough review of its internal governance framework applicable to institutions under prudential supervision. The CBFA intends to build upon the work undertaken at the level of the Basel Committee (consultation paper of July 2005) and the CEBS. The CBFA intends to better delineate the responsibility for the annual accounts and the prudential reporting of the bank’s governing bodies and its internal control mechanism in conjunction with the responsibility of the external auditors. In this context, the CBFA launched in October 2005 a consultation regarding the review of the role and tasks of the bank’s external auditors.

59. The alignment of the legal provisions for objecting notifications (BCP 5—investment criteria) for investment in a subsidiary with those for the refusal of the establishment of branches will be addressed together with modifications required by the forthcoming changes in the EU-solvency regulation.

Prudential regulations and requirements (CPs 6–15)

60. The above-mentioned overhaul of the internal governance framework of supervised firms will be used for rooting a number of governance principles in the law or in regulations (BCP 14—internal control and audit).

61. With regard to the use of bearer shares (BCP 15—money laundering), a new law has recently been approved by the Belgian Parliament. In essence, as from January 1, 2008, all new shares will be issued in either registered or dematerialized form. For existing bearer securities various transitional measures will be applied up to December 2013. The other recommendations with regard to AML/CFT will be implemented with the transposition of the EU-regulation (i.e., the implementation of Special Recommendation VII of the FATF before the end of 2005 and of the 3rd EU-Directive on money laundering by December 2007).

62. Formal guidelines for liquidity management (BCP 13—other risks) will be introduced as part of the implementation of the European Capital Requirements Directive (CRD), more specifically with respect to the second pillar of the New Capital Framework of the Basel Committee. The target date is January 1, 2007 and the reoriented approach would result in a revised liquidity reporting framework and more explicit qualitative guidelines with regard to liquidity risk management.

Methods of ongoing supervision (CPs 16–21)

63. In order to develop a common approach between banking and insurance supervision (BCP 20—consolidated supervision) various initiatives have already been taken in the day-to-day supervision such as exchange of information, joint team meetings, common approach in individual cases, joint on-site examination and supervisory review, and integration of IT-systems.

64. A specific committee has been set up which consists of the heads of departments, members of the management committee of the CBFA, in charge of Prudential Policy (banking and insurance), Banking supervision and Insurance supervision. The purpose of this committee is to enhance exchange of information, consultation and discussion regarding the supervision of complex financial institutions with cross-sectoral dimensions and preliminary discussions of policy issues of common interest.

65. As noted by the assessment team, a specific project has been set up at the end of 2004 within the Banking supervision department in order to update and review its procedures (including job descriptions for the different supervisory functions and on-site examination work programs) with a view to ensuring a more efficient application of the existing methodology. Working groups are also reviewing the overall approach for on-site examinations, the information flow within the department and the management tools (including risk assessment tools).

Formal powers of supervisors (CP 22)

66. The CBFA will inquire into the potential benefits and consequences of a more aggressive use of the supervisory power to sanction (BCP 22—remedial measures).

Home-host supervision (CPs 23–25)

67. As regards the issue of assessing the quality of home country supervision, the CBFA will follow the proposed EU-approach for mutual recognition of third-country supervisory regimes (BCP 23—globally consolidated supervision).

Report on Observance of Standards and Codes: IAIS General

68. This is a summary report on the assessment of the observance of the Insurance Core Principles of the International Association of Insurance Supervisors (IAIS) in Belgium. Belgian insurance is supervised by the Banking, Finance, and Insurance Commission (CBFA). This assessment relates to the jurisdiction as a whole and, for the most part, focuses on the responsibilities and powers of the CBFA in relation to insurance supervision. This assessment was done in the context of the IMF and World Bank Financial Sector Assessment Program (FSAP). It includes recommendations for strengthening the supervision of insurance in Belgium.

69. This assessment was conducted during a mission to Belgium from November 30 to December 13, 2004, and is based on the circumstances in place and the practices used at that time. Prospective changes have not been considered in the assessment.

70. This assessment was conducted by Mr. Wil Dullemond, a Senior Policy Advisor on Strategic Issues in Insurance Supervision at the Dutch Central Bank and Chairman of the IAIS Solvency Subcommittee. He was assisted by IMF staff members.

Institutional and macroprudential setting—overview

71. Belgium’s financial system is large, with assets of over 500 percent of GDP, and it is dominated by a few large, complex financial institutions (LCFIs). Capitalization of the stock market is relatively modest, and the insurance sector, while playing an important role through the bancassurance groups, is relatively small, with assets equivalent to less than 50 percent of GDP. On the regulatory front, as in many other EU countries, Belgium has recently adopted a system of consolidated supervision under the auspices of the newly established CBFA.

