FAQs and answers about the tightening of the Bank of Slovenia measures in the area of household lending
The Bank of Slovenia finds that the risks associated with consumer lending remain elevated, despite our previous actions. Although we have alerted banks and consumers, and introduced recommendations with regard to the maintenance of moderate growth in consumer loans, the rate is nevertheless still in excess of 10%. The Bank of Slovenia has observed a high level of deviations from the recommendations in two areas in particular, namely the debt service to income ratio, and the average maturity of consumer loans, which in certain cases even exceeds 12 years.
In November 2019 the Bank of Slovenia therefore changed the recommendation into a binding instrument in the area of consumer lending, placing caps on (a) the maturity of consumer loans, and (b) the ratio of the annual debt servicing costs to the borrower’s net income (DSTI). The second requirement also applies to housing loans.
For more, see the press release and the presentation during the introduction of the instrument.
When did the regulation enter into force?
The regulation entered into force on 1 November 2019. The regulation does not apply to loans where the borrower submitted the loan application before the entry into force of the regulation, i.e. before 1 November 2019. The term “new credit agreement” used in the regulation refers to credit agreements where the credit process was initiated by an application after the entry into force of the regulation. The conclusion of a credit agreement relates to the entire credit process (from the consumer’s loan application to the actual signing of the agreement itself). We are aware that the credit process is divided into several phases, where certain mandatory requirements must be met under the ZPotK-2. These requirements are even more comprehensive for credit agreements for real estate (e.g. the mandatory seven-day advance information on the ESIS form, a real estate valuation, a notarial deed on mortgage collateral). Given that these legal requirements can lead to delays between the loan application and the final conclusion of a loan, the regulation needs to be interpreted accordingly. The regulation therefore applies solely to credit agreements concluded on the basis of consumer loan applications made after 1 November 2019.
What does the regulation stipulate?
The regulation sets out two binding macroprudential instruments:
a) a cap on the ratio of annual total debt servicing costs to the consumer’s annual income (DSTI) when a credit agreement for a housing loan or a consumer loan is concluded,
b) a limit on the maturity of consumer loans;
and a non-binding macroprudential instrument:
c) a recommended cap on the ratio of the amount of a credit agreement for residential real estate and the value of the residential real estate used as collateral for the loan (LTV) when the credit agreement is concluded.
For more information, see this link.
Why did you opt for such a measure?
The Bank of Slovenia finds that the risks associated with the growth in consumer loans have not diminished, even after the extension of the macroprudential recommendation in November of last year. Year-on-year growth in consumer loans remains high, in excess of 10%, and the average value of consumer loans is also increasing. According to the latest figures, year-on-year growth in consumer loans stood at 11.7% in August, while the stock amounted to EUR 2.91 billion, thereby reaching its pre-crisis level. A high proportion of consumer loans are failing to comply with the recommended cap on DSTI, according to which the ratio of the annual debt servicing costs to the borrower’s annual net income may not exceed the values defined in the recommendation.
The average maturity of new consumer loans has also increased in recent years: having stood at 5.6 years at the end of 2015, the figure had lengthened to 7 years by August of this year. The stock of consumer loans whose maturity is more than 10 years is also increasing: having stood at EUR 271 million at the end of 2015, according to the latest figures, it stood at EUR 516 million in August of this year. The longest maturities of consumer loans are actually exceeding 12 years.
The Bank of Slovenia finds that almost a quarter of new consumer loans in terms of value are failing to comply with the recommendations. These developments are a cause for particular concern in a time of slowing economic growth, which will also gradually be reflected in the labour market. The Bank of Slovenia and other institutions are also warning of the risk that the economic picture could deteriorate in the future. The issue lies not with current household debt, but with the trend in this area. For more information, see the press release.
The measure is aimed at maintaining financial stability, and pursues the intermediate macroprudential policy objective of “preventing excessive credit growth and excessive borrowing”. At the same time it is forecast that by limiting ill-considered and excessive borrowing the measure will also limit or prevent the social pressures that can arise when household borrowing goes too far. It should be remembered that in addition to repaying the principal, consumers are also required to pay interest, which can be relatively high on consumer loans. The average effective interest rate on consumer loans is 8.2% on fixed-rate loans and 6.5% on variable-rate loans. Effective interest rates can even exceed 15%. Apart from shortening the maturity limit from 10 years to 7 years, the measure does not tighten the recommendation for household lending, which has been in force since November 2018.
