Belgium has one of the greatest number of banks per capita in the world, and its banking system is considered sound, profitable, and relatively efficient, according to the International Monetary Fund's (IMF) 2006 Financial System Stability Assessment. The IMF report, which assessed Belgium's observance of the Basel Core Principles (BCPs) for Effective Banking Supervision, states that Belgium exhibits a high overall level of compliance with the essential and additional criteria of the BCPs. Moreover, the legal framework for banking supervision in Belgium is well developed, and practical implementation is strong. The staff of the Banking, Finance, and Insurance Commission (CBFA) also enjoys a strong reputation for professional skill and integrity. The CBFA was established in January 2004 as the integrated supervisory authority for the Belgian financial sector. However, there is a need for effective consolidated supervision, in light of increased cross-border activities and the development of complex banking groups conducting both banking and insurance activities, also known as bancassurance groups. In the context of integrated supervision, the IMF report further recommends strengthening the non-bank supervision functions of the CBFA and upgrading its systems and staff to keep current with evolving best practices, such as Basel II, without diverting resources from the existing, sound, risk-based system of bank supervision.

General Overview

According to the International Monetary Fund's (IMF) 2006 Financial System Stability Assessment (FSSA), which assesses Belgium's observance of the Basel Core Principles (BCPs) for Effective Banking Supervision, Belgium has a high overall level of compliance with the essential and additional criteria of the BCPs. The legal framework for banking supervision in Belgium is well developed, and practical implementation is strong. Moreover, the staff of the supervisory body, the Banking, Finance, and Insurance Commission (CBFA), enjoys a strong reputation for professional skill and integrity. In the context of integrated supervision, the IMF report recommends establishing a broader mandate for the CBFA and increasing its resources. There are concerns that the need to strengthen the non-bank supervision functions of the CBFA and to upgrade systems and staff in line with best practices will divert resources from the existing sound risk-based system of banking supervision, however.

The Belgian financial market legislation is strongly influenced by EU Directives, as noted in the 2007 Sydbank report. The legal framework for banking supervision is mainly based on the 2002 Law on the Supervision of the Financial Sector and on Financial Services and the 1993 Law on the Legal Status and Supervision of Credit Institutions (hereafter referred to as "Banking Law"). Since January 1, 2004, the CBFA, an independent public institution, acts as the single supervisory authority for the Belgian financial sector. It was created as a result of the integration of the Insurance Supervision Office into the Banking and Finance Commission, pursuant to the 2002 Law. The 2006 IMF FSSA notes that, in carrying out its functions, the CBFA cooperates and shares resources with the National Bank of Belgium (NBB) in areas such as prudential reporting by credit institutions. Per the same report, two bodies were established to facilitate collaboration, namely the Financial Services Authority Supervisory Board (FSASB) and the Financial Stability Committee (FSC). The FSASB consists of the supervisory boards of both institutions, whereas the FSC comprises both entities' management boards. The 2007 Sydbank report states that the FSC "examines all questions of mutual interest to NBB and CBFA such as maintaining the stability of the Belgian financial system, interactions between prudential supervision and control of systemic risks facing market infrastructures or the coordination of the response of the Belgian financial authorities to crisis situations (financial or operational) of a systemic nature (p. 5). The FSASB, on the other hand, arranges dialogue and consultation between the CBFA and the NBB.

The Belgian financial system is dominated by financial conglomerates, which acquired important domestic market shares during the extensive financial consolidation in the 1990s, as reported in the NBB's 2007 Financial Stability Review. Most of Belgian banks' foreign claims are on counterparties residing in the Netherlands, the UK, the U.S., France, Italy, and Germany, which together account for 79.7 percent of total exposures. Furthermore, exposures to the non-bank private sector constitute the largest part of foreign claims. The banking system is considered sound, profitable, and relatively efficient, according to the IMF's 2006 FSSA, and has one of the largest number of banks per capita in the world. In 2006, the combined assets of the four largest bancassurance groups accounted for 88 percent of total bank assets. Sydbank reported in 2007 that at the end of 2006, there were 104 banks operating in Belgium, of which 50 were branches of foreign banks and 20 representative offices of foreign banks in Belgium. The NBB's 2007 Financial Stability Review (FSR) reported that, in 2006, the level of profitability of the Belgian banks remained high. The FSR also noted that the Belgian financial system practiced a high degree of international openness, which can be observed in the fact that several of the Belgian banking and insurance institutions are large financial groups in the Euro area. Sydbank reported that the dominant banks in Belgium are the Fortis Bank, KBC Bank, Dexia Bank Belgium, ING Belgium, Axa Bank Belgium, Euroclear bank, CBC Banque, and Crédit Agricole/Landbouwkrediet. In recent years, with the introduction of the Euro, consolidation in the Belgian banking sector has been intense, and a lot of activity in terms of cross border mergers of financial institutions has taken place. The 2006 IMF FSSA noted that there is a need for effective consolidated supervision in Belgium, due to the growth of cross-border activities, and the development of complex banking groups with both banking and insurance activities, also known as bancassurance groups.

