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The following OECD assessment and recommendations summarise chapter 2 of the Economic survey of Luxembourg published on 1st July 2008.
The financial sector appears to remain sound
Immediately after the onset of the subprime debacle, the financial supervisory authorities (Commission de surveillance du secteur financier) launched a special study to investigate the potential exposure of financial institutions to mortgage-related risk. Apart from a limited number of investment funds, the study concluded that the fall-out of the crisis on financial institutions would be limited, reflecting the near absence of activities linked to highly leveraged financial operations. The authorities should continue to improve their regulatory framework, so as to foster financial soundness. In this light, the draft law reinforcing cooperation between the financial supervisor (CSSF), the insurance supervisor (COMASSU) and the Central Bank (BCL) is welcome. The special investigation on subprime mortgage assets was also welcome, and the supervisors should pursue their quest for financial stability by repeating such exercises at regular intervals as well as fostering greater transparency about the stability of the financial system.
An erosion of competitive advantages may hurt the financial services in the medium term
Once the current financial crisis is resolved, the financial sector may not be able to return to its past exceptionally rapid pace of expansion. The development of the financial sector has largely benefited from a tax and regulatory framework that has been able to create a “first-mover” advantage, inducing financial firms to settle in Luxembourg. Originally, the main attractions for foreign clients of using the financial sector in Luxembourg included banking secrecy, tax advantages and the early implementation of an EU directive on a European passport for investment funds, allowing promoters in Luxembourg to operate in all EU countries. As a result, Luxembourg emerged as a major location for financial firms to register their investment funds and locate fund administration activity. Luxembourg has built expertise in particular in middle and back office activities (settling, accounting, etc) but has been less successful in attracting the front office activities, such as trading and investment-bank activities, which remain in other international financial centres. Some of the tax advantages that attracted part of the international clientele are being phased out, as exemplified by the EU Savings Directive requirement to implement a gradually increasing withholding tax rising to 35% from 1 July 2011. The increase in withholding tax is likely to be accompanied by efforts to broaden the scope of the Directive already underway as part of a review process intended to better ensure the effective taxation of saving income in the European Union. Moreover, Luxembourg will remain under pressure to relax its bank secrecy rules and move towards exchange of bank information for tax purposes in line with OECD standards. Likewise, it is becoming increasingly difficult to maintain comparative advantages in the regulatory framework as financial and taxation regulations are increasingly being harmonised across countries. In addition, new technology means that lower value-added activities will tend to be increasingly outsourced to other countries. Developments in the financial sector thus depend on the ability of the sector to diversify into higher value-added activities. Such a shift hinges on continuing to adapt financial sector regulation to changing circumstances and on attracting talent to develop such new activities.
The growth prospects hinge on boosting attractiveness; efficient health and education services would be key assets in this respect
Attracting talent will depend on the financial sector paying competitive wages and on making Luxembourg attractive in terms of the quality of life. The reliance on a growing number of cross-border workers to fill vacancies in the banking system will eventually run into physical limits, with the saturation of the transportation system used by commuters; in this respect, recommendations contained in the OECD Territorial Review of Luxembourg could go a long way towards fostering the development of transport links. It is also important to make the country more attractive to highly-skilled international talents; for this purpose, the government should consider increasing the flexibility of current immigration laws affecting non-EU workers as well as allowing dual nationality. For both recommendations, legislative proposals have been presented to parliament. However, the strict language requirement in the dual nationality proposal should be eased. Higher quality education and healthcare services, as discussed in this Survey, would also be important assets to attract international talents. It is equally important to develop talent locally, but the education system has so far not been able to satisfy this type of labour market demand. The education sector should aim more at better meeting labour market demands, including at the tertiary level, for example by bolstering higher-education in finance at the University of Luxembourg.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Luxembourg 2008 is available from:
For further information please contact the Luxembourg Desk at the OECD Economics Department at firstname.lastname@example.org. The OECD Secretariat's report was prepared by Jens Christian Høj, Ekkehard Ernst, Arnaud Bourgain and Patrice Pieretti under the supervision of Patrick Lenain. Research assistance was provided by Laure Meuro and secretarial assistance by Heloise Wickramanayake.