CSSF Regulation No 16-03 of 9 June 2016 on the setting of the countercyclical buffer rate for the third quarter of 2016

CSSF Regulation No 16-03 on the setting of the countercyclical buffer rate for the third quarter of 2016 (Mémorial A – No. 115 of July 1, 2016)

Having regard to Article 108bis of the Constitution; Having regard to the Law of December 23, 1998 establishing a supervisory commission for the financial sector, and in particular Article 9, paragraph (2); Having regard to the Law of April 5, 1993 relating to the financial sector ("LSF"), and in particular 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 June 26, 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 Articles 130, 135, and 136; Having regard to Council Regulation (EU) No 1024/2013 of October 15, 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions ("SSM Regulation"), and in particular Article 5; Having regard to the Recommendation of the European Systemic Risk Board of June 18, 2014 on guidelines on the setting of countercyclical buffer rates ("ESRB Recommendation CERS/2014/1"); Having regard to the Recommendation of the Systemic Risk Board (CRS/2016/003) of June 9, 2016 concerning the setting of the countercyclical buffer rate for the third quarter of the year 2016; Having regard to the decision of the ECB, in application of Article 5 of the SSM Regulation, not to oppose the intention of the CSSF to take the macro-prudential measures that are the subject of this Regulation;

Having regard to the opinion of the Prudential Regulation Advisory Committee; The Management of the Commission de Surveillance du Secteur Financier,

HEREBY ADOPTS THIS REGULATION:

Article 1 Applicable countercyclical buffer rate Based on the documented elements in Annex 1 and the recommendation of the Systemic Risk Board of June 9, 2016 concerning the setting of the countercyclical buffer rate for the third quarter of the year 2016, documented in Annex 2, the countercyclical buffer rate applicable to relevant exposures located in Luxembourg is maintained at 0% for the third quarter of the year 2016.

Article 2 Entry into force This Regulation shall enter into force on July 1, 2016.

Article 3 Publication This Regulation shall be published in the Mémorial and on the website of the Commission de Surveillance du Secteur Financier.

Luxembourg, June 28, 2016 COMMISSION DE SURVEILLANCE DU SECTEUR FINANCIER Françoise KAUTHEN Claude SIMON Simone DELCOURT Claude MARX General Director

Annex 1: Elements considered for the setting of the applicable countercyclical buffer rate Annex 2: Recommendation of the Systemic Risk Board of June 9, 2016 concerning the setting of the countercyclical buffer rate for the third quarter of the year 2016 (CRS/2016/003)

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 Recommendation CERS/2014/1, 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 enterprises¹, is 83.6% in the 4th quarter of 2015 (Figure 1). b) The deviation of the credit-to-GDP ratio from its long-term trend is -8.1% (Figure 2). c) The reference countercyclical buffer rate calculated in accordance with the ESRB Recommendation CERS/2014/1 is 0% (Figure 2).

These indicators do not reveal excessive growth of credit granted to the economy by actors of the national financial system. These same indicators based on alternative measures of credit 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, well below the 2% reference threshold set in the ESRB Recommendation ESRB/2014/1.

Other variables were 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. The analysis shows that credit dynamics remain stable and 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.

¹ Data modified after neutralization of the accounting reclassification of a non-financial enterprise in June 2015.

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 the reference countercyclical buffer rate

Annex 2: RECOMMENDATION OF THE SYSTEMIC RISK BOARD of June 9, 2016 concerning the setting of the countercyclical buffer rate for the third quarter of the year 2016 (CRS/2016/003)

THE SYSTEMIC RISK BOARD,

Having regard to Directive 2013/36/EU of the European Parliament and of the Council of June 26, 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 specific countercyclical capital buffer requirement and following,

Having regard to Council Regulation (EU) No 1024/2013 of October 15, 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 April 5, 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 April 5, 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 April 1, 2015 establishing a Systemic Risk Board and amending the modified Law of December 23, 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 November 16, 2015 and in particular Article 9, Article 11, and Article 12,

Having regard to the Recommendation of the European Systemic Risk Board (ESRB) of June 18, 2014 on guidelines on the setting of countercyclical buffer rates,

Having regard to the Recommendation of the European Systemic Risk Board (ESRB) of April 4, 2013 on intermediate objectives and instruments of macroprudential policy,

HAS ADOPTED THIS RECOMMENDATION:

Part 1 Recommendation on the setting of the countercyclical buffer rate for the third quarter of 2016

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 April 5, 1993, the Systemic Risk Board recommends that the designated authority set the countercyclical buffer rate for the third quarter of 2016 at 0%.

Recommendation B: Notifications Based on this, the Systemic Risk Board invites the designated authority to carry out the various required notifications, in particular within the framework of Article 59-7(7) of the Law of April 5, 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 April 5, 1993. b) The annex forms an integral part of this recommendation.

2. Monitoring

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 Board².

² Given that the CRS website is under construction, the recommendation will be published on the websites of the BCL.

3. Control and evaluation

1. The secretariat of the Systemic Risk Board: a) provides its assistance to the CSSF to facilitate the implementation of the recommendation; 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 reserved by the CSSF to this recommendation.

Done in Luxembourg, June 9, 2016. The President of the Systemic Risk Board

Annex – Methodology of the countercyclical buffer rate and calculation of the reference The methodological clarifications allowing the calculation of 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 CRS on November 16, 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. 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 regarding the activation of the capital buffer.

Graph 1: Bank credit-to-GDP ratio (%) and its trend extracted according to the HP filter Graph 2: Deviation of credit-to-GDP from its trend and the reference countercyclical buffer rate