Belgium Central Bank Statement

Author: | Published: 5 Sep 2017
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The financial sector is an important lever for achieving a sustained economic recovery in the euro area. Significant steps have been taken in recent years to restore confidence in this sector – notably with the initial phases of the banking union and, at the start of the single supervisory mechanism, a comprehensive assessment involving a review of asset quality and stress tests conducted by the European Central Bank (ECB). Nevertheless, those measures remain incomplete and if the economic recovery is to be sustained then the euro area's financial sector and its oversight requires more fundamental and decisive improvement to further reduce the uncertainty surrounding the sector. I would like to draw attention to three important issues in this context.

First, the European banking union must be completed as soon as feasible. After several years of progress in the governance of the Economic and Monetary Union, there is currently a lack of momentum. As regards the banking union, the proposals submitted by the European Commission in 2015 for establishing a common deposit guarantee system – the third pillar of the banking union – have yet to be implemented. That system would be based on a European Deposit Insurance Fund consisting of contributions from the banks geared to their risk profile. The deposit national guarantee systems would not be entirely taken over by the European system until after an eight-year transitional period. This further risk-sharing within the euro area must be accompanied by better control over the sector's risks. The completion of the banking union can conveniently coincide with the gradual implementation of the European capital markets union (CMU), aimed at developing alternative sources of finance for the economy, alongside bank financing.

Second, the review of the regulatory framework for banks that was induced by the financial crisis needs to be finalised and implemented swiftly. Therefore, it is advisable to complete the Basel 3.5 reform without delay. The main aim of this concluding piece of the Basel 3 proposals is to resolve the problem of unjustified differences in the use of internal models to calculate the capital requirements. Such an accord would also bring to completion the wave of regulatory reforms that followed the financial crisis with the aim of making the sector healthier and more resilient. The coming years will then be important for standing back and considering the (desirable and/or potentially undesirable) implications of all these reforms for the diversity of the banks' business models and for the real economy.

Third and last, the European banking sector needs to take on the challenge of continued low interest rates to battle profitability problems in the broad sense and without undue risk-taking. The interest rate level is not the only source of pressure on the European sector; excess capacity and certain inefficiencies are also contributory factors. Rigid management and cost structures often prevent the sector from adapting quickly to new realities and new developments, such as the digital revolution. Although bank balance sheets have been slimmed down since the financial crisis, measures to improve efficiency gains and simplify management and organisational structures have not always been implemented. The current environment, with its many uncertainties at both macroeconomic and regulatory level and its increased volatility and complexity, requires greater adaptability on the part of the banking sector.




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