Ten years after the crisis: lessons learnt and forward risks for the Belgian economy and the financial sector Jean Hilgers Directeur Authors: De Prest, E. Deroose, M. Dresse, L. Schepens, Th. DS.18.9.374
Overview I. Flashback: A crisis in different stages called for strong monetary policy actions II. National and EU authorities also took their part in the policy response to the crisis III. Where do we stand? Risks and challenges going forward for the Belgian economy IV. Outlook for the financial sector and risks going forward 2
A worldwide crisis in different phases American property market Worldwide money markets Euro area government debt Euro area macroeconomy 13 House prices (real indices 21 = 1) 4 Money market (spread between unsecured and secured loans; 3 months; percentage points) 15 Government debt securities (spread against 1-year Bund; percentage points) 14 Unemployment rate (%) 12 11 3,5 3 2,5 12,5 1 12 1 1 2 1,5 7,5 8 6 9 8 1,5 5 2,5 4 2 7 25 28 211 214 217 -,5 25 28 211 214 217 25 28 211 214 217 25 28 211 214 217 United States Euro area United States Euro area IT IE ES PT BE United States Euro area Sources: OECD, Thomson Reuters Datastream. 3
PHASE 1 American property market House prices (real indices 21 = 1) 13 12 11 1 9 8 7 25 28 211 214 217 United States Euro area Sources: OECD, Thomson Reuters Datastream. 4
Build-up of vulnerabilities in the pre-crisis period Macroeconomic environment Strong growth and low inflation (Goldilocks economy) Rising global imbalances Low interest rates à buoyant lending to households and companies Annual GDP growth (%) Microeconomic factors Inflation (%) Search for yield Financial innovation (e.g. securitisation) Underestimation of bank risk o (Too) easy regulation o Weak internal risk management o Inadequate supervision Euro area US Source: OECD. 5
amplified the triggers of the financial crisis Subprime crisis in US mortgage market in 26 (following Fed interest rate hike) Tensions spread globally in Summer 217 Increased uncertainty and risk repricing Liquidity crisis September 28: Bankruptcy Lehman Brothers Financial unrest escalated Source: JP Moran Chase. 6
PHASE 2 Worldwide money markets 4 Money market (spread between unsecured and secured loans; 3 months; percentage points) 3,5 3 2,5 2 1,5 1,5 -,5 25 28 211 214 217 United States Euro area Sources: OECD, Thomson Reuters Datastream. 7
In a context of financial turmoil, the ECB is "lender of last resort" Concern about the quality of bank balance sheets and collapse of Lehman Brothers lead to major turmoil on international money markets Borrowing money on the financial markets becomes virtually impossible for many banks Central banks and governments have to put together support measures Normal times Liquidity problems 8
Between 28 and 212, the central bank balance sheet fluctuated along with the financial tensions and thus demand for liquidity from banks 6,8 4,6 2,4,2-2 -4 28 29 21 211 212 -,2 Eurosystem balance sheet total (year-on-year growth, left-hand scale) Indicator of systemic stress in the financial system (CISS) (moving average over 5 weeks, right-hand scale) Source: ECB. 9
The government also aided the banking sector (e.g. through capital injections), contributing to a rising debt ratio 12 Government debt (in % of GDP) 11 1 9 8 7 6 1999 21 23 25 27 29 211 213 215 217 Euro area Belgium Source: EC. 1
PHASE 3 Euro area government debt 15 Government debt securities (spread against 1-year Bund; percentage points) 12,5 1 7,5 5 2,5 25 28 211 214 217 IT IE ES PT BE Sources: OECD, Thomson Reuters Datastream. 11
Mutual contagion between banks and sovereigns is finally halted in summer 212 (Credit Default Swaps (CDS), 5 year, senior, basis points) 16 12 Banks¹ 16 12 Governments Banking Union Whatever it takes OMT 8 8 4 4 28 21 212 214 216 218 28 21 212 214 216 218 DE BE ES IT PT Source: Thomson Reuters Datastream. 1 Banks country average. 12
after which the financial fragmentation in the euro area was greatly reduced 18 16 Yields on 1-year government bonds (%) Banking Union Whatever it takes OMT 1,5 Money market (spread between unsecured and secured loans; 3 months; percentage points) 8 Interest rate on NFC loans (lending up to 1 million, up to 1 year, %) 14 1,2 6 12 1 8 6,9,6 4 4,3 2 2 212 214 216 218 212 214 216 218 212 214 216 218 DE BE FR IT ES PT Sources: ECB, Thomson Reuters Datatsream. 13
PHASE 4 Euro area macroeconomy Unemployment rate (%) 14 12 1 8 6 4 2 25 28 211 214 217 United States Euro area Sources: OECD, Thomson Reuters Datastream. 14
