Pierre Gramegna

Luxembourg Minister of Finance

Pierre Gramegna

© Guy Jallay Luxemburger Wort 2021

Interview conducted in June 2021 by: Nadia di Pillo (Luxemburger Wort)

Minister of Finance Pierre Gramegna discusses the attitude of banks in times of crisis, the responsibility of the financial center in the face of climate emergencies and the country’s image.

Pierre Gramegna, the banks have been observed closely during this crisis. The role they were asked to play was to continue lending to households and businesses. Mission accomplished?

The mission  has indeed been accomplished, despite the doubts of some about the banks’ ability to respond to the pandemic. We’ve definitely reaped the benefits of the lessons learned from the 2008 financial crisis. Today, the banks have much higher capital and liquidity buffers and a much greater capacity to lend than in 2008. The government also played its part by guaranteeing 85% of the loans granted during the pandemic, with the banks taking a 15% share. This 85:15 ratio is ultimately very favorable for the banks.

The risk is minimal. We should note that EU rules allowed a ratio of up to 90:10. In our talks with the banks, we concluded that they would make an extra effort as regards the minimum provided for under the competition rules. So, the banks played their part in terms of loans and moratoria. A few months into the pandemic, by the middle of last year, the banks had already granted moratoria worth nearly EUR 4 billion. At the same time, loans totaled just under EUR 180 million. So, the banks were part of the solution to the crisis.

Despite this, the banks’ net income fell by 18.1% in 2020. What do you think about these results?

You have to put this figure in context. If you had asked me this question in March or April of last year, I would have been more reserved. Now, with hindsight, we can say that the results are very good, even quite remarkable. The banks have been cautious and have set aside much more than in previous years, no less than 600 million euros more, in order to deal with potential credit losses.

If we look at results before provisions, we see that profits remained stable, which is quite extraordinary for a year of economic shutdowns, lockdowns, and enormous constraints linked to COVID-19. These strong results were essentially due to three things. Firstly, the banks were in better shape than in 2008. Secondly, teleworking worked very well throughout the period and most banks were well equipped in this regard. Lastly, we have a very strong IT network in Luxembourg, so that even with a doubling or sometimes tripling of database capacity use, the system has held up really well.

Can we say that the banking sector remains very strong?

Absolutely. Both the banking sector and the investment fund sector stood up very well to such a sudden and serious crisis. The pandemic was a real-life test for the financial sector and provided an opportunity to measure the effectiveness of the system in place. The crisis of 2008 caused a “wave” of bankruptcies and bad debts. This crisis was shorter, and companies were able to return to growth more quickly. The banking sector finally closed the year 2020 with remarkable results. It has therefore been a solid pillar in this crisis. The same can be said for investment funds: after the sharp fall at the end of quarter one 2020, the recovery was relatively quick.  The fund industry ended the year with nearly €5 trillion in assets under management and as I speak, the €5 trillion threshold has been surpassed, setting a new record for the investment fund industry.

Beyond the pandemic, the Luxembourg Bankers’ Association (ABBL) is concerned about structural problems in the sector (declining profitability, low interest rates, etc.). How do you, as Minister of Finance, view these developments?

My answer to this question has three elements: Brexit, profitability and the future of the financial sector. First of all, Brexit has shown that Luxembourg remains very attractive for financial services, banks and investment funds. More than 60 players have chosen to set up or strengthen their presence in Luxembourg. This is the case for certain banks, particularly in the area of private banking. It’s also true for the insurance sector, since a dozen players have set up in Luxembourg. And it’s true for investment funds, a certain number of which have made Luxembourg their European hub or center of expertise. So, without changing anything in terms of our legislation, we’ve demonstrated a certain attractiveness.

But what about bank profitability?

If there wasn’t any attractiveness or potential profitability, none of these players would have come. That’s why I began with Brexit. All banks have a much lower profitability in Europe than in the US. This isn’t unique to Luxembourg. We are fortunate in that many banks are also active in the investment fund sector, which hasn’t experienced a drop in profitability. So we have to put things into perspective.

Yet this doesn’t make up for the lack of profitability in the banking sector.