Does Slovenia have much longer consumer loan maturities than other European countries?
Slovenia ranks at the very top in terms of the proportion of loans with a maturity of more than 5 years: the figure is fully 79% in Slovenia, compared with the euro area average of just 50%.
Proportion of consumer loans with a maturity of more than 5 years
Source: ECB
What recommendations and measures has the Bank of Slovenia already imposed?
Measures imposed to date by the Bank of Slovenia:
| HOUSING LOANS | CONSUMER LOANS |
|
September 2016: |
November 2018: |
|
November 2019: |
November 2019: |
| Allowed deviations: • DSTI: 10% |
Allowed deviations: • maturity: 15% • DSTI: 10% |
Practical examples
For a person whose net wage is no more than twice the gross minimum wage, i.e. whose net monthly wage in 2019 was less than or equal to 2 x EUR 886.63 = EUR 1,773.26, the maximum debt servicing costs are:
EUR 1,773.26 minus (76% of the gross minimum wage plus the amount required for the maintenance of dependent family members) or
50% of EUR 1,773.26 if this amount does not exceed the amount that must remain for the borrower. The borrower must be left with 76% of the gross minimum wage, which amounts to EUR 673.83, plus maintenance costs for any dependent family members.
a) Borrower’s net income: EUR 1,700. Maximum instalment = EUR 1,700 x 50% = EUR 850.
The borrower is left with more than 76% of the gross minimum wage, and this is acceptable.
b) Borrower’s net income: EUR 1,500 and two children aged under 18 who require maintenance.
Because the children are also dependent on the other parent, the amount is divided by two (EUR 237.29 for each child, divided by two, gives EUR 237.29 for the borrower).
The maximum instalment is the lower of these two amounts:
- EUR 1,500 minus (76% x EUR 886.36 plus EUR 237.29) = EUR 589.08
- 50% of EUR 1,500, which is EUR 750
The maximum instalment is therefore EUR 589.08.
c) Borrower’s net income: EUR 1,500 and one child aged under 18 who is maintained by the borrower alone.
The maximum instalment is the lower of these two amounts:
- EUR 1,500 minus (76% x EUR 886.36 plus EUR 309.68) = EUR 516.69
- 50% of EUR 1,500, which is EUR 750
The maximum instalment is therefore EUR 516.69.
How is creditworthiness calculated when the loan is being raised by several persons?
Creditworthiness is calculated for each borrower separately for the purposes of compliance with the regulation on macroprudential restrictions on household lending. When there are multiple borrowers, the credit agreement must comply with the DSTI requirement for each of the borrowers.
Are there any new developments in connection with how dependent family members are taken into account?
Dependent family members are taken into account in the same way as in the macroprudential recommendations adopted in previous years. The macroprudential recommendation for housing loans, which was approved by the Governing Board of the Bank of Slovenia on 30 August 2016, stated that “in the loan approval process (when assessing creditworthiness) it is recommended that banks apply, mutatis mutandis, the limitations on the attachment of a debtor’s financial assets set out in the Enforcement and Securing of Claims Act (ZIZ) and the Tax Procedure Act (ZDavP-2), i.e. earnings that are exempt from attachment and limitations on the attachment of a debtor’s financial earnings”. This recommendation was extended to consumer loans on 22 October 2018.
What is the most common size of a consumer loan?
The amount most commonly borrowed via a consumer loan was EUR 5,000 in the final quarter of 2018. The average contractual amount of a consumer loan has increased by EUR 2,000 or 33% over a period of four years, and stood at EUR 8,110 in the final quarter of 2018.
What does this mean for housing loans?
The DSTI cap has become a binding measure: the ratio of annual debt servicing costs to the borrower’s annual income may not exceed 50% for people whose income is no more than twice the gross minimum wage, or 67% for income above this threshold. The cap of 80% on the ratio of the amount of the loan to the value of the residential real estate collateral remains a recommendation to banks. Irrespective of income level, consumers must be left with income of at least 76% of the gross minimum wage after the payment of all instalments under credit agreements. A consumer who maintains a dependent family member or another person whose maintenance is required by law must also be left with the amount of income stipulated for the maintenance of the aforementioned person, according to the criteria set out by the law governing social security benefits for the award of cash social assistance. For more information, see the link.
