Agefi Luxembourg - février 2025

AGEFI Luxembourg 18 Février 2025 Economie / Banques By Elena PETROVA, Partner Deloitte Luxembourg and EricGUTZWILLER, DirectorDeloitte Switzerland P rivate bank lending has recently facednumerous pressures, inclu- dingwaves of newregulation, volati- lity in interest rates, increased credit risk, heightened competition including digital marketplaces andbrokers, aswell as client behavioural changes due to the generational shift ofwealth. However, many institutions have turned these challenges into opportunities to opti- mise their processes andmake themmore efficient formort- gages andLombard loans (1) alike. For example, some banks are nowable to grant certain loanswithin a fewhours after the client’s request, significantly increasing client satisfactionwhile also reducing the cost to the bank. Still, a significant number of financial institutions have yet to embark on the necessary optimisation journey due to perceived roadblocks, such as lim- ited IT budgets or complex processes arising from regulatory differences between jurisdictions. This article addresses some of these concerns by providing practical insights for lenders. Unlike some internationalmarkets such as Switzer- land and the UK, the EU market for private bank lending remains heavily regulated, as the EUdoes- n’t distinguish between the treatment of standard retail clients versus high-net-worth individuals for lending purposes. The “Mortgage Credit Directive (MCD)” or the European Banking Authority’s (EBA) “Guidelines on loan origination and moni- toring”, as well as national consumer protection laws could have a significant impact on howmort- gage and Lombard loan products are granted. The main impact on the lending process includes multiple client disclosures and specific rules that af- fect contractual arrangements in each country of operation, as well as “retail style” rules requiring a fundamental credit assessment generally indepen- dent of collateral. Inconsistencies in booking centre regulations outside the EU, and varying enforce- ment of Directives and EBA guidelines within in- dividual EU member countries add further complications to the process. Nevertheless, increas- ing process standardization and harmonization across locations, with subsequent automation and reduced time to funding shouldbe possible even in this relatively complex regulatory environment. There are six critical dimensions for banks to ex- plore: 1. Understand regulatory and legal constraints Despite some harmonisation of lending rules in the EU, regulatory and legal constraints differ from country to country. Whilst not all banks have the necessary resources and sufficient local presence to understand the rules of each EU member state, various service providers, including consulting firms, have already performed the analysis in a centralised way. This helps banks decide which markets to target cross-border based on compliance requirements and expected client volume. Harmonising pro- cesses based on the most strictly regulated loca- tions and then rolling them out in less regulated ones can be an effective strategy. In fact, there is a clear trend of international banks applying one sin- gle standard across booking centres. Also, financial institutions should not underesti- mate the impact of the ongoing roll out of new Basel rules. Smaller andmedium-sized institutions may begin to face restrictions in the granting of new loans. A sound alignment of risk appetite to local regulatory requirements and profitability ex- pectations is needed. 2. Optimise product offerings Certain product offerings need to be adapted, simplified, and potentially re- duced in terms of scope. For example, agreeing with financially sophisticated clients to shift some of their lending ex- posures to legal entities that are not subject to consumer protection couldbenefit both parties because of increased flexibility in the product offering. Reducing the offering of loans in foreign cur- rency, which are in cer- tain cases operationally and capital intensive, is also a good example. In addition, having pre-de- fined lending risk parame- ters (and potentially pricing incentives)forcertainproductswill supportrelationshipmanagersinapproachingclients with confidence and will reduce the burden of the subsequent approval process. 3. Enhanceworkflowprocesses Workflow processes need to be reviewed and opti- mised. For example, banks should avoid usingmul- tiple tools that do not communicate with each other and do not follow a logical origination process flow. A best practice process includes a single input of in- formationthatsubsequentlyfeedsvariousregulatory disclosurestoclients,loanagreements,automatescal- culationofstandardisedcostofcredit,andregulatory required sensitivity analyses. This does not have to translate into expensive IT investments. Banks have already implemented some compo- nents by using existing tools (e.g. Microsoft Office, existing core banking or mobile banking exten- sions).Asolidworkflowfoundation is also required when it comes to catering for thenewest trends such integratingArtificial Intelligence capabilities ormore complex features in credit assessment (e.g. sustain- ability) or monitoring (e.g. early warning systems with stress testing). 