The FSSA added that Belgium is on track with regard to the adoption of Basel II. The 2007 FSR noted that, in 2006, the capital adequacy requirements for Belgian banks were still calculated in accordance with Basel I Capital Accord and its 1996 amendment to incorporate market risk. However, with the implementation of the EU's Capital Requirements Directive No. 2006/48/EC on January 1, 2007, the regulatory regime governing Belgian banks' minimum capital requirements will be gradually replaced by the prudential risk framework of the Basel II Accord.

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

II

The CBFA is the body responsible for banking supervision in Belgium. The 2006 IMF FSSA stated that "in the context of managing banking supervision within an integrated supervisory agency, it could be helpful to establish a clear, broader mandate for the CBFA to reflect its responsibility to contribute to financial stability and protect consumers through its oversight of banking, capital markets activity, and insurance" (p. 34). The IMF highlighted the importance of an integrated methodology for the supervision of complex groups and close collaboration with the NBB. The IMF also recommended increasing total resources of the CBFA. Responding to the IMF assessment, Belgian authorities stated that a number of steps had been taken to enhance the effectiveness of the CBFA, including the establishment of an internal audit function, internal rules regarding the functioning of the Management Committee, and improvements in the public communication policy. However, the available sources do not directly address Belgium's compliance with this principle.

1.(2) Operational independence and adequate resources.

II

According to the IMF's 2006 FSSA, the CBFA has "appropriate autonomy and powers for banking supervision" (p. 34). Moreover, the CBFA staff enjoys a strong reputation for professional skill and integrity. However, the IMF was concerned that the need to strengthen the non-bank supervision functions of the CBFA and to upgrade systems and staff in line with best practices will divert resources from the existing, sound, risk-based system of bank supervision. The IMF recommended reviewing "the effectiveness of the management board structure in achieving its intended objectives" (p. 36). Nonetheless, the available sources do not directly address Belgium's compliance with this principle.

1.(3) A suitable legal framework for authorization and ongoing supervision.

II

According to the IMF's 2006 FSSA, "the legal framework is well developed, and practical implementation is strong" (p. 34). The legal framework for banking supervision is mainly based on the 2002 Law on the Supervision of the Financial Sector and on Financial Services, and the 1993 Banking Law. Nonetheless, the available sources do not directly address Belgium's compliance with this principle.

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

II

See Principle 1.(3).

1.(5) Legal protection for supervisors.

II

There is insufficient information publicly available addressing Belgium's compliance with this principle.

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

II

The 2006 IMF FSSA noted that, in carrying out its functions, the CBFA cooperates and shares resources with the NBB in areas such as prudential reporting by credit institutions. The report adds that two joint bodies were established to facilitate collaboration: the FSASB, which consists of the supervisory boards of both institutions, and the FSC, which comprises both entities' management boards. The IMF recommended strengthening cooperation between the CBFA and the NBB. However, the available sources do not directly address Belgium's compliance with this principle.

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

FC

As stated in the IMF's 2006 FSSA, Belgium has a high level of compliance with this principle and the report made no further recommendations for improvement.

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

CP

According to the IMF's 2006 FSSA, Belgium has a high level of compliance with principles on licensing and structure. The IMF report recommended reviewing the skills and experience of non-executive directors to effectively oversee management. While this has been achieved for the large banking groups, the concept should be extended more uniformly to smaller banks. In response to the IMF assessment, Belgian authorities stated that the CBFA was revising its internal governance framework applicable to supervised institutions. Furthermore, a consultation review on the role of external auditors was launched in October 2005.

4. Authority to review and reject transfer of ownership.

FC

As stated in the IMF's 2006 FSSA, Belgium has a high level of compliance with this principle and the report made no further recommendations for improvement.

5. Authority to review major acquisitions and investments.

CP

According to the IMF's 2006 FSSA, Belgium has a high level of compliance with principles on licensing and structure. However, the report recommended that the authorities "consider linking the power to object to the required notification by amending Article 33bis regarding subsidiaries to parallel the wording of Article 34 (which addresses branches)" (p. 36). In response to the IMF assessment, Belgian authorities responded that amendments to the European Union (EU) solvency regulation would address "the alignment of the legal provisions for objecting notifications for investment in a subsidiary with those for the refusal of the establishment of branches" (p. 38).

