Luxembourg: Financial Sector Assessment Program—Technical Note on Macroprudential Policy Framework, Tools, and Calibration

Strong policy support and high financial buffers are helping the financial sector weather the consecutive shocks, but pre-pandemic vulnerabilities have continued to rise. Ultra loose financial conditions, in part as a consequence of ECB’s monetary policy, have contributed to increased households’ indebtedness and stretched asset prices. Specifically, real estate prices had grown rapidly over 2018–22 with signs of overvaluation. Households’ indebtedness continued to rise, although partly mitigated by high households’ net wealth. These mounting real estate vulnerabilities prompted measures from the authorities, including on the macroprudential front, that bolstered the resilience of the banking sector but had mixed effects on the risk profile of new mortgages. The average LTV has dropped but the impact on DSTI and DTI has been more muted.