4. Simplify credit analysis Creditworthinessassessmentisaparticularpainpoint observedintheEUbankingsectorduetotheneed,in certain cases, to apply retail style credit assessments (independent of the collateral), such as affordability rules.Privatebankingclientsmightconsiderthegath- eringof information toperformsuch assessments in- trusive. In this case, banks could place more reliance onspecificcontractsthatincludenon-recourseclauses and rely on existing internal client data - such as Know-Your-Customer information andother prede- fined indicators of credit quality in proportion to the riskinvolved.Wealsoseesignificantpotentialforfur- ther simplification in, for example, the definition of standardvs.non-standardcases,counterpartydefini- tionsortheapplicationoflendingvaluesandhaircuts. 5. Reviewcorporate governance Approval and credit governance processes need to bestreamlinedbyallowingcompetentindividualsto make most decisions, especially for standard re- quests, instead of credit committees. Credit commit- tee approvals could be limited to requests that significantly impact the bank. Bankscanalsodesigntheircreditriskdelegationpro- cess to be more efficient in responding to client re- quests. This trend is visible in the EBA’s “Guidelines on internal governance,”which aimto shift business riskownership,includingcreditrisk,tothe1 st Lineof Defence Business units, rather than relying heavily on 2 nd Line of Defence Risk Departments, Senior Committees,ExecutiveBoardsorBoardofDirectors. 6. Leverage regulatory flexibility to test new technologies In certain jurisdictions, institutions should leverage thehigher regulatoryflexibility for in-house innova- tion (at least to keeppacewith local competition). In places like the US, Singapore or Switzerland, clients can approve loans themselves to some extent through self-service processes. For Lombard loans, if the pre-pledge agreements and client information were handled during onboarding, clients could use fully automatedmobile applications to instantly ac- tivate their first Lombard loan limit in their app (e.g. for margin lending investments). The collateral and credit limit are often calculated daily in the back- ground, usingconservative lendingvalues andhair- cuts automatically. Growth in Lombard lending is undeniable.Onaverage, Lombard loans account for 6-7%ofthedepositedassetsundermanagement.Yet, many banks have not reached this level, indicating significant untapped growth potential. With the recent interest rate decreases andmore ex- pected,anewexpansioncyclewithanewgeneration of clients is coming across all lending products. Therefore, to keep pace with market growth and competition, banks should seize the opportunity to transformnow. 1)Loanssecuredby(generally)liquidassetsheldwithinaclient’sinvest- ment portfolio Transforming private bank lending by overcoming obstacles and seizing growth opportunities Opinion - by Prof. Bruno COLMANT, Ph.D., Member of the RoyalAcademy of Belgium U ndeniably, a fiscal rebalan- cing in favor of reducing labor taxation is necessary, which iswhy the government is considering taxing financial capital gains. However, this represents one of themost significant breakswith the philosophy of personal income taxation establishedby the 1962 legislator, which led to the creation of theCode des Im- pôts sur les Revenus (CIR– In- come TaxCode).And the name says it all: capital gains are not taxed inBelgium(except in rare cases) because income is already hea- vily taxed. Labor income quickly reaches a marginal tax rate of 50%.At the same time, stockdividends are subject to corporate tax and awithholding tax (which canbe further increasedby foreignprepayments), bringing the total taxation to 50%. Moreover, in the specific case of capital gains on shares,suchtaxationalwaysresultsindoubletaxation: it taxes the seller of security while the dividends of thatsamesecurity,whichincreasetojustifythecapital gain,willbetaxedinthehandsofthebuyer.Toavoid this pitfall, I proposed, inAugust 2017, the securities account tax at the request of then-Prime Minister Charles Michel. Rather than taxing the realization of acapitalgain,theideawastotaxthestockoffinancial assets. The tax increased proportionallywhen acqui- ringnewsecuritiesorariseinprices,anditdecreased in the opposite case. Thus, capital fluctuations were taxed based on the unrealized variations in assetvalue.Theinitialideawastotaxallsecu- rities accounts at a rate of 5 basis points (0.05%),whichwasultimatelyincreasedto15 basis points (0.15%) for accounts exceeding onemillion euros. Focusing on capital gains from listed securities, the proposed taxation would be, unlike the securities account tax, declarative: banks will not withhold it directly, mea- ningthetaxpayerwillhaveto declare it in their tax return. It is