CSSF Regulation No 17-02 of 26 June 2017 on the setting of the countercyclical buffer rate for the third quarter of 2017

CSSF Regulation No 17-02 on the setting of the countercyclical buffer rate for the third quarter of 2017 (Mémorial A – No. 600 of 28 June 2017) Having regard to Article 108bis of the Constitution; Having regard to the Law of 23 December 1998 establishing a supervisory commission for the financial sector and in particular its Article 9, paragraph (2); Having regard to the Law of 5 April 1993 relating to the financial sector ("LSF"), and in particular its Article 59-7 pursuant to which the CSSF, as the designated authority, and after consultation with the BCL, is responsible for setting the countercyclical buffer rate applicable to Luxembourg; Having regard to CSSF Regulation No 15-01 on the calculation of the specific countercyclical buffer rate, transposing Article 140 of Directive 2013/36/EU; Having regard to CSSF Regulation No 15-04 on the setting of the countercyclical buffer rate; Having regard to CSSF Regulation No 15-05 concerning the exemption of investment firms qualifying as small and medium-sized enterprises from the countercyclical capital buffer and capital conservation buffer requirements; Having regard to Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on the access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC and in particular its Articles 130, 135 and 136; Having regard to Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions ("SSM Regulation") and in particular its Article 5; Having regard to the recommendation of the European Systemic Risk Board of 18 June 2014 on guidelines on the setting of countercyclical buffer rates ("ESRB/2014/1 Recommendation"); Having regard to the recommendation of the Systemic Risk Board (SRB/2017/003) of 29 May 2017 concerning the setting of the countercyclical buffer rate for the third quarter of 2017; Having regard to the decision of the ECB pursuant to Article 5 of the SSM Regulation not to oppose the intention of the CSSF to take the macro-prudential measures which are the subject of this regulation;

2 Having regard to the opinion of the Prudential Regulation Advisory Committee; The Management of the Commission de Surveillance du Secteur Financier, Hereby decides: Article 1 Applicable countercyclical buffer rate Based on the documented elements in Annex 1 and the recommendation of the Systemic Risk Board of 29 May 2017 concerning the setting of the countercyclical buffer rate for the third quarter of 2017, documented in Annex 2, the countercyclical buffer rate applicable to relevant exposures located in Luxembourg is maintained at 0% for the third quarter of 2017. Article 2 Entry into force This regulation shall enter into force on 1 July 2017. Article 3 Publication This regulation shall be published in the Mémorial and on the website of the Commission de Surveillance du Secteur Financier. Luxembourg, 26 June 2017 COMMISSION DE SURVEILLANCE DU SECTEUR FINANCIER Jean-Pierre FABER Françoise KAUTHEN Claude SIMON Director Simone DELCOURT Claude MARX Director Director General Annex 1: Elements considered for the setting of the applicable countercyclical buffer rate Annex 2: Recommendation of the Systemic Risk Board of 29 May 2017 concerning the setting of the countercyclical buffer rate for the third quarter of 2017 (SRB/2017/003)

3 Annex 1: Elements considered for the setting of the applicable countercyclical buffer rate Pursuant to paragraphs 2 and 3 of Article 59-7 of the LSF and to the ESRB/2014/1 Recommendation, the setting of the rate is based on the following indicators: a) The credit-to-GDP ratio, calculated based on bank loans granted to Luxembourgish households and non-financial enterprises, is 95.6% in the 4th quarter of 2016 (Figure 1). b) The deviation of the credit-to-GDP ratio from its long-term trend is -5.9% (Figure 2). c) The reference countercyclical buffer rate calculated in accordance with the ESRB/2014/1 Recommendation is 0% (Figure 2). These indicators do not reveal excessive credit growth granted to the economy by actors of the national financial system. These same indicators based on alternative credit measures proposed by the European Central Bank, the Bank for International Settlements and the Central Bank of Luxembourg have all led to similar results with negative deviations of the credit-to-GDP ratio, below the reference threshold of 2% set in the ESRB/2014/1 Recommendation. Other variables have been taken into account insofar as they may signal an accumulation of systemic risks linked to excessive credit growth, such as credit dynamics, measures of potential overvaluation of real estate prices as well as measures related to the macroeconomic environment. It emerges from the analysis that credit evolution, although dynamic, remains in line with economic growth, that macroeconomic fundamentals continue to strengthen, whether in terms of GDP, the trade balance or employment, and that bank resilience measured by their level of capitalization or leverage is stable.