72. The Belgian insurance market is smaller, relative to GDP, than the OECD and EU 15 average, with total premium close to 8 percent of GDP in recent years. While there are many stand-alone insurers, most of the largest insurers are part of bancassurance groups. Overall, the insurance market is less concentrated than the banking sector—the top four banking groups account for over 80 percent of both loans and deposits, while the top four insurance groups collect 64 percent of the life premium and 52 percent of the nonlife insurance premium. Insurance forms a major part of some bancassurance groups; for instance it contributed to 30–40 percent of total profits of Fortis and KBC in 2003.

73. Improvements in life insurance results have been recorded recently, but the low level of long-term interest rates relative to the guaranteed rates of return on liabilities continues to pose problems. Guaranteed returns offered by insurers were close to the maximum of 4.75 percent until 1999, after which the maximum was lowered to 3.75 percent and insurers have been offering guaranteed rates for new contracts of around 3 percent recently. However, the estimated guaranteed return on all outstanding contracts remains close to 4 percent, which is approximately equal to long-term interest rates. Losses due to the steep decline in equity prices made insurers increase the weight of fixed income securities in their portfolios. In 2003, fixed income securities accounted for 72 percent of the investment portfolio, with only 15 percent of the portfolio invested in equities. The net impact of a rise in interest rates on insurers’ financial position is unclear—higher interest rates would help alleviate the burden of guaranteed returns, but would also negatively affect the value of their fixed income securities.

Main findings

74. A relatively low level of compliance is surprising for a jurisdiction with a well developed insurance market. The authorities are actively pursuing a number of supervisory initiatives that hold the potential to materially improve the level of observance in the coming years.

75. Both supervisory guidance and professional standards, (e.g., for the actuarial profession) are in some cases either absent or are at a fairly high level rather than being operational. Accordingly, the level of observance for these principles can be improved through the issuance of more complete and explicit guidance to industry regarding supervisory expectations, e.g., in the areas of governance, risk management, and internal controls.

Conditions for effective insurance supervision (ICP1)

76. Belgium mainly meets the conditions necessary for effective insurance supervision.

The supervisory system (ICP 2–5)

77. The assessment of the supervisory system indicates a broad observance of the international criteria. Some improvements in the legislation would be beneficial for the supervisor. The CBFA adopted a project leading to a risk-based approach to supervision. Making use of both insurance and banking expertise within the newly merged entity would surely enhance the quality of the supervisory system.

The supervised entity (ICP 6–10)

78. The assessment of the principles regarding the supervised entity show room for future improvements. These especially concern the assessments of the suitability of persons, corporate governance, and internal control. Within the CBFA, a unit has already been formed to address the corporate governance aspects of insurance supervision.

Ongoing supervision (ICP 11–17)

79. In this area, the principles are mainly met. Only the on-site inspections require improvement, both in number and in scope.

Prudential requirements (ICP 18–23)

80. The most important improvements are needed in this area. Until recently, supervision focused on technical provisions, profitability of products, and solvency requirements. Analyses of assets and derivatives, especially in relation to liabilities (ALM issues), would help supervision follow the developments in the insurance industry more closely.

Markets and consumers (ICP 24–27)

81. Though the Belgian regulation on intermediaries is in the process of transposing the EU directive, in the present situation the principle on intermediaries is already largely observed. The other principles in this area are partly observed. The requirements on public information provided by insurers should be upgraded to international standards.

Anti-money laundering, combating the financing of terrorism (ICP 28)

82. Belgium has extensive anti-money laundering regulations. Sufficient resources need to be allocated to AML/CFT supervision in insurance.

Table 7.

Recommended Action Plan to Improve Observance of IAIS Insurance Core Principles

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Authorities’ response

83. The CBFA globally supports the conclusions drawn by the IMF at the date of the FSAP. Those conclusions have been very useful in order to initiate and elaborate significant improvements of the insurance sector supervision. Indeed, taking into account the limitations placed on the available human resources, most of the recommendations are being met, especially by a reorganization of the department that started end 2004 and will end beginning 2006. Substantive efforts have already been made to integrate the banking supervision know-how and to develop and improve the prudential insurance supervision, in particular for conglomerates. Moreover, on-site supervision, including joint on-site supervision of conglomerates, is being strongly developed, on an audit level as well as on a technical and financial level. We consider that the measures taken will significantly and rapidly improve the global assessment of this FSAP.

Report on the Observance of Standards and Codes: Implementation of the IOSCO Objectives and Principles of Securities Regulation


84. An assessment of implementation of the International Organization of Securities Commission (IOSCO) Principles was carried out as part of the first FSAP mission, from November 30 to December 13, 2004 by Jennifer Elliott. The assessment was updated in November 2005.

85. The assessment was carried out using the IOSCO Assessment Methodology (the Methodology), adopted by IOSCO in October 2003. The assessment relied on a detailed self-assessment completed by the Banking, Finance, and Insurance Commission (CBFA), in-depth interviews with CBFA staff, interviews with market participants and industry associations, and a review of key pieces of legislation and CBFA rules.

