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IMF Country Report No. 17/122

LUXEMBOURG

FINANCIAL SYSTEM STABILITY ASSESSMENT

May 2017

This Financial System Stability Assessment on Luxembourg was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed in April 2017.

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© 2017 International Monetary Fund

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LUXEMBOURG

FINANCIAL SYSTEM STABILITY ASSESSMENT

April 17, 2017

Approved By

James Morsink and Jörg Decressin

Prepared By

Monetary and Capital Markets Department

• The FSAP team was led by Peter Breuer and included Bradley Jones (deputy mission chief), Richard Berkhout, Antoine Bouveret, Jana Gieck Bricco, Giovanni Cucinotta, Ender Emre, Ziya Gorpe, Cyril Pouvelle, Nadine Schwarz, Thierry Tressel, and Froukelien Wendt (all IMF staff), as well as Michael Deasy, David Scott, Richard Stobo (external experts) with assistance from Christie Chea (IMF). The mission met with the Minister of Finance, the Governor of the Banque centrale du Luxembourg (BCL), the Directeur Général of the Commission de Surveillance du Secteur Financier (CSSF), the Directeur Général of the Commission aux Assurances (CAA) and their staffs, and representatives of the European Central Bank (ECB), the European Systemic Risk Board and the Single Resolution Board. The mission also met with representatives of banks, investment firms, insurance companies, other financial institutions, industry associations, as well as auditors, accountants, and lawyers.

• FSAPs assess the stability of the financial system as a whole and not that of individual institutions. They are intended to help countries identify key sources of systemic risk in the financial sector and implement policies to enhance its resilience to shocks and contagion. Certain categories of risk affecting financial institutions, such as operational or legal risk, or risk related to fraud, are not covered in FSAPs.

• Luxembourg is deemed by the Fund to have a systemically important financial sector and the stability assessment under this FSAP is part of bilateral surveillance under Article IV of the Fund’s Articles of Agreement

• This report was prepared by Messrs. Peter Breuer and Bradley Jones, with inputs from the Luxembourg FSAP team members. The report draws on six Technical Notes and one Detailed Assessment Report.

Contents

• Glossary

• EXECUTIVE SUMMARY

• KEY RECOMMENDATIONS

• MACROFINANCIAL SETTING

• A. Background

• B. Luxembourg Financial System Structure and Trends

• C. Vulnerabilities

• RISKS, RESILIENCE AND SPILLOVERS

• A. Stability Risks and Resilience

• B. Spillover and Contagion Analysis

• PRUDENTIAL OVERSIGHT

• A. General and Cross Cutting Themes

• B. Macroprudential Policy Framework

• C. Banking Regulation and Supervision

• D. Investment Fund Regulation and Supervision

• E. Insurance Regulation and Supervision

• F. Financial Markets Infrastructure—Clearstream Banking Luxembourg

• G. Anti-Money Laundering and Combating Financing of Terrorism

• CRISIS RESOLUTION AND SAFETY NETS

• References

• BOX

• 1. Is the Residential Real Estate Market in Line with Fundamentals?

• FIGURES

• 1. Macroeconomic and Macrofinancial Context

• 2. Key Components of the Luxembourg Financial System

• 3. Bank Profit Sources

• 4. Investment Fund Assets Domiciled in Luxembourg

• 5. Investment Fund Exposures by Country

• 6. Insurance Industry: Premiums and Assets

• 7. Clearstream Luxembourg and the FMI Ecosystem

• 8. Bank Financial Soundness Indicators

• 9. Investment and Money Market Funds: Liquid Asset Holdings

• 10. The Insurance Industry: Capital and Profitability

• 12. Bank Intragroup Exposures

• 13. Bank Liabilities Accounted for by Investment and Money Market Funds

• 14. Residential Real Estate Market Affordability Measures

• 15. Summary of Luxembourg FSAP Stress Test Sectoral Coverage

• 16. Real GDP in the Adverse Scenario

• 17. FSAP Stress Test Macro Projections

• 18. Results of Top-Down Bank Solvency Stress Tests

• 19. Bank Liquidity Coverage

• 20. Insurance Capital and Eligible Own Funds in the Adverse Scenario

• 21. CNAV Money Market Fund Portfolios

• 22. Indices of Domestic Contagion and Vulnerability—Balance Sheet Analysis

• 23. Domestic Network Model—Market Data Analysis

• 24. Domestic vs. Cross-border Network of Financial Institutions

• 25. Network Analysis of Gross Intragroup and Cross-border Bank Exposures—Balance Sheet Analysis

• 26. Indices of Contagion and Vulnerability—Balance Sheet Analysis

• 27. Global Network Model—Market Data Analysis

• 28. Concentration Risk and Common Exposures in Luxembourg Bond Funds

• 29. Investment Fund Ownership Share of Sovereign Debt Markets

• TABLES

• 1. FSAP Update 2017: Key Recommendations

• 2. Selected Economic Indicators, 2014–22

• 3. Structure of the Luxembourg Financial System

• 4. Composition of Luxembourg Bank Assets and Liabilities

• 5. Bank Financial Soundness Indicators (All Banks)

• 6. Investment Fund Exposures to Banks

• 7. Bank Liquidity Stress Test Results

• 8. Money Market and Investment Fund Liquidity Stress Tests

• ANNEXES

• I. Implementation Status of Key 2011 FSAP Recommendations

• II. Risk Assessment Matrix (RAM)

• III. Stress Testing Matrix (STeM)

• IV. Report on the Observance of Standards and Codes (ROSC)—Summary Assessments of CPSS-IOSCO Principles for Financial Market Infrastructures: Clearstream Banking Luxembourg