The Director General of the Financial Sector Supervisory Commission (CSSF) talks about the supervision of the financial sector in times of crisis and the developments it could experience. He explains why this job requires dialogue and outspokenness, and how he has transformed the institution since his arrival in 2016.

What challenges does the coronavirus crisis pose to an institution like the CSSF?

Claude Marx. – “Faced with the risks that the coronavirus pandemic (Covid-19) represents for the financial sector, the CSSF protects its agents, maintains its supervisory missions and uses all the flexibility conferred on it by the European regulatory framework to support the actors of the financial center. Covid-19 is first and foremost a human tragedy.

However, the last three months have shown that the spread of the virus has had a significant impact on the economy and, through contagion, on financial markets, banks, investment funds and other supervised entities.

We support the financial sector through a very active dialogue and through press releases and questions and answers that are updated as often as necessary. The CSSF also coordinates with the European authorities such as the European Central Bank (ECB), the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA), but also with other Luxembourg institutions, such as the Central Bank of Luxembourg (BCL).

How was the CSSF able to continue its day-to-day activity?

“To be able to ensure the continuity of our surveillance, but also the support of the supervised entities, we naturally had to first think about the health of our own agents. The CSSF has thus activated its BCP (business continuity plan).

We have put in place a strategy of careful and gradual reintegration of our premises from May 25, with a presence of around 11% in the first three weeks.
[Claude Marx]

Claude Marx, General Manager of the CSSF

As part of its modernization strategy (CSSF 4.0), the CSSF has made significant technological investments, and its agents have the possibility of working and interacting with the supervised entities remotely, through digital and secure channels. Thus, we very quickly switched to off-site mode. During the confinement period, less than 2% of CSSF agents were on site, without this interfering with our modus operandi.

How is the resumption of face-to-face work now organized in the offices of the CSSF?

“We have put in place a strategy of careful and gradual reintegration of our premises from May 25, with a presence of around 11% in the first three weeks.

Many measures have been taken to ensure the protection of the health of our agents: global disinfection plan for our buildings and technical infrastructures, provision of reusable masks, hydroalcoholic gel, single-use gloves, or disinfectant wipes; implementation of social distancing measures and communication via visuals and booklet; identification of vulnerable people and living with vulnerable people (who obviously are not returning to the office for now).

We could theoretically accommodate about half of our workforce on site. But we will do it gradually, giving priority to essential functions and implementing a rotation system. For the time being, telework remains preferred, even if the standard at the CSSF, as everywhere else, is for the time being on-site work.

What impact could the Covid-19 crisis have on the CSSF's reporting requirements and controls?

“We have issued a number of recommendations to the sector and alleviated some of the administrative burden by, for example, extending the deadlines for submitting regulatory reports. This was done alongside legislative action, as well as action by EU authorities.

You have to realize that we directly oversee almost 50,000 direct jobs, which together with their families represent about 150,000 people.
[Claude Marx]

Claude Marx, General Manager of the CSSF

More generally, we stayed in contact with all the players in the financial market, and in particular the professional associations, but also the Ministry of Finance. All meetings with the supervised entities were held by audio or video conference, and we dealt with current files and new files normally.

What is your assessment of the generalized teleworking of companies in the financial sector?

“Even though no one was specifically prepared for a pandemic, the vast majority of professionals had implemented BCPs that generally enabled remote working. The financial sector was therefore generally well prepared and has so far avoided major operational problems. We were very vigilant from the start of the crisis, and we encouraged teleworking and the implementation of BCPs from the beginning of March, i.e. two weeks before the start of confinement.

You have to realize that we directly oversee almost 50,000 direct jobs, which together with their families represent about 150,000 people. Without discipline, the sector could easily be a source of major problems. Based on our analysis, the sector has been disciplined, but we remain vigilant, and have advocated teleworking beyond May 25.

Will this crisis accelerate certain transformations of the financial sector?

“I see three main, longer-term impacts. First, telework will be developed in the sector. This will have a positive impact on costs, as supervised entities will need less office space, as well as on the environment, due to less traffic. Not to mention the positive impact on the work-life balance of the employees concerned. Second, the crisis will also accelerate digitalisation.

Unlike the situation in 2008/2009, the financial center is not the cause of this crisis.
[Claude Marx]

Claude Marx, General Manager of the CSSF

This will be positive for our ecosystem, especially for start-ups, fintechs and specialized service providers. Third, the implementation of the European Commission's Green Deal will be more relevant than ever. Funding will be public, but also private, hence the importance of sustainable finance. It will be necessary to quickly finalize the work in terms of taxonomy and transparency, in particular by setting up non-financial reporting. We will fully support this development.

Do you fear bankruptcies in the sector?

“Contrary to the situation of 2008/2009, the financial center is not at the origin of this crisis. It is first of all a health crisis, which has gradually become an economic crisis. We will only know the extent of this crisis in a few months, at the earliest in the third quarter of this year. Although the financial sector is better equipped than 10 years ago to deal with emergency situations – thanks to a stronger and more efficient legal framework – it is not immune.

Today, we have a situation that is not dramatic, both in terms of the profitability of players in the financial market and stock exchanges. However, the situation could deteriorate. If, for example, many companies were unable to repay their loans, this could affect the solvency of banks, and the economic crisis could turn into a financial crisis. This crisis would then be more violent than that of 2008/2009 due to the crisis in the underlying real economy.

We now have regulations and an institutional framework that are much more robust than before the crisis.
[Claude Marx]

Claude Marx, Managing Director of the CSSF

"It's neither relief nor annoyance. We did not discover the theme of the fight against money laundering and the financing of terrorism with the announcement of the assessment of the Grand Duchy by the FATF. This is a subject on which we have invested a lot for years and for which we will continue to invest ourselves after the visit of the Gafi. We were ready to welcome them in 2020; we will also be in 2021.

In times of crisis like the coronavirus, can the evolution of financial sector supervision help minimize the damage?

“A crisis can never be avoided. Risk taking is inherent in the financial sector. Without risk, there is no finance. But a lot has changed since 2008. Today we have a regulation and an institutional framework that are much more robust than before the crisis. The G20 changed the governance of international regulations, creating the FSB (Financial Stability Board) in April 2009.

At European level, we have also witnessed a change in the supervisory infrastructure at banking level since November 2014. A transfer of powers to the ECB has been decided: around 130 large banking groups are now supervised directly by the ECB. And the other banks are supervised at the national level in the euro zone, on behalf of the ECB. As already pointed out, a possible contagion of the economic crisis to the banks will depend on the evolution of Covid-19, a possible second or third wave of infections and the economic recovery. And it's too early to tell.

Is the regulatory framework now complete?

“He has evolved a lot. At banking level, we now have a banking union with three pillars: central supervision (SSM, Single Supervisory Mechanism) at ECB level, resolution in the event of default, and the European deposit guarantee (which is not not yet completed). In addition, the Basel III framework resulted in the establishment of new solvency and liquidity ratios. However, this is still a work in progress.

After the CRD IV (Capital Requirements Directive) and CRR (Capital Requirements Regulation), we agreed on CRD V and CRR II last year, for application in August 2021. In the end, thanks to these regulatory changes , banks have more capital and liquidity, which is also of better quality, than before the crisis. Luxembourg banks have liquidity levels well above the minimum requirements.