Why Luxembourg cannot be compared to Cyprus

Transcription

1 Why Luxembourg cannot be compared to Cyprus 1- Some facts about Luxembourg 1.1 Public Finances: The Luxembourg public debt currently stands at 19% of GDP. This is far below the 60% imposed by the euro convergence criteria of the Maastricht Treaty. Luxembourg's current level of public debt was fuelled in part by the financial and economic crisis. The Luxembourg government also took shareholdings in two large banks, namely BGL BNP Paribas and BIL. It is important to note that Luxembourg did not ask for assistance from the European Union in order to set up a rescue plan for these two banks; the State of Luxembourg managed on its own. Rating Sovereign Risk: Luxembourg is AAA rated with a stable outlook. It reflects the view by rating agencies that Luxembourg s strong public finances and stable political environment are sufficient to outweigh risks to its economy. 1.2 Diversification of the financial sector : The Luxembourg financial centre relies on 5 strategic pillars: - Wealth Management - Asset Management and Investment Funds - International Loans - Insurance - Structured finance These pillars ensure the diversification of financial services available within an international and cross border context. Diversification means that financial activities go far beyond private banking activities, which represent about 15 % of the added value of financial services in Luxembourg. Namely the management, administration and custody of globally distributed investment funds are very important activities. The 5 pillars also ensure a diversified customer base and a sophisticated product offer. An efficient supervisory mechanism and a rigorous respect and implementation of international standards add to the solidity of the Luxembourg financial centre. 1.3 Global Financial Centres Index : The Global Financial Centres Index (GFCI) is a well known instrument for gauging the attractiveness both in absolute and in dynamic terms of financial centres. In the latest review published in March 2013, the Luxembourg financial centre has moved up and now ranks 18th (up six places from 24 th in 2012). Of the 79 financial centres analysed, Luxembourg is considered to be one of the few financial centres that will grow in importance and become more significant in the future, together with Singapore, Shanghai, Hong Kong, Seoul, Toronto and Sao Paulo. 1

2 According to the index, Luxembourg is classified as a global player that is highly specialised. The GFCI is based on an online survey (1539 respondents banks, Governments, regulators, ) and on other instrumental factors (external indices). 2- Luxembourg vs. Cyprus : Luxembourg is one of the euro zone s largest financial centres and has weathered the financial crisis well, so far. Fears about the safety of Luxembourg-domiciled assets have triggered comparisons between the size of the country s financial sector as a percentage of its gross domestic product. Indeed, some officials boiled down Cyprus s problems into a simple question of the size of its banking system relative to its overall economy. The proportionality of a financial sector cannot be determined by relating the size of a financial sector to the GDP of a country. Such a restrictive approach assumes that a financial sector in a given economy exists only to finance the domestic economy, completely ignoring that financial services can be offered on a cross border basis, in line with the principle of the European Union single market. The correlation between the size of the financial sector and GDP is not an appropriate tool to analyze the quality and solidity of a financial sector. Luxembourg s banking sector consists almost exclusively of subsidiaries and branches of foreign banks. This means in practice that, if a Luxembourg based bank ever became insolvent, the parent company, and possibly even the Government of the home country, would step in to safeguard the solvency and the reputation of the ailing bank. According to European Central Bank data, domestic banks hold 7% of Luxembourg s banking assets. In the case of Cyprus, 71% of banking assets are held by domestic banks. This very large difference must be taken into account when comparing the two centres. Presence of international banks : As a leading international banking centre, 141 banks are present in Luxembourg as of end of February As shown in the table below, the Luxembourg financial centre is very diversified in terms of countries of origin of Luxembourg banks. Banks from 26 different countries are represented in Luxembourg with Germany leading the ranking. Country of origin Number Germany 37 France 14 Switzerland 11 Italy 9 Sweden 8 United Kingdom 7 Belgium 6 USA 6 Japan 5 Luxembourg 5 China 4 2

3 The Netherlands 4 Others 25 TOTAL 141 Other countries represented include: Brazil, Israel, Portugal, Qatar, Andorra, Canada, Norway, Denmark, Spain, Greece, Latvia, Liechtenstein, Russia, Turkey. All Luxembourg based banks are regulated by the Luxembourg regulator (CSSF), and most are also regulated by the banking supervisor of their parent company. In comparison, banks in Cyprus originate from 11 different countries (see table below). Country of origin Number Greece 10 Lebanon 10 Cyprus 9 Russia 3 Latvia 3 Jordan 3 UK 2 Others 5 TOTAL 45 Other countries represented include: Bulgaria, Romania, Ukraine and France. These two tables clearly show that international diversification is a fundamental part of the Luxembourg banking sector business model. The Luxembourg financial sector is very international and acts as an important gateway for Europe by attracting investments and thus contributing to the economies and general competitiveness of all Member States. Luxembourg based banks play a key role in providing funding and liquidity to the European economy. Origin of clients : Source: ABBL 3

