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Contents | Executive Summary | How to obtain this publication | Additional information
The following OECD assessment and recommendations summarise Chapter 5 of the Economic survey of Belgium published on 13 March 2007.
Contents
Could the performance of the financial sector be improved further?
The financial sector is sound, dynamic and stable. Banks have shown a capacity for adapting to new market conditions, such as a declining reliance on intermediation of government debt and greater international exposure. They have contributed to economic growth not only by the expansion of their own activities but also, more importantly, by mobilising the large accumulated stock of household savings and intermediating it effectively to meet financing needs. The fact that no serious banking problems have been experienced for several decades, unlike in a number of other countries, is a testimony to the sector’s persistent health.
A defining feature of the Belgian financial system is its concentration in the hands of four large “bancassurance” conglomerates, which offer customers a mix of insurance, banking and financial services. The authorities considered that the emergence of such conglomerates would enhance diversification and contribute to financial stability. These institutions, however, also tend to capture customers by the use of cross-selling strategies, which as such raise switching costs and reduce price transparency, leading to lower competitive pressures. Some steps have been taken by the government to improve price transparency and facilitate switching. The government has also requested an examination of competitive pressure in the savings account market segment, but more needs to be done. The authorities should reconsider the regulation allowing the tying of a mortgage interest rate reduction and the purchase of certain insurance products. More generally, measures aimed at strengthening competition and contestability in the financial market can be pushed forcefully by the competition authority.
Mortgage cross-selling
1. Cross-selling is measured as the average of products that customers purchasing a mortgage are purchasing from the same financial institution.
Source: European Commission, “Retail Banking Survey”, 2005–06.
Concentration in the banking sector and size of the economy(1)
1. Concentration ratio refers to the five largest institutions' share of total bank assets, 2004. The concentration ratio of the three largest banks of some major non-European countries is 30% (USA), 39% (JPN) and 53% (CAN). Size of the economy is measured by GDP volume at PPP, billions of USD, 2005.
Source: OECD (2005), Allen et al.
Government intervention in the consumer credit and mortgage loan markets is also more extensive than in a number of countries. The authorities seek to protect consumers notably against over-indebtedness via a variety of administrative measures, including a grid of maximum interest rates. However, this regulation risks stifling innovation in some particular segments of the credit market. Also, the interest rate grid has become the norm for certain credits, notably for credit or store cards. Although the regulation seems effective, it appears to be overly prescriptive. This raises the question as to whether the same results could be achieved in a less prescriptive way, for instance by making the grid indicative. Empirical research on the various effects of the interest rate grid could contribute to a debate among interested parties and help the government to formulate possible reforms. This should be accompanied by bolstering financial education to enable customers to adapt to the new market-based regulatory environment.
Government interventions in the housing and mortgage markets are also extensive. Regulation caps the allowable variability of interest rates on floating-rate mortgage loans. Fees on early repayment of mortgages are also capped at three months of interest payments. High transaction costs on the housing market have reduced the incentive to withdraw equity by trading down to a smaller house or moving to a rental; recent regional decisions to lower transaction costs go in the right direction, but more could be done. Likewise, lengthy foreclosure procedures may add to banks’ operating costs, potentially increasing the prices of mortgage loans in certain market segments. Also, mortgages are almost exclusively provided by banks; the near absence of non-bank mortgage institutions may be explained by the lack of mortgage bond legislation and the absence of a mortgage-backed securities market. Mortgage loans can only be reloaded up to the initial value of the loan – reducing the incentive to tap increasing housing equity to smooth consumption. Altogether, there is little use of financial instruments to borrow against housing wealth, such as home equity withdrawal. So as to modernise the mortgage market, adjustment caps on interest rates should be left to individual decisions, early repayment fees should be cost-based, high real estate transaction costs should be cut and the lengthy foreclosure period should be reduced. Competition in the market for mortgages can be enhanced by introducing mortgage bond legislation. Moreover, consumption smoothing for households should be facilitated by modernising home equity withdrawal and reverse mortgage legislations to make it easier to take out new mortgages on capital gains.
The authorities have also used tax policy to shape financial developments. There are a number of tax incentives favourable to household savings accounts, pension savings plans, life insurance schemes and mortgage payments, with a corresponding tax expenditure of close to 1% of GDP. Such measures do not necessarily increase saving rates and they do not obviously benefit the consumer, but they do influence the allocation of saving. Furthermore, they require higher income tax rates than otherwise. Thus, the costs and benefits of the various tax incentives favouring specific savings vehicles should be reviewed and, where needed, tax incentives should be reconsidered.
Savings accounts with tax preferences
Share of saving accounts with fiscal advantages in per cent of total, 2005
Source: European Commission, “Retail Banking Survey”, 2005-2006.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.
The complete edition of the Economic survey of Belgium 2007 is available from:
- SourceOECD for subscribing institutions and many libraries
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OLISnet, under "Publication Locator", for government officials with accounts ( subscribe)
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Additional information
For further information please contact the Belgium Desk at the OECD Economics Department at eco.survey@oecd.org. The OECD Secretariat's report was prepared by Jens Hoj, Ekkehard Ernst and Stefaan Ide under the supervision of Patrick Lenain.
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