The European Union’s banking sector has demonstrated remarkable resilience in the face of recent geopolitical and economic turbulence, including the banking crisis of early 2023. This resilience owes much to the establishment of the EU Banking Union ten years ago, which has reinforced the stability and supervision of banks across Europe. Luxembourg’s banking sector stands out for its adherence to regulatory frameworks and its robust governance practices.

Luxembourg’s banking resilience

PwC’s report shows that Luxembourg’s banking sector, with 117 credit institutions and a total balance sheet of EUR 957 billion as of March 2024, remains a pillar of strength in Europe. The sector saw exceptional performance in 2023, with net profits growing by 67% due to favourable interest margins. However, the CSSF cautions that this growth may be temporary, with rising expenses and ongoing economic challenges.

Strategic recommendations for future stability:

To maintain and enhance stability, Luxembourg’s banking sector must focus on several key areas:

• Adhering to ECB supervisory priorities: Ensuring compliance with the SSM guidelines for 2024-2026.
• Enhancing anti-money laundering measures: Aligning with the new regulations and directive included in the European Commission's recent AML Package.
• Investing in digital transformation: Embracing digital technologies to improve customer service, reduce costs, and enhance operational efficiency.
• Impact of AI on tax functions: Banks must assess how AI can enhance the efficiency and opportunities within their tax functions, particularly for those with dedicated tax departments.

The report offers a comprehensive C-Suites roadmap to help in navigating these priorities.

Julie Batsch, PwC Luxembourg Partner, Banking and Capital Markets Leader stated: “Luxembourg’s banking sector has been a paragon of stability and sound, prudent governance since the emergence of the country’s first banks in the mid-19th century. For this report, we decided to take stock of the European Central Bank’s latest supervisory priorities and delve into tax and financial crime-related matters – two areas not directly under the ECB’s remit – to offer signposts for the leadership of the Grand Duchy’s banking sector to stay ahead of the curve in this increasingly fractured and crisis-prone environment”.

Björn Ebert, PwC Luxembourg Partner, Financial Services Leader said: “Luxembourg's banking sector has demonstrated overall stability over the past decades, however recent market challenges present escalating difficulties to maintaining its resilience. Our comprehensive report highlights the European Central Bank's latest supervisory priorities and addresses current topics of the banking market, providing essential guidance for leaders in Luxembourg's banking sector amidst today's intricate landscape. Clearly, GenAI is poised to play a pivotal role in the sector's future, elevating efficiency, accuracy, and customer service standards.”

Addressing future challenges

 The PwC Banking in Luxembourg report shows that in 2023, banks in Luxembourg achieved exceptional performance, backed up by CSSF findings. However, the report also shows this surge is considered temporary, as banks also reported higher general expenses, particularly in staff costs.

This trend of strong profits was seen across Europe, with the 20 largest banks in continental Europe earning over EUR 100bn in net income, surpassing the EUR 100bn mark for the first time, a significant rise from EUR 78bn in 2022. This occurred against the backdrop of the European Central Bank raising interest rates to record highs, ending a decade of ultra-low rates.

Despite these gains, Luxembourg’s banking sector faces challenges, including a crisis in the construction sector, a drop in housing loan volumes, and difficulties in hiring and retaining staff. To help senior management navigate these challenges, the report provides guidance and recommendations on the European Central Bank's supervisory priorities for 2024-2026.

Luxembourg’s Regulatory Commitment

The Banque Centrale du Luxembourg (BCL) and the Commission de Surveillance du Secteur Financier (CSSF) continue to ensure that Luxembourg’s banking sector adheres to stringent regulatory standards. This commitment has positioned Luxembourg as a model of financial stability within the EU.

The Banking in Luxembourg report demonstrates that Luxembourg’s banking sector remains a beacon of stability and resilience in Europe, ready to face future economic challenges with robust regulatory compliance and strategic foresight.

Download the executive summary and the PwC Luxembourg “Banking in Luxembourg” full report  for more insights and practical recommendations!