Do unsecured housing loans (for renovations) now count as consumer loans or housing loans?
The regulation on macroprudential restrictions on household lending makes no change to the definition of a housing loan. It is defined with regard to its purpose: all loans raised for the purpose of purchasing, renovating or constructing residential real estate (irrespective of collateral) are housing loans.
Do the restrictions under the regulation also apply to leasing?
The macroprudential restrictions on household lending do not apply to leasing business; when assessing creditworthiness and calculating DSTI, banks are also required to take account of liabilities from lease agreements.
Will the measure have an impact on the real estate market?
The measure primarily targets the consumer loan market, but it is also the case that it partly concerns housing loans. The real estate market is influenced by numerous factors, of which loan supply is just one. More and more transactions on the Slovenian real estate market have recently been financed by the purchasers’ own resources, and therefore the effect of these measures is smaller than it would be if transactions were financed to a greater extent by loans. Analysis in countries that have already introduced similar macroprudential measures shows that measures of this type can also have an impact on prices on the real estate market. When prices fall, housing affordability increases, which mitigates the impact of reduced access to loans (in this event the borrower only needs a smaller loan, which can be obtained despite the tightened DSTI requirement).
Are deviations or exemptions from the binding requirements allowed?
The Bank of Slovenia allows for deviations from the binding requirements. The allowed deviations are determined at the quarterly level, and are calculated relative to the total amount of new credit agreements that comply with the maturity limit and cap on DSTI. The maturity limit may be exceeded by a maximum of 15% of new credit agreements for consumer purposes, provided that maturity of such loans does not exceed 120 months and they comply with the cap on DSTI. The cap on DSTI may be exceeded by a maximum of 10% of new credit agreements for residential real estate and a maximum of 10% of new credit agreements for consumer purposes, provided that the borrower is left with at least the prescribed minimum amount and the DSTI for the credit agreements does not exceed 67%. Credit agreements for consumer purposes that exceed the cap on DSTI must comply with the maturity limit. The allowed deviations are an important part of the measure, as they give banks manoeuvring room to approve a loan at their own discretion in certain cases, even when the basic parameters of the measure would not allow them to do so.
The Bank of Slovenia is leaving it to banks to decide on exemptions from the measure. Banks are responsible for taking up and managing risks when credit agreements are entered into, but it is the banks themselves who are most aware of all the circumstances and attributes of borrowers that have an impact on their creditworthiness. Banks will therefore continue setting their internal risk take-up and management policies for themselves, in line with the applicable regulations.
Do the Bank of Slovenia requirements actually restrict banks?
Approved loans mostly in fact do not exceed the restrictions.
| • Family of four with two children aged under 18 • Borrower’s income: EUR 1,119 (average net wage in Slovenia in July 2019) • Existing loans: EUR 0 • Creditworthiness = 1,119 - (715+237) = a maximum monthly repayment of EUR 167 |
Amount of 7-year consumer loan | Amount of 20-year housing loan |
| Most commonly approved loan amount in 2018 for borrower with income at the average wage |
5,000 EUR |
30,000 EUR |
| Maximum loan amount after 1 November 2019 according to BAS calculation |
11,500 EUR |
30,000 EUR |
What are the average effective interest rates on consumer loans?
The average effective interest rates on consumer credit agreements entered into by banks and savings banks during the first six months of 2019 were as follows (calculated by the method set out in Article 26 of the Consumer Credit Act [Official Gazette of the Republic of Slovenia, No. 77/16]):
|
Consumer loan (with regard to maturity and amount) |
Average effective interest rate,* % | |
|
up to 6 months |
and up to 1,000 EUR |
44.5 |
|
up to 12 months |
and up to 2,000 EUR |
19.2 |
|
up to 36 months |
and up to 4,000 EUR |
12.9 |
|
up to 10 years |
and up to 20,000 EUR |
8.5 |
What burden is placed on households by hire purchase and other non-housing loans?
