Stress tests confirm the stability of the Slovenian banking system, which has sufficient capital adequacy
Euro area banks have sufficient capital adequacy, according to the stress tests conducted at significant banks under the aegis of the ECB. The stress tests, in which the two largest Slovenian banks were also included, show banks retaining high resilience even under the adverse scenario. Comparable tests were conducted for smaller banks and savings banks at Banka Slovenije, and showed similar results.
This year’s stress tests thus confirm the stability of the Slovenian banking system, which is disclosing sufficient capital adequacy.
As part of the supervisory function within the Single Supervisory Mechanism (SSM), and under the aegis of the ECB, bottom-up stress tests were again conducted this year, using the EBA approach and methodology. These had been scheduled for 2020, but were postponed because of the Covid-19 pandemic. On this occasion the stress testing covered 89 significant euro area banks under the ECB’s direct supervision, including the two largest Slovenian banks.
The purpose of the stress tests was to evaluate the impact on the capital adequacy of individual banks over the 2021 to 2023 horizon from credit risk, market risks and operational risk, and also risk to income generation capacity, on the basis of a baseline scenario and an adverse scenario.
The results confirm that even under the adverse scenario the banks retain sufficient resilience and adequate capital ratios. The banks have also been found to have made progress since the previous stress tests in 2018. Thanks to the successful reduction of non-performing exposures and the restriction of operating costs, the starting position of the banks in the stress tests was better on average. This year’s larger capital depletion compared with 2018 was primarily attributable to the change in economic circumstances, which had an impact on items in the adverse scenario. The largest negative impacts came from credit risk and market risk.
The two Slovenian banks that participated in the ECB stress tests disclosed slightly above-average results: the capital depletion under the adverse scenario was primarily attributable to additional credit losses and a decline in net interest income. The two banks were placed in bucket 2 in terms of capital depletion (a decline in the common equity Tier 1 capital ratio of between 3 percentage points and 5.99 percentage points), where the majority of SSM banks were also placed.
Figure: Distribution of stress test results across capital depletion buckets according to the decline in the CET1 ratio in the third year of the adverse scenario relative to the initial position
Comparable stress tests were conducted by Banka Slovenije for smaller domestic banks and savings banks, subsidiary banks under majority foreign ownership and SID banka. They show these banks to be disclosing sufficient capital adequacy under the baseline scenario and under the adverse scenario alike. Another finding is that the banks have reduced their credit risk over the last three years, and also disclose lower exposure to market risks compared with the significant banks.
All of the stress tests therefore confirm the stability of the Slovenian banking system, with sufficient capital adequacy even under the adverse scenario. In light of the new challenges related to Covid-19, it is nevertheless vital that banks continue measuring and managing credit risk correctly.
As in previous years, the outcomes of the stress tests at individual banks will be one of the inputs into the supervisory review and evaluation process (SREP) in determining guidance on additional capital requirements.