Methodologies and indicators
Given the high level of interconnectedness between the different actors in the financial system the identification and analysis of potential systemic risks requires a holistic approach. Indeed, any component of the financial system is likely to generate potential vulnerabilities that can greatly impact the financial sector and the real economy. Consequently, macro-prudential analysis must be based on a broad set of relevant macroeconomic and micro-financial data and indicators.
In that respect, the BCL tracks multiple macro-prudential indicators in order to monitor developments in the Luxembourg financial sector.
As regards the macro-prudential tools, they include modelling the links between the financial sector and the real economy, the construction of a model dedicated to the analysis of banks’ liquidity in the presence of shocks, the development of a system-wide vulnerability index with forecasts and the estimation of banks’ and counterparties’ default probabilities. Other indicators developed by the BCL fall under the prospective approach. Indeed, in order to anticipate risks and weaknesses within the banking sector the BCL assigns a high level of importance to the evolution of its financial vulnerability indicator as well as to the results of macro-prudential stress-tests.
Moreover, in order to acquire a deeper knowledge not only of the interconnectedness of Luxembourg banks but also of the level of their exposures to common counterparties the BCL contributes to the Macro-prudential Research and Supervision Network (MaRs) set up by the European Central Bank. The European System of Central Banks also engages in the analysis of contagion channels.