Double-dip recession in the euro area caused considerable economic slack 6 4 2 GDP (year-on-year growth) Recovery 4 2 Output gap (% of potential GDP) -2-4 -6 2 24 28 212 216 15 1 95 9 85 Total gross fixed capital formation (index: peak 28 = 1) 8 28 212 216-2 -4 2 24 28 212 216 12 1 98 96 94 92 Employment (index: peak 28Q1 = 1) 9 28 212 216 Sources: EC, ECB. 15 In hours worked In persons employed
that pushed inflation down. 5 Euro area inflation (%) 3 Euro area long-term inflation expectations (%) 4 APP announcement 2,5 APP announcement 3 2 2 1,5 1 1,5-1 1999 23 27 211 215 25 27 29 211 213 215 217 Headline inflation Underlying inflation¹ From financial markets² From surveys³ Sources: Bloomberg, ECB. 1 Total HICP inflation excluding energy and food. 2 Implicit inflation rate derived from swap contracts hedging the inflation risk in the euro area during a five-year period starting five years after conclusion of the contract. 3 Average of the aggregate probability distribution of five-year inflation expectations. The data were obtained from the ECB s quarterly survey of professional forecasters. 16
Monetary stimulus intended to support the economy and bring inflation in line with its target 6 5 Key policy rates and money market rate (%) 5 4 Eurosystem balance sheet (billion ) Start APP 4 3 3 2 2 1 1-1 27 29 211 213 215 217 27 29 211 213 215 217 Deposit facility rate Main refinancing rate Marginal lending facility rate Eonia Source: Thomson Reuters Datastream. 17
Recessions associated with financial crises are longer and more severe than other recessions 16 Output following financial versus other recessions (pre-recession peak = 1) 14 12 1 98 96 94 1 2 3 4 5 6 7 8 9 1 11 12 Years Recessie Financial met crisis financiële crisis Andere All other recessies Recessions How can we prevent them from happening again? Source: IMF. 18
Overview I. Flashback: A crisis in different stages called for strong monetary policy actions II. National and EU authorities also took their part in the policy response to the crisis III. Where do we stand? Risks and challenges going forward for the Belgian economy IV. Outlook for the financial sector and risks going forward 19
Increasing resilience in the medium term: reforms have been achieved but further steps may need to be taken Fiscal policy and surveillance Macro-economic surveillance Emergency financial assistance Banking union Realised reform of Stability and Growth Pact (SGP) Macroeconomic imbalance procedure (MIP) and European Semester European Stability Mechanism (ESM) Single Supervisory Mechanism (SSM) Single Resolution Mechanism (SRM) and Single Resolution Fund (SRF) Unfinished agenda increase transparency of the rules and improve implementation need for a fiscal stabilisation function? improve implementation of country specific recommendations (CSR) Strengthening and further development of the ESM last resort fiscal backstop for the Single Resolution Fund European Deposit Insurance Scheme (EDIS) 2
Overview I. Flashback: A crisis in different stages called for strong monetary policy actions II. National and EU authorities also took their part in the policy response to the crisis III. Where do we stand? Risks and challenges going forward for the Belgian economy IV. Outlook for the financial sector and risks going forward 21
In Belgium, activity has been growing at a continuous (but moderate) pace for 5 years 115 11 GDP profile since the crisis (Index 28Q1 = 1) Worldwide Great Recession Euro area sovereign debt crisis 15 1 95 9 28 29 21 211 212 213 214 215 216 217 218 Belgium Euro area Germany France The Netherlands Sources: EC, NAI. 22
Economic growth is supported by domestic demand and strong job creations 2, Contributions to GDP growth (percentage points) 7 Changes in employment (thousands of people) 1,5 6 5 1, 4 3,5 2, 1 -,5-1 -2-1, 212 213 214 215 216 217 218e -3 212 213 214 215 216 217 218e Net export¹ and changes inventories Administration and education Public expenditures Employees: Non-market sector Private investment¹ Self-employed people Private consumption Employees: Industry and market services GDP (%) Total Sources: NAI, NBB. 1 Data adjusted for major specific transactions. 23
Activity is firming, but risks are looming: Mounting policy uncertainties worldwide Uncertainty index of US trade policy 1-1 -2-3 -4-5 -6-7 -8 Policy-mix: structural fiscal balance (in % GDP) 212 213 214 215 216 217 218 219 US Euro Area Sources: Policy Uncertainty. Baker, Bloom et Davis (216), EC. 1 Number of articles refering to the uncertainty of US trade policy in American newspapers. 24
already impacted vulnerable emerging economies 11 1 9 8 7 6 5 4 Currencies of many EMEs depreciated substantially in 218 (EUR / EME currencies; 1 Jan. 217 = 1) 3 1/217 4/217 7/217 1/217 1/218 4/218 7/218 1/218 Argentinean peso Brazilian real Chinese yuan renminbi Indian rupee Indonesia rupiah Mexican peso Russian rouble Turkish lira South African rand Sources: Thomson Reuters, ECB. 25
