Update on Asset management and Non-bank financial intermediation in Belgium
This article presents the executive summary and conclusion of the most recent joint update report on asset management and non-bank financial intermediation (NBFI) by the Financial Services and Markets Authority (FSMA) and National Bank of Belgium (NBB), published on 13 January 2025. It is the fifth update of the joint NBB-FSMA report on Asset management and NBFI. For more information on the report the reader is referred to the websites of the FSMA and the NBB.
The National Bank of Belgium (NBB) and the Financial Services and Markets Authority (FSMA) are committed to monitoring and, where relevant, addressing risks arising from non-bank financial intermediation (NBFI) and asset management, within an international context. The publication of this joint report is part of that commitment, in a context of continuous monitoring arrangements between the NBB and the FSMA. It is part of a series of recurring reports, of which the first edition was published in 2017(1). The importance of continued efforts to monitor NBFI and the asset management sector was a key policy conclusion of the 2017 Monitoring Report, and has been reaffirmed by subsequent update reports. The goal of this report is to discuss recent developments in NBFI and asset management in Belgium. The report presents an update of key metrics that have been published in previous editions(2).
A well-developed, diverse and resilient financial sector is vital to ensure stable financing of the real economy and to meet the needs of savers and investors. For companies, governments and households, financial intermediation outside the banking system may provide a source of funding that is a valuable alternative to credit supply by banks. At the same time, it offers investment opportunities beyond bank savings and more classic investment products. A deepening of the Capital Markets Union (CMU) plan may lead to the transfer of savings from bank accounts to capital markets, reinforcing the importance of enhanced resilience and investor protection in non-bank financial intermediation.
Because NBFI and asset management often involve cross-border activities and because there are generally similarities in the main vulnerabilities across jurisdictions, international cooperation is crucial. Therefore, the FSMA and the NBB participate in the work of various international organisations and that of EU authorities. International work aimed at mitigating the financial stability risks of NBFI focuses on identifying the vulnerabilities specific to NBFI and developing policies to address these vulnerabilities. In this regard, the March 2020 market turmoil marked a turning point in the financial stability debate around NBFI. Subsequent stress episodes in other countries, notably in the UK gilt market, in the commodities market and at the time of the failure of Archegos have provided additional evidence of vulnerabilities associated with NBFI leverage. The Financial Stability Board (FSB)(3), in collaboration with the International Organization of Securities Commission (IOSCO)(4) and other standard setting bodies, developed a framework and a comprehensive work programme to enhance the resilience of NBFI. In Europe, the European Systemic Risk Board (ESRB) and European Securities and Markets Authority (ESMA), among others, have carried out or coordinated analytical and policy work on NBFI to support financial stability. In addition, the European Commission launched a targeted consultation to seek views on the adequacy of the macroprudential framework for NBFI.
The main risks of NBFI that have been identified at the international level relate to liquidity, the use of leverage and interconnectedness. Recent work conducted by the FSB and IOSCO has focused on the specific vulnerabilities of money market funds and short-term funding markets, liquidity mismatches in open-ended funds, margin practices, liquidity preparedness for margin and collateral calls, and leverage in NBFI. Chapter I of the report summarises recent developments in the international work on NBFI vulnerabilities and policies to enhance resilience. Where relevant, this chapter also seeks to illustrate the extent to which this is relevant to Belgian entities.
The NBB and the FSMA adopt a risk-based approach to monitoring NBFI. NBFI may refer to a very diverse set of entities and activities outside the banking system, each with their own function in the financial system. In a broad context, NBFI may refer to entities such as insurance companies, pension funds, investment funds, broker-dealers, central counterparties and less regulated entities, such as family offices. In line with the monitoring framework of the FSB, the report focuses on a narrow, risk-based, subset of NBFI: entities involved in credit intermediation activities that may pose bank-like financial stability risks. These risks involve maturity transformation, liquidity transformation, leverage or imperfect credit risk transfer. Several methods can be used to determine which entities fall under this definition. When using the method proposed by the FSB, the narrow NBFI measure covered
€ 172 billion in Belgium at the end of 2023. Based on the method determined in the EU regulatory framework, this was € 23.4 billion. Chapter II of the report provides a detailed overview of recent development in NBFI in Belgium.
The asset management industry has an important role in financial intermediation through capital markets. In the report, asset management refers to the segment of the financial industry that is involved in the management of financial assets on behalf of investors. The focus is on collective management through investment funds, although asset management may also comprise the discretionary management of an individual investor’s portfolio. The main entities in this industry are investment funds and their managers. As cross-border activities are important in this industry, the size is different for Belgian investment funds and Belgian asset managers. At the end of 2023, Belgian investment funds accounted for € 215 billion in net assets, while Belgian asset managers had € 208 billion in assets under management. In Chapter III, the report discusses recent developments in asset management in Belgium.
