The International Monetary Fund (IMF) has put pressure on the Luxembourg banking sector. In its annual analysis of the Grand Duchy’s economy, published on Wednesday 6 May, the institution calls for greater vigilance regarding property risks and even suggests a possible tightening of the regulations governing mortgage lending.

A few hours later, at the annual conference of the Association of Banks and Bankers in Luxembourg (ABBL) at the House of Finance in Kirchberg, representatives from the banks responded directly to this warning.

When asked about the “very poor report” issued by the IMF regarding Luxembourg and the possibility of tighter conditions for accessing mortgage loans, the president of the ABBL, Yves Stein, acknowledged that “property risk is still perceived as a major risk in Luxembourg”. The bank executive points out, however, that this risk is long-standing and linked to the very structure of the Luxembourg market. According to him, this perception can be explained “by the nature of our country, namely a property market that has grown significantly yet remains limited to the domestic market”.

Banks today are more afraid of cyber threats than of a credit crisis. [And this has been the case] for a very, very long time.

Yves Stein, president, ABBL

But Yves Stein is primarily seeking to put into perspective the idea of an immediate systemic threat to Luxembourg’s banks. “Banks today are more afraid of cyber threats than of a credit crisis. [And this has been the case] for a very, very long time,” he told the press.

The ABBL acknowledges, however, that some players in the property sector are going through a difficult period. “There are certainly some players in the property market who are struggling and who will need to be monitored closely,” explained the chairman. But he also points out that other companies in the sector “continue to perform very well”.

A “systemic risk” that is more or less manageable

The banks’ main message is to defend their ability to manage this risk without further destabilising the property market. “Our members have the expertise to manage this risk,” insisted Yves Stein, whilst also highlighting the work of the Luxembourg regulators.

Banks having bad loans is nothing new. But yes, in theory, if there are too many of them, it could pose a systemic risk.

Jerry Grbic, CEO, ABBL

The CEO of the ABBL, Jerry Grbic, took a similar line. He explicitly acknowledges the theoretical danger of a build-up of problem loans in the banking sector. “Banks having bad loans is nothing new. But yes, theoretically [if] the number is too high, it could pose a systemic risk,” he said. The banking executive also admits that “given the sluggish state of the construction sector, the risk is higher”. But he highlights another indicator: “[Overall], credit risk has decreased on banks’ balance sheets.”

The IMF takes a more cautious view. The institution believes that “the vulnerabilities and risks associated with high levels of household and corporate debt warrant ongoing monitoring”. It also considers that certain indicators of household risk “have continued to deteriorate” and refers to “a significant and persistent share of more vulnerable mortgage loans”. The Fund therefore recommends maintaining “rigorous banking risk management practices” as well as targeted reviews of vulnerable portfolios, particularly in the construction and property sectors.

Several options for tightening

The IMF goes even further, suggesting several avenues for macroprudential tightening: strengthening banks’ capital buffers, stricter regulation of mortgage lending, and a gradual reduction in high loan-to-value (LTV) ratios. The ABBL does not subscribe to this approach of across-the-board tightening. On the contrary, the banking sector points out that the Luxembourg property market is only just beginning to emerge from the crisis of 2022 and 2023.

In its official statement, the association emphasises that “banks continue to finance the sector” and that the volume of loans granted for property projects in Luxembourg has risen by 15.6% compared with 2024. Above all, the banking organisation believes that “the main obstacle is not so much financing as buyers’ confidence in the completion of projects”.

Behind this exchange between the IMF and the banks lies a delicate balancing act for Luxembourg: maintaining financial stability without further stifling a property market and construction sector that are already in a fragile state.