Banking has been gaining in importance since the 1970s and has become the most significant part of the economy; by 1998, banking and insurance employed about 15% of the total workforce. The principal bank and the sole bank of issue is the International Bank of Luxembourg ( Banque Internationale à Luxembourg ), founded in 1856. The Belgium-Luxembourg monetary agreement, as renewed for 10 years in 1991, provided for the establishment of the Luxembourg Monetary Institute to represent the nation at international monetary conferences and institutions. The banking sector has benefited from favorable laws governing holding companies. The European Investment Bank, the European Court of Auditors (both EU institutions), and the European Monetary Fund are headquartered in Luxembourg, as are all of the big six accounting firms. As a financial center, Luxembourg has the advantages of strict banking secrecy, a trained multilingual workforce, and a government that is sympathetic to the sector's needs. These last two factors are proving attractive to the developing cross-border insurance business. In addition, a strict 1992 law aimed at combating money laundering reinforces Luxembourg's reputation as a corrupt-free environment. The financial sector is currently active in three main areas: the Eurobond market, investment funds, and the developing cross-border life insurance market.
Faced with the impossibility of raising the capital for its steel industry alone, Luxembourg has always been open to the financial world. But its current success in the field owes more to legislation in neighboring countries and external economic factors than to any deliberate policy on the part of the government.
The Euro-markets have made Luxembourg the home of Cedel Bank, one of the two international clearing and settlement depositories. In 2001 this group recorded a consolidated gross operating income of 979.5 million euros and a pretax operating profit of 113.4 million euros. In 1999, Cedel and Deutsche Börse Clearing announced a merger. The new company is called Cedel International and will serve as a single European clearing organization.
Luxembourg controls about 90% of Europe's offshore investment funds, making it the fourth largest world market. The International Monetary Fund reports that in 2001, currency and demand deposits—an aggregate commonly known as M1—were equal to $46.0 billion. In that same year, M2—an aggregate equal to M1 plus savings deposits, small scale time deposits, and money market mutual funds—was $139.4 billion.
The Luxembourg Bourse, founded in 1929 in the city of Luxembourg, primarily handles stocks and bonds issued by domestic companies, although it also lists Belgian securities. The exchange was closed down on 10 May 1940. Dealing resumed but was limited to domestic and German securities. The exchange was again closed down when the country was liberated and did not reopen until October 1945.