In light of the continued growth of residential housing prices and the impact on household debt, the Luxembourg parliament adopted a new act on 4 December 2019¹ (the Act) to grant specific intervention powers to Luxembourg’s financial sector regulator, the Commission de Surveillance du Secteur Financier (CSSF). In the event that developments in the Luxembourg real estate sector (potentially) threaten the stability of the national financial system, the CSSF is entitled by the Act to set the conditions upon which credit institutions, insurance undertakings and professionals carrying on lending operations, may grant loans relating to residential properties situated in Luxembourg.

To that end, provisions have been included, as the new Chapter 6 of Part III, in the act of 5 April 1993 on the financial sector, as amended. They define the measures that can be taken by the CSSF (I.), the conditions upon which such powers can be exercised (II.) and the terms of cooperation with other EU competent authorities (III.).

I. Measures that can be taken by the CSSF

In the first version of the text, the measures that could be taken by the CSSF were defined in relatively broad terms. In the Act, the scope of the CSSF’s intervention powers has been defined more narrowly to address comments from the State Council (Conseil d’Etat) pursuant to which intervention powers may only be granted to the CSSF within a strict legal framework.

Hence, for the granting of loans relating to residential properties, the CSSF may impose a maximum limit for:

• the ratio between the sum of all loans or tranches of loans guaranteed by the borrower in respect of the property at the time of the loan origination and the value of that property at that time, which should be situated between 75% and 100%;
• the ratio between the sum of all loans or loan tranches guaranteed by the borrower in respect of the property at the time of the loan origination and the total annual disposable income of the borrower at that time, which should be situated between 400% and 1200%;
• the ratio between the total indebtedness of the borrower at the time the loan is arranged and the total annual disposable income of the borrower at that time, which should be situated between 400% and 1200%;
• the ratio between the total annual borrowing costs and the total annual disposable income of the borrower at the time the loan is arranged, which should be situated between 35% and 75%; and
• the initial borrowing term, which should be situated between 20 and 35 years.

These measures may be applied alone or in combination and may cover all or part of the amount of the new loans.

It is important to note that the measure(s) that may be taken by the CSSF, will only apply to loan agreements made after any such measures have been adopted by the CSSF.

II. Conditions of exercise

The CSSF will be entitled to take the above measures only if all the following cumulative conditions are met:

• these measures may counter dysfunctioning of the national financial system or reduce the accumulation of risks for national financial stability resulting from developments in the real estate sector in Luxembourg and none of the other measures that may be taken pursuant to the Banking Act, the Regulation (EU) N° 575/2013 or related implementing measures, taken separately or in combination, would allow these risks to be adequately addressed;
• the Systemic Risk Committee has assessed whether there exists a malfunctioning of the national financial system or a risk to national financial stability and has issued a recommendation in that respect to the CSSF2; and
• a concertation with the Luxembourg central bank, the Banque centrale du Luxembourg took place in order to reach a common position. Where insurance sector stakeholders are concerned, the prior concertation is to be organised with the Luxembourg regulator of the insurance sector, the Commissariat aux Assurances.

III. Cooperation with other EU competent authorities

The CSSF may ask the national authorities of other EU Member States to recognise and apply the conditions set for the granting of loans in respect of residential properties situated in Luxembourg to the entities under their supervision, provided that:

• a recommendation has been adopted and addressed to it by the Systemic Risk Committee; and
• a concertation with the Banque centrale du Luxembourg has taken place to reach a common position.

Should you wish to know more about the CSSF’s new intervention powers, please contact the experts identified below.

_{1 The full text of the new Act is available via the following link: http://legilux.public.lu/eli/etat/leg/loi/2019/12/04/a811/jo}

_{2 To be complete, the Act also amends the act of 1st April 2015 creating the Systemic Risk Committee in order to grant access rights to the Banque Centrale du Luxembourg to data which is relevant for the Systemic Risk Committee to perform its mission.}