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Belgium Central Bank Statement

By Jan Smets, Governor, National Bank of Belgium


The financial sector is of crucial importance for achieving and supporting sustainable long-term economic growth and economic welfare. However, while indispensable for achieving sufficient and sustainable growth, financial development – when excessive or biased – also carries the potential for financial instability. In this context, it is becoming increasingly clear that not only the level of financial development or market depth but also the composition of the financial sector has some role to play in shaping the performance of and the risks to the financial sector and indirectly the real economy.

Overall, a more balanced European financial sector with a more pronounced role for capital markets and direct finance could help to overcome some of the disadvantages of a too bank-dominated European financial sector. Regulation has an important role to play in setting the beacons right for developing such a balanced financial sector in support of economic welfare. Further developing an equilibrated, robust and growth-friendly financial sector should be one of the prime objectives of regulators in the years to come and many efforts towards this goal are indeed underway.

The completion of the Capital Markets Union (CMU) is in this context of first-order importance. Providing both improved risk reduction (for instance through better diversified funding sources) and (private) risk sharing, the CMU is effectively stabilizing the financial system while strengthening the Economic and Monetary Union (EMU) at the same time. As such, the CMU provides for an important complement to the Banking Union project. Completing the supervisory and legislative CMU framework by stepping-up efforts and prioritising among ongoing projects is clearly needed.

However, we should realize that even with the completion of the regulatory framework the CMU is only half way. Inducing the private sector to roll out the capital markets within the CMU framework remains a challenge and may require additional and adequate incentives, such as a general reduction in tax biases towards debt financing. At the same time, we should remain mindful of the potential stability risks inherent in expanding EU-wide capital markets. Supervisory convergence in the EU is therefore a crucial factor for efficient and effective oversight of such an enhanced CMU. Establishing and maintaining a comprehensive regulatory framework for non-banks and market-based activities is needed for monitoring and managing possible risk shifts from the banking to the non-banking sector.

These enhanced regulatory and supervisory frameworks for the financial sector should moreover be sufficiently comprehensive, flexible and forward-looking to anticipate on the structural factors that are fundamentally transforming the financial sector- bank and non-bank sectors alike. Balancing the inherently large benefits of digitisation and fintech innovation, with its potential financial (stability) and cyber-risks, is an important challenge going forward. More specifically, finding the right balance between supporting and facilitating innovation, on the one hand, and ensuring financial stability and consumer protection, on the other, remains inherently difficult; especially in the current case where mutual interactions between the digitisation trends and regulation shape both the regulatory as well as the technological developments introduced in the European financial sector. The targeted and gradual approach, as proposed in the EU action plan on fintech, towards introducing alternative financial instruments and products is welcomed in this context.