The risks within the Belgian NBFI and asset management sectors and the risks of potential spill-overs to other sectors of the Belgian economy are analysed in Chapter IV of the report. For the part of the NBFI sector that overlaps with the asset management sector, the main risk is liquidity risk, and particularly the risk of sudden, large-scale redemptions. In Belgium, these liquidity risks are already partly addressed by existing legislation, through, for example, rules on asset diversification and the introduction of additional liquidity management tools for asset managers. That Chapter also provides an overview of the links between Belgian residents and potential NBFI entities worldwide. Overall, while links with the sector of other financial intermediaries (OFI) can be important in some cases, the interconnectedness with entities belonging to the narrow measure of NBFI is limited and concentrated in activities that are generally part and parcel of normal business affairs.
For the Belgian asset management sector, policy initiatives and supervisory activities in this area have focused mainly on liquidity and leverage, which are the factors most likely to jeopardise financial stability. In 2023, potential liquidity risks of Belgian investment funds were assessed by both the International Monetary Fund (IMF) and the FSMA. The IMF subjected the Belgian investment fund sector to a liquidity stress test. The FSMA performed a Liquidity Risk Assessment based on quantitative and qualitative analysis. Both entities concluded that the Belgian investment fund sector would be able to withstand severe but plausible redemption shocks. In addition, in accordance with European legislation, the FSMA also regularly assesses the systemic risk arising from the use of leverage by alternative investment fund managers. The FSMA has not identified any immediate systemic risks requiring the adoption of measures specific to leverage, such as imposing limits on the use of this technique.
A specific focus of the report is the commercial real estate (CRE) sector, which has been subject to challenges from increased interest rates and shifts in demand for certain segments and types of properties. Noting these developments, the ESRB has recommended EU and national authorities to improve the monitoring of systemic risks stemming from this sector. In 2023, ESMA found that real estate funds pose low risks on an individual basis, due to their limited use of leverage or size in most jurisdictions, but that they could be more systemically relevant in jurisdictions where groups of funds own a large share of the real estate market on aggregate. Box 3 discusses legal frameworks that may be applicable to physical real estate investing in Belgium and assesses the size of some parts of this market. In Belgium, investing in physical real estate via financial vehicles is subject to specific legal frameworks (e.g., Real Estate Investment Companies, Specialised Real Estate Funds). In Belgium, potential leverage-related systemic risks from real estate funds appear to be contained, although risks from CRE continue to be an area requiring attention by the FSMA and NBB. The closed-ended nature of the Belgian financial vehicles investing in physical real estate and the limited footprint of real estate investment funds strongly mitigate the potential financial stability risks stemming from these vehicles. Yet, they are part of a broader ecosystem that results in an overall sizeable exposure of the Belgian financial system to commercial real estate. Therefore, these entities and their links with Belgian banks and insurance companies are also part of the NBB’s macroprudential monitoring framework, which was enhanced in light of the challenging market conditions, in line with the ESRB Recommendation of 2022.
Another specific focus of the report is private finance, which generally encompasses activities relating to capital raising and lending provided by non-bank investors to companies through bilateral transactions, such as private equity and private credit. It is a key funding source for companies without access to public markets and provides additional investment opportunities for long-term investors, but may also entail investor protection and financial stability risks. In Europe, private finance activities arranged through investment funds are subject to the AIFMD framework. In Belgium, private finance activities are often structured within the national framework of the ‘Private Pricaf’. Many of those vehicles also qualify as alternative investment funds according to the AIFMD, which means that their managing body is generally subject to a registration or authorisation requirement. Box 4 provides an overview of the relevant legal frameworks for private finance, while Chapter II provides an overview of the composition and size of the (broadly defined) private investment sector in Belgium. This analysis points to 347 companies that are classified as private investment companies, with € 48 billion total financial assets at the end of 2022. However, almost half of these assets are within a small number of listed companies, while the aggregate size of the Private Pricafs identified is limited to 5%. Overall, the picture is relatively reassuring from a financial stability point of view, as a substantial part of the investment risk from this sector is borne by participants in public financial markets, leverage is low and there are limited funding links with the banking sector.
The analysis underlying the report did not result in the identification of material financial stability risks relating to the NBFI and asset management sectors in Belgium. However, the NBB and the FSMA remain committed to continuing their joint monitoring of these sectors. Both institutions remain vigilant in particular about risks arising from the use of leverage, structural liquidity mismatches, interconnectedness with other financial institutions and linkages with the real economy. In this respect, they continue to consider new developments and potential risks, such as those emanating from CRE and private finance. Given the cross-border nature of NBFI and asset management, they will also continue to do so within an international context. This entails an active participation in relevant international work. Where necessary, they will contribute to the strengthening of the regulatory framework and supervision. The NBB and the FSMA intend to publish an update of the monitoring report every two years from now on.
Notes
1) The first edition and its subsequent updates are available on the websites of the NBB and FSMA.
(2) The current edition focuses on data from 2019 until 2023, where available.
(3) The FSB is an organisation created by the G20 that coordinates work on financial stability at the global level. In 2011, the FSB established a framework to monitor NBFI. For more information, see Chapter I and Box 1 of the report.
(4) IOSCO is the international body that brings together the world's securities regulators and is recognised as the global standard setter for financial markets regulation.
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