Luxembourg: Financial Sector Assessment Program—Technical Note on Stress Testing and Systemic Risk Analysis

This paper focuses on a technical note on Stress Testing and Systemic Risk Analysis for the Luxembourg Financial Sector Assessment Program. The Luxembourg financial system is highly interconnected, diverse and complex. It has displayed a high level of resilience in the past but currently faces a backdrop of heightened economic, financial, and geopolitical uncertainty. The banking, insurance and investment fund sector stress tests were integrated in a number of ways, and included key external and domestic risks. Under the adverse scenario, the banking system would experience a significant decline in the system-wide capital ratio but would still be very well capitalized, thanks to healthy initial positions. The majority of banks would be able to sustain bank runs akin to those experienced in the US and Switzerland in March 2023, but some need attention. Despite resilience taken together, the assessment of banking sector vulnerabilities points to several areas where the authorities could prioritize supervisory attention. The increasing share of alternative investment funds and the higher interlinkages both within the investment fund sector and with the rest of the financial sector call for vigilance.