Luxembourg’s financial regulator addressed a range of issues that plagued the financial markets, from an unexpected war in Europe to inflationary pressures, in its recently released 2022 annual report. The economic landscape was filled with heightened volatility and uncertainty, largely influenced by crises at Europe’s doorsteps.
, the director general of the Luxembourg Financial Sector Supervisory Commission (CSSF), emphasised the European Central Bank’s role in countering a 6.3% inflation rate in Luxembourg and 8.4% in the euro area in 2022 by raising interest rates into positive territory for the first time in a decade.
Despite these challenges, Luxembourg’s financial system remained resilient, as reflected by low levels of non-performing loans and increased interest income for banks.
The war, energy crisis and high inflation
To counter inflation--particularly due to high energy and other commodity prices--the ECB took decisive action by progressively raising interest rates, moving them into positive territory for the first time in a decade as of July 2022.
This measure came with mixed results; while it helped curb inflation, it also led to a higher cost of borrowing. Yet, Luxembourg’s financial system remained steadfast, with banks recording strong interest income in the latter half of 2022, as noted by the CSSF.
Sustainability and regulatory measures
“Sustainability must be a core value of the Luxembourg financial center,” Marx stressed in the report, echoing sentiments about the urgency to tackle climate change, biodiversity loss and pollution.
According to Marx, the European Commission estimates that over €700bn will be needed annually to meet the ambitious objectives of the EU Green Deal, REPowerEU and the Net Zero Industrial Act.
Digital transformation and financial innovation
The CSSF is expanding its focus beyond traditional finance to include emerging digital technologies.
It has initiated programmes such as a pilot regime for market infrastructures that rely on distributed ledger technology and has also issued guidelines on artificial intelligence. These efforts underscore the CSSF’s dedication to staying abreast of rapidly evolving financial innovations.
According to the report, the CSSF anticipates significant advancements in AI that could transform asset management in the near future. To that end, both the CSSF and EU regulatory bodies are working on creating a balanced framework that accommodates the potential benefits and risks of incorporating AI into the financial sector.
The crypto challenge: protecting young investors
Marx also focused on crypto exchanges and the need for robust regulation, especially after the downfall of FTX, the world’s second-largest crypto exchange, in November 2022.
“Financial education is more than ever needed,” Marx stated, “especially given the shift toward green finance and the dangers associated with some crypto markets.”
Prevention of cyber incidents
Another priority for the CSSF in 2022 was the prevention of cyber incidents and participation in the EU Commission’s work on operational resilience.
A key regulation called the Digital Operational Resilience Act was published in December 2022, entered into force in January 2023, and will be applicable from January 2025 onward.
The CSSF employed a total of 968 staff as of 31 December 2022, with women making up 44.8% of the total personnel and men 55.2%. The CSSF reported a net turnover of €142.9m and a net profit of €9.9m.
The full report is available .