evident that capital gains on registe- red shares (i.e., shares recordedintheshare- holders' register), which escape the securities account tax because they are not held in an account, will also be targetedby this newtax. Inpracticalterms,banksmustgenerateanannualsta- tement of buy and sell transactions, including corres- ponding capital gains and losses. Since a taxpayer may have securities accounts with multiple institu- tions, consolidating these bank statementswill deter- mine the net taxable capital gain, from which a tax- free amount of €10,000 canbedeductedbefore a 10% taxrateisapplied.Supposeataxpayerholdsasecuri- ties account abroad. In that case, they will have to request the same typeof certificate fromtheir bankor prepare their statements, with all the verification dif- ficulties that entails. The technical challenges are immediately apparent. Here is one of themost fundamental questions:How willcapitalgainbedetermined?Imaginethatin2026, theexpectedyearofimplementation,aninvestorpur- chases the same stock at €10, then at €12, and later at €8.Theythenownthreesharesofthesamecompany. Howwillthecapitalgainbecalculatediftheysellone shareat€9?Willthesalebebasedonthefirstpurchase price (€10), resulting in a capital loss of €1? Or will it bebasedonthethirdpurchase(€8),leadingtoacapital gainof €1?Will the capital gainsbe calculatedusinga moving average? Will it follow standard accounting methods, suchas LIFO(last in, first out) or FIFO(first in, first out)? This difficulty will be compounded by the need to convert capital gains into euros for trans- actions conducted in foreign currencies. Which exchange rate will apply? The one at the time of the transactionortheexchangerateattheendoftheyear? The devil is in the details. And that is not all. Howwill contributions of shares, mergers, and demergers be treated? None of these scenarios seemtohave been considered. Furthermore, this 10% capital gains tax will coexist with an older 33% tax rate applied to gains that fall outsidethescopeofprudentwealthmanagement(the so-called "bon père de famille" principle). Additio- nally,capitalgainsmaybetaxedprogressivelyunder personal income tax rates if the frequency of transac- tionsishighenoughtoresembleaprofessionaltrading activity. The definition of prudent wealth manage- ment has never been established, which means that, based on an assessment by the tax authorities, a tax- payer could be taxed at 33% instead of 10% if the authoritiesconsiderthenumberoftransactionsexces- sive—butaccordingtowhichcriteria?Nooneknows. This reform is shaping into a bureaucratic nightmare for a low revenue yield. The wealthiest investors do notselltheirshares—theytransferthem.Thoseliving off investment income do not need to realize capital gains. This tax will primarily impact small and medium-riskinvestors,whilewealthyrentiersremain unaffected.At this rate, no one should be surprised if the Brussels Stock Exchange, which has seen zero IPOs in the past two years, becomes evenmore des- erted. To illustrate: I once had the honor of leading the Brussels Stock Exchange, and today, the former stockmarketbuildinghasbecome…abeermuseum. Instead of implementing such a tax, the government shouldstimulateinvestmentthroughnotionalinterest deductions (a Belgian tax incentive on equity capital) or reinstate the Cooreman-De Clercq measure. The Cooreman-De Clercq measures, introduced in Belgium in the early 1980s, were a set of fiscal incen- tives designed to encourage private individuals to investinthestockmarketandprovidecapitalforbusi- nesses. Thesemeasures allowed taxpayers to deduct part of their investments innewly issuedshares from their taxable income, reducing their overall tax liabi- lity. The objective was to channel household savings into productive investment, foster entrepreneurship, and strengthen Belgian companies' access to capital. The policy was highly effective, attracting billions of eurosintothefinancialmarketsandsignificantlyboos- ting corporate funding. By stimulating direct invest- ment in equities, the Cooreman-De Clercq system contributed to the democratization of stock market participation, allowingsmall investors toplayamore active role in financing the economy. Today, as dis- cussionsoncapital gains taxationarise, thesepast ini- tiatives serve as a reminder that stimulating invest- ment through incentives rather than imposing puni- tive taxation can be a far more effective strategy for economic growth and innovation. This happens when government negotiations occur inaclimateofnervousnessandpoliticalagitation.The bigger picture is lost. The reality of aworld requiring risk capital injection is ignored. Belgian companies remaindwarfedbyinternationalconglomeratesope- ratingincountriesencouragingentrepreneurshipand investment. I amalmost sure that this taxwill eventuallybeaban- donedunder theweight of contradictions, legal chal- lenges,andadministrativecomplexity.Andifitisnot, the courtswill be overwhelmedwithdisputes. Taxation of capital gains on securities in Belgium: the path to failure