4 Figure 1: Bank credit to GDP ratio and its long-term trend Figure 2: Deviation of credit to GDP from its long-term trend and reference countercyclical buffer rate

Annex 2: RECOMMENDATION OF THE SYSTEMIC RISK BOARD of 29 May 2017 concerning the setting of the countercyclical buffer rate for the third quarter of 2017 (SRB/2017/003) THE SYSTEMIC RISK BOARD, having regard to Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on the access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC and its Article 130 concerning the institution-specific countercyclical capital buffer requirement and following, having regard to Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions and in particular its Article 5 (hereinafter "SSM Regulation"), having regard to the Law of 5 April 1993 relating to the financial sector and in particular its Articles 59-1, 59-2, 59-5, 59-6 and 59-7 (hereinafter "Law of 5 April 1993"), having regard to CSSF Regulation No 15-01 on the calculation of the specific countercyclical capital buffer rate, having regard to CSSF Regulation No 15-04 on the setting of the countercyclical buffer rate, having regard to CSSF Regulation No 15-05 concerning the exemption of investment firms qualifying as small and medium-sized enterprises from the countercyclical capital buffer and capital conservation buffer requirements, having regard to the Law of 1 April 2015 establishing a Systemic Risk Board and amending the modified Law of 23 December 1998 relating to the monetary status and the Central Bank of Luxembourg, and in particular Article 2, paragraph e) and Article 7, having regard to the internal regulations of the Systemic Risk Board of 16 November 2015 and in particular Article 9, Article 11 and Article 12, having regard to the recommendation of the European Systemic Risk Board (ESRB) of 18 June 2014 on guidelines on the setting of countercyclical buffer rates, having regard to the recommendation of the European Systemic Risk Board of 4 April 2013 on intermediate objectives and instruments of macroprudential policy,

6 HAS ADOPTED THIS RECOMMENDATION: Part 1 Recommendation on the setting of the countercyclical buffer rate for the third quarter of 2017 Recommendation A: calibration of the countercyclical buffer rate Based on the various quantitative and qualitative elements, annexed to this recommendation, and in particular based on the reference for countercyclical capital buffers calculated in application of Article 59-7(2) of the Law of 5 April 1993, the Systemic Risk Board recommends that the designated authority set the countercyclical buffer rate for the third quarter of 2017 at 0%. Recommendation B: Notifications Based on this, the Systemic Risk Board invites the designated authority to proceed with the various notifications required, in particular under Article 59-7 (7) of the Law of 5 April 1993 as well as Article 5(1) of the SSM Regulation. Part 2 Implementation of the recommendation

1. Interpretation a) The terms used in this recommendation have the same meaning as in the Law of 5 April 1993. b) The annex forms an integral part of this recommendation.
2. Follow-up

1. The Systemic Risk Board invites the CSSF, as the recipient of this recommendation, to communicate as soon as possible to the Systemic Risk Board via the secretariat, the follow-up given to this recommendation.
2. The Systemic Risk Board invites the committee secretariat to proceed with the publication of this recommendation on the website of the Systemic Risk Board1 .

3. Monitoring and evaluation

1. The secretariat of the Systemic Risk Board: a) provides its assistance to the CSSF to facilitate the implementation of the recommendation; and 1 Given that the website of the SRB is under construction, the recommendation will be published on the website of the BCL.

7 b) prepares a report on the follow-up given to this recommendation and shares it with the Systemic Risk Board. 2) The Systemic Risk Board evaluates and monitors the responses that the CSSF has reserved for this recommendation. Done in Luxembourg, 29 May 2017. For the Systemic Risk Board Pierre Gramegna President

8 Annex – Methodology of the countercyclical buffer rate and calculation of the reference The methodological clarifications allowing to calculate the deviation (or gap) of the credit-to-GDP ratio from its long-term average are described in the annex of the recommendation issued by the SRB, 16 November 2015: The evolution of the credit-to-GDP ratio and its long-term trend, its deviation from this trend and the reference countercyclical buffer rate are presented below.2 The data used include loans granted by Luxembourgish banks to Luxembourgish households and non-financial enterprises. It appears from these graphs that the deviation of the credit-to-GDP ratio is negative and that the reference remains at 0%. This result is confirmed by the analyses conducted by the BCL adopting a set of measures suggested by the ESRB recommendation on the activation of the capital buffer. Chart 1: Bank credit to GDP ratio (%) and its trend extracted according to the HP filter 2 The data series relating to the "bank credit to GDP ratio" differ from the series used in some of the previous recommendations of the Systemic Risk Board due to a change at the level of the methodology.

9 Chart 2: Deviation of credit to GDP from its trend and reference countercyclical buffer rate