It partly offsets the difficulties associated with the very low interest rates currently depressing the bank revenues. Also, a lot of additional assets were added in 2020 and in 2021, helping to offset some of the lack of profitability for banks. But this doesn’t take away the need for a whole series of diversifications. I’m thinking above all about sustainable finance. The sustainable development issue is now everywhere and is becoming increasingly important in the financial sector. Cumulative green bonds surpassed USD 1 trillion worldwide for the first time in 2020. The share of sustainable assets in the investment fund portfolio is also growing strongly and passed the threshold of USD 2 trillion last year. Of this USD 2 trillion, 20% is domiciled in Luxembourg. So this is clearly an area we are focusing on.

In terms of strengthening regulations, do you think the EU at times overregulates?

Sometimes I agree with these criticisms, but with a certain degree of nuance. Before 2008, we went through an extraordinary period of deregulation and the pendulum went too far in one direction. As always when the pendulum swings back in the opposite direction, it tends to go too far. What’s important is that Europe strikes the right regulatory balance and avoids making the European single market more complicated and less efficient than the other major markets in Asia and the US.

But it is already the case... Sometimes.

However, it must be said that foreign players in the European market all have to play by the same rules. At the same time, it is important to continue attracting new investors. Hence the need to find the right balance. But there are also other challenges that we need to consider and overcome, whether in relation to financial movements, the fight against money laundering, or digitalization. So, it’s perfectly normal for the regulations to be constantly changing. I also think Europe is the world region that’s making the best effort to keep up with recent developments. For example, in the digital field, the European Commission has put forward a whole raft of directives aimed at regulating digital finance, including cryptocurrencies. And it will shortly introduce a major initiative on the fight against money laundering. All of these measures are absolutely essential and in line with the times.

The agreement on post-Brexit trade relations doesn’t settle the question of financial services. What consequences does this have for Luxembourg’s financial sector?

It is important to realize that financial services were not part of the negotiating mandate in the Brexit negotiations. Hence, the agreement reached a few weeks ago on the Memorandum of Understanding (MOU). We very clearly welcome this because it gives us a framework for regular and substantial dialogue with the UK. From Luxembourg’s point of view, we believe that it’s in the interests of both the UK and the EU to maintain bridges between the two markets and to start with the fact that we have exactly the same rules for the time being.

So no change for the moment...

Not for now, but the legislation may change. We’re lucky to have the same rules at present – by definition, since the UK was part of the EU – and so we can build on this common base rather than creating divisions. This can be done via regular and intensive dialogue, which is what we’re hoping for, and the European Commissioner for Financial Services, Mairead McGuinness, has assured me she wants this as well. Mairead has also assured me that she is in regular contact with Luxembourg [authorities and businesses] because we are an important player in the financial services field.

Therefore, the MOU gives us a framework for dialogue, and going forward we will discuss matters on a case-by-case basis. There’s a good chance that in the area of financial services, our point of view will be shared on the other side of the Channel. Thus, we can develop the legislation together.

It is interesting to note that since Brexit, the European Stability Mechanism and the European Investment Bank (EIB) have very often used Luxembourg law for loans, bonds or financial transactions, whereas previously they had used UK law. This is very good news for Luxembourg’s financial center. For example, the social bonds of the EU’s SURE program, which provides temporary support to mitigate unemployment risks in emergencies, have been listed on the Luxembourg Green Exchange (LGX).

Will the Taxonomy Regulation – one of the EU’s tools for determining which activities can be considered sustainable across the EU – be a game changer for green finance?

The taxonomy is absolutely essential if we want sustainable finance that is credible. Without common European rules, anyone could label whatever they like sustainable. The taxonomy also allows us to avoid greenwashing and, ultimately, to achieve our sustainable development objectives and the objectives of the Paris Agreement. So, we must not be under any illusions: we have to play the game properly and apply the rules of the taxonomy.

We talked about the regulations sometimes going too far: this is an example of Europe being clearly ahead of the rest. There are still delegated acts and a further refinement of the legislation to be issued by the Commission this year. But everything is in place to further develop sustainable assets and green loans, and to finance climate-friendly projects.

It is important to understand that this is a medium- and long-term goal, even if we are starting from a very low base today. Over time, we will see a dynamic established: the Luxembourg Sustainable Finance Initiative, which I run together with the Minister for the Environment, Carole Dieschbourg, aims to encourage financial market players to become more involved in sustainable finance, for example by carrying out benchmarking exercises, or by carefully studying the loans and assets they hold so as to be able to monitor developments over time. I think we’re one of the most advanced countries in the world in this area.

