2023 Q4 Quarterly Decision on Countercyclical Buffer Rate

Quarterly decision of the National Bank of Belgium on the countercyclical buffer rate for 2023Q4: 1.0 % Pursuant to Art. 5 §2 Annex IV to the Banking Law, the National Bank of Belgium has decided to set the countercyclical buffer rate for exposures in Belgium at 1.0 %. Justification

1. The countercyclical capital buffer is a macroprudential instrument designed to mitigate cyclical systemic risks and to counter pro-cyclicality in lending. Its objective is to support the sustainable provision of credit through the cycle by strengthening the resilience of banks. In particular, capital buffers are imposed whenever there is an increase in cyclical systemic risks (i.e. with excessive growth in lending), so that these additional requirements can be relaxed when the cycle turns and the risks start to decline. If risks emerge – in a situation of financial stress for instance – a decision can be taken to release the buffer instantly in order to give the banks some extra breathing space and thus put them in a better position to absorb losses and keep up their level of lending when the economic and financial environment is vulnerable. The countercyclical buffer rate, expressed as a percentage of banks’ risk-weighted assets, is generally between 0 and 2.5 %, but can be set higher when justified by the underlying risk. It should be noted that the countercyclical capital buffer is only one of the macroprudential instruments available to the National Bank of Belgium for achieving its mission of contributing to the stability of the financial system.
2. Pursuant to Article 5 of Annex IV to the Law of 25 April 2014 on the legal status and supervision of credit institutions, the National Bank of Belgium sets each quarter the countercyclical buffer rate applicable to credit exposures to counterparties located on Belgian territory on the basis of one or more reference indicators that reflect the credit cycle and the risks stemming from excessive credit growth in Belgium, and that account for the specific elements of the national economy. These indicators shall include the deviation of the credit-to-GDP ratio from its long-term trend (the credit￾to-GDP gap), accounting for the change in volumes of credit granted on Belgian territory and the evolution of Belgian GDP, the recommendations issued by the ESRB, and any other variable that the National Bank of Belgium deems relevant to capture cyclical systemic risk.
3. The National Bank of Belgium sets the countercyclical buffer rate pursuant to its policy strategy regarding the countercyclical capital buffer.1 In line with the Basel III framework and the ESRB Recommendation of 18 June 2014 on guidance for setting countercyclical buffer rates, the quarterly decision on the countercyclical buffer rate is partially based on a ‘buffer guide’ derived from the credit-to-GDP gap.2 Given the specific features of the domestic financial system and statistical properties of the credit series monitored, the National Bank of Belgium sets the credit-to-GDP variable on the basis of resident bank loans. The quarterly decision on the countercyclical buffer rate also takes into account additional macrofinancial indicators, including broader credit measures.
4. The National Bank of Belgium has decided to set the countercyclical capital buffer rate for Belgian exposures at 0.5% as from 1 April 2024, i.e. six months after announcing the rate increase, and at 1.0% starting on 1 October 2024, i.e. 12 months after the announcement. The Bank considers that the uncertain economic environment facing the financial sector following the sudden and rapid hike in interest rates constitutes an exceptional circumstance that justifies setting the countercyclical buffer rate at 0.5% as from 1 April 2024, less than twelve months after the date on which the rate increase was first announced.
5. In 2022 and the first half of 2023, amidst high uncertainty caused by a potential energy crisis, turning credit and real estate cycles and turbulence in the US and Swiss banking sectors, the National Bank 1 "Setting the countercyclical buffer rate in Belgium: a policy strategy". 2 The buffer guide is the result of the credit-to-GDP gap being mapped into a benchmark buffer rate, as specified in the ESRB Recommendation of 18 June 2014 on guidance for setting countercyclical buffer rates. The benchmark buffer rate equals 0 % for credit-to-GDP gap levels up to 2 percentage points. When the credit-to-GDP gap exceeds 2 percentage points, the benchmark buffer rate increases linearly, reaching its maximum level of 2.5 % for credit-to-GDP gap levels of 10 percentage points and higher.

