Slovenia: Banking system faces extensive structural reforms

Slovenia: Banking system faces extensive structural reforms

The Bank of Slovenia issued the Financial Stability Review which estimates that, in addition to the current pandemic-related risks, the banking system is also facing extensive structural changes.

“The systemic risks to financial stability remain elevated in the Covid-19 epidemic. Macroeconomic risk remains high, although it is gradually diminishing as businesses and households gradually make adaptations. Credit risk is becoming more evident with the steady withdrawal of extensive government measures to support businesses and households. Income risk remains elevated. The new Financial Stability Review further finds that the financial system’s resilience to systemic risks continues to be relatively high, given the good position in which it entered the crisis and the speed and scale of the economic policy measures taken,” the Bank announced.

It particularly notes that, alongside the current challenges, the banking system is also facing structural reforms that demand a clear strategy of action.

Under the aegis of the Governing Council of the ECB, the Bank has put extensive monetary policy measures in place to alleviate the crisis. The introduction of the pandemic emergency purchase programme (PEPP) with an envelope of EUR 1,850 billion and a horizon to March 2022, with the principal of maturing securities being fully reinvested at least until the end of 2023, stands out.

In the area of regulatory activities, numerous capital and regulatory reliefs were adopted within the framework of the Single Supervisory Mechanism and the European Banking Authority, making it easier for banks to carry out business and provide support to the real sector.

“All the measures applying to the systemically important banks were also applied to the other banks in the Slovenian banking system by the Bank of Slovenia (Banka Slovenije). The measure envisaging the frizzing of dividend payments has been extended and adjusted this year. This is helping to ensure the retention of capital at banks, so that the Slovenian banking system is better able to withstand potential losses and can continue supplying credit to businesses and households. The regulation on macroprudential restrictions on consumer lending was adjusted, so that a temporary decline in consumers’ income during an official epidemic period can be excluded from the calculation of their creditworthiness,” the Bank underlines in the Review.

The Bank claims that, with the process of recovery underway in the sectors not directly impacted by the containment measures, the economic situation remains difficult. Macroeconomic risk consequently remains high, although it began to decline owing to the improved outlook for emergence from the crisis in the final quarter of 2020.

Credit risk worsened, as the gradual expiry of the extensive government measures to support businesses and households will render the deterioration in the quality of the banking system’s credit portfolio more evident, while this will be reflected in an increase in non-performing exposures. This will bring an end to the period of several years of successful reduction in NPEs, which will begin to surge again.

Conditions for generating income in the banking system worsened further, in the wake of last year’s sharp slowdown in growth in bank lending. Income risk, therefore, remains elevated with an upward tendency.

Banks’ resilience to systemic risks, which was high throughout most of 2020, has deteriorated in the solvency and profitability segments and is now on the medium level. Amid the anticipated deterioration in the quality of the credit portfolio, banks might also begin to witness a decline in their capital ratios. There is also considerable variation in the level of resilience at individual banks, given the differences in the structure and quality of their credit portfolios and in their capital surpluses. Bank resilience in the liquidity segment remains high, again with variation between individual banks.

The Bank notes that the last decade has brought structural changes to the banking system balance sheet. The particularly pronounced changes seen in Slovenia mainly reflect the banks’ shift from corporate lending to household lending, so that the current balance between individual elements of bank balance sheets is out of kilter with the traditional, predominant concept of financial intermediation. Consequently, it will be necessary that a new consensus be reached with regard to the banking sector’s business strategy in the conditions of the new normal. “This deliberation should be set in a broader context, and alongside the usual questions around future demand for banking products, target customer groups, digitalisation, etc., it should also relate to employee competencies at all levels, the search for competitive advantage in the banking market, and an assessment of the ability to secure additional equity to ensure the banks’ successful future development in these conditions. Only such a well-considered strategy can guarantee the long-term viability of the banking system, to ensure that the economy as a whole is properly served,” the Bank concludes in its Review. /ibna