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

II

The 2006 IMF report notes that prudential regulations and requirements in Belgium are generally appropriate and well enforced in practice. In 2006, as reported in the NBB's 2007 FSR, the capital buffer available in the Belgian banking system to cope with unexpected losses remained well above the minimum regulatory requirements. However, the regulatory solvency requirements applicable to Belgian banks were still calculated on the basis of the Basel I Capital Accord. With the implementation of the EU's Capital Requirements Directive No. 2006/48/EC on January 1, 2007, the regulatory regime governing Belgian banks' minimum capital requirements will be gradually replaced by the prudential risk framework of the Basel II Accord. Nevertheless, the available sources do not directly address Belgium's compliance with this principle.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

II

As noted in the IMF's 2006 FSSA, prudential regulations and requirements in Belgium are generally appropriate and well enforced in practice. Nevertheless, the available sources do not directly address Belgium's compliance with this principle.

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

II

The 2006 IMF report notes that prudential regulations and requirements in Belgium are generally appropriate and well enforced in practice. Nevertheless, the available sources do not directly address Belgium's compliance with this principle.

9. Prudential limits and management information system on concentration of exposure.

II

As stated in the IMF's 2006 FSSA, prudential regulations and requirements in Belgium are generally appropriate and well enforced in practice. Nevertheless, the available sources do not directly address Belgium's compliance with this principle.

10. Arm's length rule and monitoring for connected lending.

II

Prudential regulations and requirements in Belgium are generally appropriate and well enforced in practice, as stated in the IMF's 2006 FSSA. Nevertheless, the available sources do not directly address Belgium's compliance with this principle.

11. Policies and procedures for country risk and transfer risk.

II

According to the IMF's 2006 FSSA, prudential regulations and requirements in Belgium are generally appropriate and well enforced in practice. As reported in the NBB's 2007 Financial Stability Review, most Belgian banks' foreign claims are on counterparties residing in the Netherlands, the UK, the U.S., France, Italy, and Germany, which together account for 79.7 percent of total exposures. Furthermore, exposures to the non-bank private sector constitute the largest part of foreign claims. Nevertheless, the available sources do not directly address Belgium's compliance with this principle.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

II

The 2006 IMF report notes that prudential regulations and requirements in Belgium are generally appropriate and well enforced in practice. The report added that while bank sensitivity to interest rate risk and credit risk is considerable, the impact of other market risks on bank capital is small. Nevertheless, the available sources do not directly address Belgium's compliance with this principle.

13. Comprehensive risk management processes.

II

As stated in the IMF's 2006 FSSA, prudential regulations and requirements in Belgium are generally appropriate and well enforced in practice. Per the same report, the development of bancassurance groups and the growth of cross-border activities calls for "liquidity management on a more integrated basis and on a pan-European scale" (p. 23). The IMF recommended introducing formal liquidity guidelines for banks. In response to the IMF assessment, authorities responded that formal guidelines for liquidity management would be introduced by January 1, 2007, as part of the implementation of the EU Capital Requirements Directive. The NBB's 2007 FSR indicated that several initiatives were introduced to improve liquidity risk management in bank, one of which was the revision of the CBFA framework for the supervision of liquidity risk. The report adds that the "main Belgian banking groups' practices with regard to liquidity risk management are largely in line with those of other internationally active financial groups, and with the sound practices on liquidity risk management articulated by the Basel Committee" (p. 16). Interest rate risk is likely to be an important part of the supervisory review process of banks' overall capital adequacy under the Basel II framework. Nevertheless, there is insufficient information regarding the implementation of these guidelines.

14. Adequate internal controls.

II

According to the IMF's 2006 FSSA, prudential regulations and requirements in Belgium are generally appropriate and well enforced in practice. Although areas of internal governance and control are usually addressed in protocols or circulars, the IMF recommended supporting these issues by laws and regulations. Moreover, the skills, experience, and risk management practices of bank boards should be formally assessed. However, the available sources do not directly address Belgium's compliance with this principle.