86. The assessment was made possible by the generosity and diligence of the CBFA staff who were at all times very open and informative. The assessor would like to extend her thanks in appreciation for all of the hard work and support given by CBFA staff. The assessor would also like to thank market participants and the industry associations for their time and contribution to the report.

Institutional setting and market structure

87. The Belgian market is fully integrated into the European market. The financial sector is dominated by four large banks, all of whom carry out direct investment services and have investment fund affiliates. There are 66 licensed investment firms, including portfolio managers, derivatives specialists, order execution firms and full service firms. 37 of these firms are members of the exchange. There are also 65 credit institutions, many of which carry out investment services, but without a separate license. There are three licensed investment advisers. There are 138 separate (open-ended) investment fund companies in Belgium, with a total of 1,462 subfunds and EUR 96.2 billion in assets under management.7 This sector is dominated by bank affiliated collective investment schemes.

88. Euronext Brussels is the only regulated stock exchange in Belgium. Euronext Brussels is 100 percent owned by Euronext BV, a Dutch company listed on the Euronext exchange. Euronext Brussels has a total market capitalization of EUR 232 billion with 227 listed companies.8 There are another 200 unlisted issuers in Belgium.

89. In 2003, a total of EUR 385 million in equities were issued on the Belgian market (EUR 33 million representing Belgian companies and 352 foreign companies); and a total of EUR 1.57 billion in fixed income securities (EUR 50 million representing Belgian companies).9 The total for 2004 will be greater as a result of the privatization and offer of Belgacom, a very large telecommunications company on the market in early 2004.

90. One unique feature of the Belgian financial markets is the use of “bearer shares.” Bearer shares are those not registered on the share registry of a company, being fully transferable without a need to record the transfer. Bearer shares are held in certificate form or in electronic form in investment firm or bank accounts and in the central depositary, from which they may be transferred by wire. There is a tradition of the use of bearer shares. They appear to be popular as a means of avoiding tax on transfer (e.g., inheritance tax).

Description of regulatory structure and practices

91. The CBFA is an integrated regulator with a mandate to regulate and supervise credit institutions, investment firms, regulated secondary markets, collective investment schemes, issuers and insurance companies. The CBFA was formed in 2004 (incorporating banking, securities and insurance regulation). In addition the CBFA’s mandate has significantly expanded since the privatization of Euronext.

92. The majority of legislative change implemented over the past several years and included in the current work program is as a result of European level initiatives. The CBFA participates at the European level through the Committee of European Securities Regulators (CESR) which develops detailed policy under each EU Directive. The CBFA has approximately 400 staff employed directly by the CBFA and subject to an independent salary scale.

General preconditions for effective securities regulation

93. The IOSCO Principles list a number of pre-conditions to effective securities regulation. These include the appropriateness of legal, tax, and accounting framework within which the securities markets operate, and the effectiveness of procedures for the efficient resolution of problems in the securities market; and the soundness of macroeconomic policies (those aspects that could affect the operations of the securities market). These preconditions appear to be in place in Belgium.

Summary of the principle-by-principle assessment

Principles related to the regulator

94. The CBFA is an independent regulator with a full mandate to regulate and supervise securities markets activities; although it does not have absolute budgetary independence, at this time it operates within an appropriate budget and has sufficient resources. The agency is subject to accountability provisions, including annual reporting and a strict code of conduct. The agency has expanded its mandate considerably over recent years but has nevertheless been able to attract skilled staff and to establish effective processes in all areas.

95. There is currently no investor education program; the CBFA should take steps to develop one, in keeping with its investor protection mandate. The principles require that “like” products be treated equally in a financial sector. While collective investment schemes in Belgium are subject to considerable regulation, there appear to be competing products developed by insurance companies that are not subject to equivalent regulation. It is, however, recognized that this situation is largely governed by EU-level directives.

Principles related to compliance and enforcement

96. The CBFA has all necessary powers to carry out inspections and investigations, as well as a range of sanctioning powers. The inspection program for investment firms and collective investment schemes is thorough and well-planned. The investigations and administrative sanctioning function of the CBFA is relatively new and only a few cases have been undertaken. The CBFA should increase the transparency of the rules administrative proceedings and, more importantly, the transparency of decisions to levy a sanction.

Principles related to information sharing and cooperation

97. The CBFA has the ability to share confidential information with foreign counterparties under a formal agreement. The agency is part of the Council of European Securities Regulators (CESR) information sharing agreement, among others, and is active in its response to requests for cooperation and information. It has become a signatory to the IOSCO Multilateral MOU for information sharing.

Principles related to issuers

98. The CBFA sets and enforces detailed prospectus and on-going disclosure requirements. Accounting and auditing standards are of an internationally acceptable quality; The International Financial Reporting Standards (IFRS) were introduced for listed issuers on January 1, 2005. Material event (or price sensitive information) disclosure requirements are monitored by the CBFA’s market surveillance function