Luxembourg for Finance has launched the “Eis Finanzplaz” awareness campaign. How attached do you think Luxembourgers are to “their” financial center?

I think our banks have faced two challenges in recent years. The first is that in most countries, until very recently, banks didn’t have a very good brand image. This declining brand image abroad has also had some impact on the perception of banks here in Luxembourg.

The second cause for reflection in this area was the need to make people understand the importance of the financial center for our economy, our well-being and our social safety net, which is extremely generous. The campaign we have launched aims to show that our financial center has modernized over time and is now transparent.

Do you think people tend to forget this?

I think so. Many Luxembourgers take it for granted today that the financial center provides over 50,000 jobs, a large part of tax on profits and a lot of the State’s revenues. In reality, however, this isn’t obvious at all. Our financial center deserves to be promoted more among the public, especially now that it has played a very important role in managing the crisis. The fact that the banks were part of the solution to help companies bounce back illustrates the importance of the financial sector in Luxembourg. The financial center was part of our resilience in this crisis and this helped us a lot.

Lastly, after LuxLeaks, Openlux, etc., how do you intend to improve the image of the financial center abroad?

The Openlux articles, which were intended to damage our country’s image, ultimately served to illustrate how far we have come. The Openlux effect was extremely limited and didn’t lead to a wave of protests. I have also been assured by players in the center that the media reports have had no negative effects on bank customers either.

Why do you think that is?

There are two explanations. The first is that our reputation is much better in 2021 than it was in 2014. This is because we’ve changed our legislation. We now have transparency; banking secrecy is no longer an obstacle to exchanging information with the rest of the world. We’ve implemented all the progressive taxation directives issued by the OECD and adopted by the EU. We have implemented everything and so we’re fully compliant.

Secondly, the register of beneficial owners, which was the subject of criticism in Openlux, is one of the most open and accessible in Europe. It meets all the conditions of the directive, but is above all very open, in the sense that everyone can access it free of charge, including journalists. There are a number of countries that don’t yet have a register of beneficial owners.

Other countries have lists of beneficial owners, but access is very expensive or limited. In the end, it often stood out that all the information published in these Openlux articles was already public. There was therefore no reason to characterize Luxembourg as being particularly to blame for having done something wrong. On the contrary, we are transparent. Ultimately, it is reassuring that thanks to these articles everyone discovered that Luxembourg plays fair and has absolutely nothing to hide.

So, you see no need to change the country’s image?

Our image has improved in recent years, but we have to be realistic. It takes a generation to change a reputation. We have suffered from a bad image for decades, which was sometimes unjustified, sometimes justified. It takes time to change a bad image. I think the Openlux case showed us that our efforts have been rewarded, in the sense that the attack sort of evaporated, since there were no major problems after all. At the same time, the case showed that those behind it focused on Luxembourg when they could have looked at the beneficial owner registers of other countries. So, there’s still a problem. It is certainly less important, but it shouldn’t be overlooked.

So, in concrete terms, what do you intend to do?

We’re also working on Luxembourg’s brand image via the Eis Finanzplaz campaign. The campaign is mainly aimed at Luxembourg residents, and explains what Luxembourg’s financial center is and what has changed in recent years. We also have to stay focused on our commitment to comply with all EU rules and avoid appearing on blacklists, as we unfortunately have in the past. Our reputation is improving, and we’ll continue improving it step by step through our efforts to remain beyond reproach.

A final word on the on-site visit of the Financial Action Task Force (FATF) for Luxembourg’s mutual evaluation...

It’s not imminent, or in any case it’s not a matter of weeks. The FATF is still a little unsure whether the review will be done remotely or face-to-face. The new schedule will depend on this decision.

Will Luxembourg get a good rating?

We’ll do everything we can to get one and we’re very confident in our ability to do so. I’m not the slightest bit apprehensive about the review. We should do everything to ensure a good rating. It’s a bit like school, you have to revise everything to maximize your chances of success. We’re making good progress, for example, we’ve adopted all the EU anti-money laundering directives. We’re completely in order as regards the legal framework. We’re now in the process of reinforcing the effectiveness of the measures and controls in place. This is our main point of action. We’re going to use the months between now and the review to become even stronger and more credible.