of Belgium decided to maintain the countercyclical capital buffer rate at 0% to ensure that Belgian banks had full flexibility to use their ample available capital to raise credit provisions in a pro-active way and to support the real economy. 6. Mid-2023, the National Bank of Belgium announced that it would consider reactivating the countercyclical capital buffer. As there is now less uncertainty regarding the impact of the rate hikes on the economy and given that the downturn in the credit and real estate cycles has been orderly thus far, the National Bank of Belgium is confirming this intention by means of a formal decision. As the pass-through of tighter financial conditions to the real economy is a gradual and ongoing process, the National Bank of Belgium continues to believe that banks remain potentially exposed to unexpected losses, whereas their provisions for expected credit losses have dropped back to pre-pandemic levels. Reactivating the countercyclical capital buffer will heighten the banking sector’s resilience to potentially higher-than-expected losses. 7. Countercyclical capital buffer decisions are revisited each quarter, in accordance with European regulations and the National Bank of Belgium’s macroprudential powers under the 2014 Banking Act.

Table 1: Key indicators1 Variable Unit Latest period Value Non-financial private sector credit cycle (resident bank loans) Preferred credit-to-GDP gap % GDP 2023 Q2 -4.1 Households % GDP 2023 Q2 -4.2 Non-financial corporations % GDP 2023 Q2 0.1 CCyB guide related to preferred credit gap2 % RWA 2023 Q2 0.0 Standardised credit-to-GDP gap % GDP 2023 Q1 -31.9 CCyB guide related to standardized credit gap2 % RWA 2023 Q1 0.0 Bank loan growth y-o-y % 2023 M06 3.6 Households y-o-y % 2023 M06 3.3 Non-financial corporations y-o-y % 2023 M06 4.1 p.m. Credit-to-GDP ratio3 % GDP 2023 Q2 81.4 Non-financial private sector resilience Debt-to-GDP ratio % GDP 2023 Q1 117.3 Households % GDP 2023 Q1 59.9 Non-financial corporations % GDP 2023 Q1 57.4 Net financial assets % GDP 2023 Q1 129.3 Financial and assets markets Equity prices, nominal (Euro Stoxx 50) y-o-y % 2023 M07 23.9 Price-earnings ratio (Euro Stoxx 50)4 – 2023 M07 14.0 House prices, nominal y-o-y % 2023 Q1 4.1 House prices, real y-o-y % 2023 Q1 -3.2 10-year government bond yield % points/y 2023 M07 3.1 Bank lending rate on mortgage loans to households % points/y 2023 M05 3.3 Bank lending rate on loans to non-financial corporations % points/y 2023 M05 3.9 Banking sector resilience CET 1 capital ratio % 2023 Q2 17.3 Equity-to-total assets ratio % 2023 Q2 6.8 Loan-to-deposit ratio % 2023 Q2 92.8 External imbalances Current account % GDP 2023 Q1 -3.8 Net international investment position % GDP 2023 Q1 53.5 Asset quality NPL ratio Belgian non-financial corporations % total loans 2023 Q2 3.28 Belgian households % total loans 2023 Q2 1.18 Forbearance ratio Belgian non-financial corporations % total loans 2023 Q2 2.55 Belgian households % total loans 2023 Q2 1.24 Loan loss ratio5 Consolidated, including interbank loans b.p. 2022 9.8 Non-consolidated, excluding interbank loans b.p. 2022 9.3 Sources: Thomson Reuters, NBB. 1 Monthly averages for daily data. Data are shown end of quarter (March, June, September, December) or for the latest month available. 2 CCyB guides are expressed in percentage of risk-weighted assets.

3 Outstanding amounts of loans granted by resident monetary financial institutions to households and non-financial corporations, including those securitized, in percentage of GDP. 4 Price earnings (P/E) ratio is a trailing (12 months) P/E ratio. 5 The loan loss ratio is the net flow of new impairments for credit losses, expressed as a percentage of the total stock of loans (one basis point is one-hundredth of one per cent).

STATISTICAL ANNEX Sources: Thomson Reuters, Refinitiv, NBB.

STATISTICAL ANNEX (cont.) Sources: Thomson Reuters, Refinitiv, NBB.

STATISTICAL ANNEX (cont.) Sources: NBB.