Some 80% of survey respondents in 2018 stated that their hire purchases and other non-housing loans represented a large or medium-large burden. During the crisis the corresponding figure reached fully 93%.
Proportion of survey respondents who have such liabilities
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Sources: SILC survey, SORS
Will banks no longer lend to pensioners and people on lower incomes?
Banks are already failing to lend to pensioners and people on low incomes.
Those aged over 65 accounted for just 0.8% of housing loans and just 5.9% of consumer loans in 2018. There is no demand for loans from older people, or banks are not approving loans once the borrower is over a certain age.
People on lower incomes were not seen as creditworthy under banks’ internal rules even before the adoption of the regulation. This is reflected in the data submitted to the Bank of Slovenia by banks as part of their regular reporting and in surveys:
- Less than 3% of consumer loans approved in 2018 went to borrowers whose income was no more than the net minimum wage, while 20% of consumer loans (in terms of loan amount) went to borrowers whose income was no more than the level sufficient to maintain two dependent children.
- Not a single housing loan was approved in the first half of 2019 for borrowers whose income was less than the net minimum wage, while just 4% of housing loans (in terms of loan amount) went to borrowers whose income was no more than the level sufficient to maintain two dependent children.
Breakdown of housing loans (in terms of loan amount) by income level
Source: BSMAP, Q1-Q3 2019
Why are banks more motivated to approve consumer loans?
Interest rates on consumer loans are approximately double those on housing loans: the average interest rate on consumer loans is 5.3%, compared with 2.3% on housing loans. By raising a housing loan instead of a consumer loan (e.g. for roof replacement) borrowers could obtain a larger loan or could pay significantly less for a loan of the same size.
Example: Borrower’s total costs for consumer loan and housing loan of EUR 15,000
| Variable-rate | Fixed-rate | |
| Consumer loan (cash) |
19,356 |
19,548 |
| Housing loan |
16,562 |
17,152 |
| Difference (saving on housing loan) |
2,794 |
2,396 |
Sources: bank websites, 4 November 2019
Note: 7-year unsecured loan
Why are interest rates on fixed-rate housing loans in Slovenia higher than in neighbouring countries and in the euro area?
Slovenian banks’ interest rates on housing loans have always exceeded the euro area average. The largest spreads with euro area average occurred between 2012 and 2014, when the Slovenian economy faced a fall in GDP and uncertainty with regard to the size of the banking system’s losses. Variable interest rates on housing loans were 52 basis points higher than in the euro area overall on average between January 2007 and May 2019, while fixed interest rates on housing loans were 137 basis points higher. There are several reasons for these spreads, and they are so diverse as to make a comparison of interest rates between countries difficult. Caution is therefore required when drawing conclusions about potential causes. The potential reasons for the spreads in interest rates between individual countries that otherwise have a common monetary policy are as follows:
- The stability of the macroeconomic environment is an significant factor affecting banks’ decision-making with regard to setting the level of interest rates. The factors belonging to this category that are significant for housing lenders are inflation, the sovereign credit rating, and the yield curve.
- The banks’ average funding costs also have a significant impact on the level of interest rates required for individual loans. This category includes capital requirements for individual banks, household deposits and deposits by non-financial corporations, and bond funding.
- Bond funding: by issuing mortgage bonds, a bank transfers the interest rate risk and liquidity risk inherent in deposit funding to the capital market or, more precisely, to investors in mortgage bonds. The reduced risk allows for a lower interest margin and smaller risk premium, which allows for cheaper mortgage loans. In this context it is important to highlight that Slovenian banks do not issue mortgage bonds to fund real estate loans, although these are typically an important source of funding for real estate loans for foreign banks.
- The average original maturity of housing loans and the fixation period: the longer the maturity of the housing loans or the interest rate fixation period (in the case of fixed-rate loans), the higher is the interest rate and thus the cost of the loan. The typical maturity of housing loans across the euro area varies from 20 years to 30 years. The maximum maturity offered by European banks varies from 30 years to 40 years. Loans of longer maturity, including up to 50 years, are occasionally seen. Individual countries usually cite the data on original maturities of housing loans in their publications (e.g. in the financial stability review). The average maturity of new housing loans in Slovenia is 20 years.