Risks in Europe: Brexit, Italy Share of UK in the export of goods (in % of total export, 215-217) Ireland Netherlands Belgium Cyprus Spain Germany Denmark France Portugal Poland Sweden Slovakia Italy Czech Republic Latvia Finland Romania Luxembourg Ma lta Greece Lithuania Hungary Austria Estonia Bulgaria Slovenia Croatia 5 1 15 35 3 25 2 15 1 5 Italy: 1-year sovereign bond spread (basis points, with respect to German Bund) 1/17 3/17 5/17 7/17 9/17 11/17 1/18 3/18 5/18 7/18 9/18 11/18 Sources: EC, NAI, NBB, Thomas Reuters. 26
Debt levels are still elevated, as the deleveraging is slow and uneven across countries 4 Debt of the non-financial private sector (in % of GDP) 2 Public debt (in % of GDP) 18 3 16 14 12 2 1 8 1 6 4 2 DE IT EL ES FR PT BE IE NL EA NL DE IE FR ES BE PT IT EL EA Non-financial corporations (218 Q1) Households (218 Q1) 218² Peak 2 27 Peak of total private debt¹ Total private debt in 2 Total private debt in 27 Sources: ECB, EC. ¹ Between 28 and 218. ² EC 218 Spring forecast. 27
The crisis intensified the downward trend in potential growth in Belgium 3, 2,5 Contributions to potential growth (percentage points) Pre-crisis period Crisis period Post-crisis period 2, 1,5 1,,5, -,5 1996 1998 2 22 24 26 28 21 212 214 216 218 22 TFP Capital Labour Public sector Potential growth (%) Sources: NAI, NBB. 28
intertwined with the unfolding of population ageing 3 Budgetary cost of population ageing (social benefits in % of GDP) 28 26 24 22 21 215 22 225 23 235 24 245 25 255 26 265 27 Source: Study Committee on Ageing. 29
The employment rate should increase further in Belgium Employment rate of risk groups (217, in % of the corresponding population aged between 2 and 64 years) BE EU Total 68,5 72,1 Women 63,6 66,4 Low skilled 45,9 54,9 55-64 years 48,3 57,1 Non-EU citizens 41,6 57,4 Source: EC (LFS). 3
The transition towards the labour market should be enhanced, in a context of shortages 1 Unemployement rate (in % of population aged 15-64 year) Difficulties in matching supply to demand (breakdown of employment by skill level and unemployment by level of education, in % of the population aged between 15 and 64 years, 216) 9 8 7 6 1987 199 1993 1996 1999 22 25 28 211 214 217 218 Q1 Source: Eurostat. 31
Overview I. Flashback: A crisis in different stages called for strong monetary policy actions II. National and EU authorities also took their part in the policy response to the crisis III. Where do we stand? Risks and challenges going forward for the Belgian economy IV. Outlook for the financial sector and risks going forward 32
Main drivers of restructuring in the banking sector Measures imposed by the European Commission on a number of Belgian financial institutions in return for the state aid received Fundamental revision of the regulatory frameworks for banks (Basel 2.5 and Basel 3) and insurance companies (introduction of Solvency II) which integrated the lessons of the crisis Lessons learned during the crisis by bankers as regards the weaknesses in the business models of the pre-crisis period Combination of an unusually low interest rate environment with the increasing digitalisation of finance 33
Ten years after the crisis - outlook for the financial sector and risks going forward Belgian banking and insurance sectors are back to a relatively sound financial situation, thanks to major restructuring efforts in the post-crisis years Bank restructuring significantly reshaped the business model : back to basics : increased focus on financial intermediation back to Belgium : sharp reduction in non-core foreign assets more robust balance sheet (less leverage; more liquidity) Insurance restructuring mainly driven by the low interest rate challenge for traditional life insurance 34
Bank restructuring and deleveraging... 35
... but dynamic domestic lending 36
Banks recovered their profitability... 37
... and raised their resilience Key ratios for the banking sector In % 216 217 218 (June) Return on equity 9.2 8.9 8.1 Return on assets.6.6.5 CET1 capital ratio 15.7 16.2 15.3 Liquidity coverage ratio 14 138 133 38
Risks / challenges going forward Adverse interest rate scenarios : Low-for-long Snapback Belgian residential real estate market Digitalisation 39
Adverse interest rate scenarios : banks 4
Adverse interest rate scenarios : insurance 41
Residential real estate market 42
Digitalisation Opportunities : Cost savings / efficiency gains Improved customer relationship Risks : «Miss the boat» 43