Bank of Slovenia draws attention to risks

In connection with the police investigations related to the raising of loans at banks that were undertaken in recent days, the Bank of Slovenia can report that problems of this type in connection with internal fraud are seen by almost all banks, and that frauds of this type are usually limited to small cases, where the case of one of the banks in 2017 was an exception.

The Bank of Slovenia devotes a good deal of attention to the area of consumer credit, particularly given the growth in this area and the decline in credit standards. The Bank of Slovenia’s Banking Supervision Department has recently conducted several inspections in the area of credit risk in consumer lending. Lending of this type accounts for approximately a third of all household lending, and has increased more than other types over the last two years, although there is considerable variation from bank to bank. In addition to these inspections, the Bank of Slovenia also conducted a more detailed examination of fraud and compliance at certain banks, and steered members of the former special inspection group into systematic work to prevent fraud in the banking sector.

Within the framework of the supervision of banking compliance, alongside the area of AML/CFT the Bank of Slovenia regularly monitors the implementation of the Consumer Credit Act (the ZPotK-2), and conducts supervision of credit intermediaries and supervision of the prevention of fraud and misuse in the banking system, which constitutes an augmentation of prudential supervision. This supervision aims to identify bad banking practices, and to determine whether banks have put in place an effective method of defence against fraud that ensures the mitigation and elimination of factors that lead to fraud, both at the level of the individual bank and at the systemic level.

The Bank of Slovenia has on several occasions warned banks of the elevated risks inherent in the decline in credit standards in the case of so-called quick loans, most notably in the letter to banks of 27 March 2018, at bilateral meetings with individual banks, and at the meeting with members of bank management boards on 5 June 2018. In so doing the Bank of Slovenia highlighted the need for an adequate level of internal controls and the credit assessment of clients, particularly in automated loan approval procedures:
• by taking account of the adopted credit policy, which must be aligned with the strategy and the risk appetite,
• through clear credit standards in approval by means of guaranteed technical support and clear criteria for the consideration of exemptions,
• through an appropriate pricing policy,
• through a value adjustment methodology,
• through an effective risk monitoring system, including an early warning system for elevated credit risk, and
• by putting in place an adequate control environment to mitigate operational risks (fraud).

In addition, through the aforementioned supervisory procedures it has instructed banks in several cases to:
• promptly identify clients and to properly verify the information provided by clients,
• review the low limits set for minimum residual monthly income during the calculation of the client’s creditworthiness,
• take account of all living expenses and to appropriately determine the wealth of an individual consumer during the calculation of creditworthiness,
• improve the limit system for limiting credit risk inherent in household lending,
• improve the rating classification of clients (the failure to take account of all material information that could lead to a downgrading in the client’s creditworthiness),
• analyse the price viability of the bank’s consumer credit products and to take account of all components (e.g. age of the portfolio),
• update documentation and working guidelines in the approval of consumer loans.

It should be added that for several months the Bank of Slovenia has been involved in a proposed initiative to amend the Central Credit Register Act, where it is arguing for the position that the principal guideline cannot simply be the pursuit of speed and the automation of access to /approval of so-called quick loans, but instead the need to ensure adequate management of credit risk, operational risk, security risk and other risks.

There have also been suggestions made in public of supposed deficiencies in the SISBON system, which is alleged to facilitate abuse because of the lengthy procedure to flag over-indebtedness. It should be emphasised that having identified the increased supply of quick loans at banks, the Bank of Slovenia took action via secondary legislation to commit members of the SISBON system to immediately submitting all changes of information in connection with client indebtedness. Given the requisite technical adjustments, this obligation will begin to be enforced in practice on 1 March 2019.

As the operator of SISBON and SISBIZ, within the framework of the systems the Bank of Slovenia does not prescribe the way in which creditworthiness is determined for members of the system, and does not define over-indebtedness. The way in which over-indebtedness is determined, monitored and flagged is subject to the business policy of the individual member, whereby information from SISBON and SISBIZ is merely additional information in the procedures for approving and concluding a credit operation alongside the information that the member already has at its disposal.

Internal fraud cannot be avoided at banks, but the scale of internal fraud can be effectively reduced through sound credit policy and internal controls.