- The level of competition on the banking market: the general level of market interest rates in a particular country can also depend on the level of competition on its banking market. The stronger the competition on the banking market, the lower are the interest rates and the narrower are the spreads between banks.
- Other potential factors cited by the literature (ECB, 2006): Differences in interest rates can also be driven by the differing risk profiles of individual loans, including the type and level of collateral for housing loans. In addition, differences in the regulatory regime (requirements with regard to LTV and DSTI or maximum maturities) and in the fiscal framework between individual euro area countries are also a factor in the differences in interest rates. A factor that might make interest rates on housing loans lower in certain countries is the existence of large dedicated housing schemes supported by the government. The interest rate statistics also show nominal interest rates alone, which in countries with lower interest rates could mean that banks in these countries are charging higher non-interest fees. From the perspective of risks and market structure, there are several more factors that can be linked with differences in interest rates: expectations regarding the evolution of residential real estate prices, the stability of the domestic economy, the stability of the economies in export markets, households’ financial stability, operating costs, the effectiveness of the judicial system (the recovery rate), market structure (ownership structure, number of branches), and certain other structural differences, such as banking practices with regard to the way in which the charging of various costs is structured.
Sources: Bank of Slovenia, ECB: Differences in MFI Interest Rates Across Euro Area Countries (September 2006)
Available online at: https://www.ecb.europa.eu/pub/pdf/other/differencesmfiinterestrates2006en.pdf
Fixed interest rates on housing loans, %
How often do Slovenes opt to raise loans in the rest of the world?
Financial accounts figures, which do not allow for a distinction between bank and non-bank resources from the rest of the world, show that the proportion of total loans to households (bank and non-bank) accounted for by loans from the rest of the world stands at around 2.4%, which is less than in previous years. These findings are confirmed by data on the geographical source of bank loans to Slovenian borrowers taken from the ECB database. The stock of bank loans from the rest of the world has been declining since 2016, and the proportion of total loans that they account for is also declining. The majority of these loans come from two neighbouring countries, Austria and Italy, followed by Germany.
Breakdown of household loan liabilities, %
| Loans in Slovenia (S.1) | Loans in rest of the world (S.2) | Total loans (S.0) | |
| 2012 | 96.6 | 3.4 | 100.0 |
| 2013 | 96.9 | 3.1 | 100.0 |
| 2014 | 96.7 | 3.3 | 100.0 |
| 2015 | 96.9 | 3.1 | 100.0 |
| 2016 | 96.5 | 3.5 | 100.0 |
| 2017 | 97.2 | 2.8 | 100.0 |
| 2018 | 97.5 | 2.5 | 100.0 |
| 2019 Q2 | 97.6 | 2.4 | 100.0 |
Source: Financial accounts (unconsolidated figures)
Is it not contradictory that the ECB is charging negative interest rates to commercial banks with the aim of persuading them to lend more, while at the same time the Bank of Slovenia is restricting lending?
The ECB is responsible for monetary policy in the euro area. Its target is to ensure that inflation is close to but below 2% over the medium term. Negative interest rates, which encourage lending by commercial banks, are one of the instruments used by the ECB to meet its objectives. Monetary policy in the euro area is tailored to the average, which means that it can be too lax for certain countries. This can be reflected in excessive and unsustainable credit growth, and in a relaxation of credit standards. All of this can endanger financial stability. Despite the Bank of Slovenia recommendations, growth in consumer loans in Slovenia is still excessive, and poses a risk to financial stability. The Bank of Slovenia has therefore introduced binding macroprudential restrictions on household lending. The measure introduces minimum credit standards for consumer loans and housing loans. These will help to keep credit growth at a sustainable level, and will ensure that the financial sector makes a lasting contribution to economic growth.
Have similar measures been adopted by any other countries?
The countries that apply a limit to the maturity of consumer loans are Portugal (10 years), Slovakia (8 years) and Romania (5 years). Many European countries have a cap on DSTI: Cyprus, Estonia, Lithuania, Malta, Poland, Slovakia, etc. Further information on specific areas of the restrictions and the types of macroprudential instruments involved can be found at
https://www.esrb.europa.eu/national_policy/shared/pdf/esrb.measures_overview_macroprudential_measures.xlsx.