4 As represented on the chart here above, the Luxembourg banking sector client base is diverse. It reflects Luxembourg s international character and a service offer which attracts clients far beyond its and the EU s borders. In respect of Cyprus, there are no official data on the origin of bank funding, however, based on recent newspaper articles regarding the Cyprus bailout, Russian clients appear to account for about 50% of total Cypriot bank deposits, with another 15% split between Ukraine and Lebanon. The remaining deposits are held by Cypriot citizens. Solvency Ratio: The solvency ratio measures the proportion between own funds and risk based assets. Solvency Ratio: Banks in Luxembourg vs. Cyprus 20,00% 15,00% 10,00% 5,00% Luxembourg Cyprus 0,00% Source: Luxembourg CSSF Cyprus European Central Bank, data available between 2008 and As shown on the chart above, the Luxembourg banking system can boast a solvency ratio of over 17% over the last few years. Based on the available data, the solvency ratio of Cypriot banks has decreased over the last year or so. Return on Assets (RoA): The chart below shows clearly that Cyprus is an outlier as from Cypriot banks recorded profits in 2009 and 2010, but realized a strong decrease in RoA at the end of 2011 and through mid A large exposure to Greece sovereign debt explains the deterioration of Cypriot bank s profitability. In contrast, Luxembourg banks have shown a stable, positive RoA throughout the period. Source: IMF elibrary Data, + Bruegel Institute 4

5 Share of non performing loans: The Cyprus bailout has focused on massive losses that the two biggest banks have suffered. Large exposure to Greek sovereign debt has significantly increased losses for Cypriot banks and non-performing loans in Cyprus soared as from 2011, accelerating losses in the Cypriot banking industry. Furthermore, major problems with domestic loans had a negative impact on the banks balance sheets. Non performing loans in Luxembourg are extremely limited. Source : IMF elibrary Data, + Bruegel Institute Bank refunding by ECB per euro zone country: The table below shows the percentage of bond refunding by the ECB for every country in the euro zone. Luxembourg places almost no reliance on ECB funding. Luxembourg based banks are able to refund bonds through interbank funding and client deposits. This also explains why Luxembourg based banks are very liquid and contribute substantially to the liquidity of their respective groups. 5

6 Greece Portugal Ireland Spain Slovenia Cyprus Italy Slovakia Eurozone Belgium France Netherlands Austria Estonia Malta Finland Germany Luxembourg Source: ECB 3,4% 2,7% 2,0% 1,1% 1,0% 0,7% 0,6% 0,6% 0,3% 0,3% Refunding by ECB in % 9,6% 9,1% 8,3% 7,8% 7,5% 6,7% 6,0% 24,7% 0,0% 5,0% 10,0% 15,0% 20,0% 25,0% 30,0% Quotes : What they say about Luxembourg? Wolfgang Schäuble, German Minister of Economy: Ein Vergleich zwischen Luxemburg und Zypern ist absurd. Luxemburg ist ein erfolgreicher Bankenplatz und Luxemburg hat ein völlig anderes Bankenmodell Benoît Coeuré, European Central Bank: La situation était tellement particulière qu'il a fallu une solution particulière, mais je ne vois pas de raison qu'on emploie les mêmes méthodes ailleurs. Les banques chypriotes n'étaient plus solvables. C'était une place financière offshore, ça n'existe pas ailleurs dans la zone euro. Tous les pays ont des problèmes différents, des problèmes économiques, des problèmes de chômage, mais il n'y a aucun pays qui présente la même concentration de problèmes que Chypre. Michel Barnier, European Commissioner (Internal Market and Services): C est le caractère hypertrophié du secteur financier, associé à une gouvernance et une supervision faible qui a causé les problèmes de Chypre. Ce n est pas le cas des autres pays. Ulrich Kater, Economist Deka Bank: The Luxembourgish banking system is largely made up of subsidiaries and branches of foreign banks, which can rely on headquarters in case of problems. Luxembourg can not be compared to Cyprus. 6