Saturday, April 28, 2012

Panorama of the Luxembourg banking


Since World War II, the Grand Duchy of Luxembourg has become one of the richest countries of the world in terms of per capita GDP, supported by a financial services sector booming, political stability and European integration .

The Luxembourg banking sector in figures

Luxembourg's financial sector, the largest contributor to the Luxembourg economy (one quarter of its GDP), plays a major role as an international financial center. Taking advantage of a favorable tax legislation, many banks and investment funds have moved into the capital.
 
The banking sector is largely in foreign hands and is very internationally oriented, with only a few banks are active in the retail internal market. Luxembourg as an international center has over 14,000 Holdings, approximately 13,300 funds and 142 banks with 26,000 employees, representing the largest concentration of banking in the EU. The total assets managed by banks exceeded 780 billion euros in October 2011, about 50 times the GDP of Luxembourg.

The center of wealth management in the euro area

The private banking industry, with over 10,300 employees, € 300 billion in assets and approximately € 3.4 billion in revenue, is a key pillar of the Luxembourg financial sector. This enables Luxembourg to be the center of the private bank in the euro area and position themselves in eighth place among the largest financial centers in the world. This positioning is the result of the existence of bank secrecy and a competitive tax environment: there is no tax on capital, no tax on capital gains or inheritance tax for non- residents, and the tax on dividends is 15%.

The Luxembourg attracts mainly family assets and wealth of HNWI clients [1] of Luxembourg customers and neighboring countries. Together they represent 63% of all clients and about 50% of assets held. The average size of this portfolio of clients increased over the last three years, thanks mainly to new customers HNWIs.

A magnet for international funds

Today, Luxembourg is the second largest global center for investment funds after the United States. Luxembourg's position as a center for international funds began in 1988 when the first UCITS Directive [2] has been transposed into local law. Since then, Luxembourg has grown significantly and continues in the number of assets and funds under management

Investment funds domiciled in Luxembourg and marketed are generally managed from other international financial centers, and approximately 70% of total financial sector assets and about 30% of total assets under management of European funds. In September 2011, Luxembourg held about 2,000 billion euros in net assets in nearly 13,300 funds.

A country shaken by the crisis but not reversed

The crisis exposed the vulnerabilities of the Luxembourg financial system by materializing a significant liquidity risks and counterparty risks, mainly because of the predominance of foreign bank subsidiaries that owned cross-border exposures vis-à-vis their parent companies. Thus, banks' balance sheets were reduced significantly during the crisis (-15% in 2009) due to the decrease in cross-border intra-group transactions. Some branches of banks were also affected by the contagion of the problems encountered by their parent companies (liquidity problems and solvency).

The investment fund industry has meanwhile faced large capital outflows at the height of the crisis, resulting in particular those funds with high exposures to structured products. However, a strong recovery was recorded in September 2010 for almost hit historical highs (€ 2,100 bn).

By cons, the effects of the crisis on the domestic credit market have been low due to the dual nature of the banking system, the relatively low household debt and a resilient housing market.

Today, indicators of the strength and performance of the financial sector appear favorable. The average capital adequacy ratios of banks amounted to 19.5% (the minimum is set at 8% by regulation), and gained ground thanks to the contraction of bank balance sheets, capital injections, and the impact of the implementation of Basel II in 2008-2009.

However, while Luxembourg's position seems favorable compared to other European countries, levels of ROA [3] and ROE [4] are still low compared to the strong performance before the crisis. Liquidity risk remains an important concern of Luxembourg institutions, despite strong liquidity levels by international standards.

The challenges and the future of an economy mainly financial

Luxembourg remains vulnerable to international instability today, particularly because of the exposure of local banks compared to their foreign parent companies and sovereign risk.

In the area of
​​investment funds, the systemic importance of Luxembourg as a global hub for example introduces the potential risk of cross-border contagion. Given the large size of the Luxembourg financial sector relative to GDP, the consequences of such contagion could be significant.

In the longer term, Basel III and other regulatory changes pose challenges for the Luxembourg financial center. Although the impact of the capital requirements of Basel III appears limited given the current level and composition of bank capital, regulations on liquidity levels could have a significant impact, particularly on the activities of fund investment.

The Luxembourg financial sector will also be impacted by the ongoing reforms related to taxation, banking secrecy and regulation of investment funds. Moreover, expanding options for registration of hedge funds in Luxembourg, combined with the tightening of U.S. rules, could prove beneficial.

It is difficult at this stage to determine which direction the Luxembourg financial sector will evolve following these changes combined. However it should be noted that in the past, Luxembourg has shown a strong capacity to adapt and maintain its competitive advantages.