15. Strict "know-your-customer" rules and high ethical and professional standards.

II

As noted in the IMF's 2006 Report on the Observance of Standards and Codes, which addresses the Financial Action Task Force's (FATF) Recommendations for Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT), the CBFA is responsible for the proper organization, operations, and financial position of credit institutions. In its 2006 FSSA, the IMF noted that prudential regulations and requirements in Belgium are generally appropriate and well enforced in practice. Moreover, "Belgium has a sound legislative AML/CFT framework in place" (p. 26). However, the common use of bearer shares makes it possible for beneficial owners of accounts to change anonymously, undermining the comprehensive AML/CFT approach. Hence the FSSA recommended abolishing bearer shares or developing an alternative approach. It further advised ensuring that the AML/CFT framework has the force of law. In response to the FSSA, the Belgian authorities responded that all new shares are required to be issued in either registered or dematerialized form starting January 1, 2008. There will be a transition period for existing shares until December 2013. Authorities further noted that remaining shortcomings would be addressed through the implementation of the FATF's Special Recommendation VII relating to wire transfer rules, as well as the transposition into Belgian law of the Third EU Directive on Money Laundering. As noted in the 2006 FATF mutual evaluation, Belgium largely complies with FATF's recommendations on customer due diligence, record keeping, suspicious transaction reporting, and internal controls for financial institutions. Nevertheless, there is insufficient information regarding the regulatory changes mentioned above.

16. Effective supervisory system consisting of on-site and off-site supervision.

II

According to the IMF's 2006 FSSA, Belgium has a well developed and effective supervisory system consisting of on-site and off-site supervision, with a sound risk-focused approach. Nevertheless, the available sources do not directly address Belgium's compliance with this principle.

17. Regular contact with bank management and understanding of bank's operations.

II

There is insufficient information publicly available addressing Belgium's compliance with this principle.

18. Analytical reports and statistical returns on solo and consolidated basis.

II

There is insufficient information publicly available addressing Belgium's compliance with this principle.

19. Independent validation of supervisory information through on-site examination or external auditors.

II

There is insufficient information publicly available addressing Belgium's compliance with this principle.

20. Ability to supervise on a consolidated basis.

II

Consolidated supervision is effective in practice for large conglomerate groups, as stated in the IMF's 2006 FSSA. The FSSA also added that the development of bancassurance groups and the growth of cross-border activities calls for "an effective mechanism for consolidated supervision of the bancassurance groups" (p. 24). Although the CBFA has concluded memoranda of understanding (MoUs) with other supervisory authorities, the IMF report recommended establishing a more formal process within the CBFA to improve coordination and cooperation between insurance and banking supervision. In response to the IMF assessment, Belgian authorities indicated that they had already taken steps to improve and develop a common approach between banking and insurance supervision. Initiatives include exchange of information, joint team meetings, a common approach in individual cases, joint on-site examination and supervisory review, and integration of IT systems. However, the available sources do not directly address Belgium's compliance with this principle.

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

II

According to a regulatory and standard-setting framework assessment published by the Institute of Registered Auditors in 2005, accounting standard setting is regulated through the Belgian Accounting Law of 1975. While the CBFA does not have legal authority for the enforcement of accounting, reporting and auditing for general external financial reporting, it is competent for prudential reporting by financial institutions. As of 2005, per the September 2005 update available from the Deloitte & Touche IAS Plus website, Belgian companies listed in an EU or European Economic-Area securities market are required to prepare their consolidated financial statements in accordance with International Financial Reporting Standards. Moreover, according to the IMF's 2006 FSSA, "accounting and auditing standards are of an internationally acceptable quality" (p. 48). However, the available sources do not directly address Belgium's compliance with this principle.

22. Adequate supervisory measures to ensure timely corrective action.

II

The 1993 Banking Law enables the CBFA to act promptly and avoid time-consuming legal proceedings. Moreover, a wide range of remedial measures are available to the CBFA. In its 2006 FSSA, the IMF advises the CBFA to use its powers of sanction more aggressively "in light of the possible deterrent effect" (p.37). However, the available sources do not directly address Belgium's compliance with this principle.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

II

According to the IMF's 2006 FSSA, "Belgium has a strong home-host regime, particularly with respect to the largest banking groups where specific MoUs are in place" (p. 36). Moreover, the CBFA conducts routine on-site inspections over the significant foreign establishments of its banks. The IMF report recommends "formalizing the process for assessing the quality of home country supervision" (p. 37), in line with the proposed EU approach to mutual recognition for third-country supervisory regime. However, the available sources do not directly address Belgium's compliance with this principle.

24. International exchange of information with other supervisors.

II

The IMF report notes that a sound system of information exchange and coordination with foreign supervisory authorities is in place. Nonetheless, the available sources do not directly address Belgium's compliance with this principle.

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

II

As stated in the IMF's 2006 FSSA, "Belgium has a strong home-host regime, particularly with respect to the largest banking groups where specific MoUs are in place" (p. 36). However, the available sources do not directly address Belgium's compliance with this principle.