Financial Stability Review: financial system in Slovenia remains robust; individual risks remain elevated

The survey indicators for the economies of Slovenia and the euro area point to an improvement in the economic situation in the early part of the year compared with the final quarter of last year, and a better outlook. Given the fast pace of change, which recently has driven an increase in uncertainty, Banka Slovenije assesses the following risks as elevated: (i) interest rate risk, (ii) credit risk and (iii) risk inherent in the real estate market. Meanwhile the banking system’s resilience to any realisation of risks remains robust: it is assessed as medium in the segment of solvency and profitability, and high in the segment of liquidity.

Banka Slovenije supports the resilience of the banking system through macroprudential policy, which currently is primarily addressing access to loans, and is also limiting the transmission of risks from the real estate market to the banking system. At the end of the year we also raised the countercyclical capital buffer requirement, thereby building the banking system’s resilience to systemic risks.

Key systemic risks to the Slovenian banking system

Uncertainty again prevails in the macroeconomic environment this year, but the economic indicators in the early part of the year were encouraging for Slovenia and for the euro area overall. Conversely, the broadly based core inflation points to a weaker outlook for private consumption, and the ongoing monetary policy action to address high inflation is putting additional pressure on future private investment.

In the wake of the monetary policy measures and the resulting higher interest rates, performance has improved at banks in euro area countries, Slovenia included, but they remain exposed to certain risks. The rise in interest rates has increased the financial burden in parts of the non-banking sector, and the likelihood of a future rise in non-performing exposures at banks is increasing.

In this situation the risk to financial stability inherent in the real estate market is assessed as elevated, but has recently declined: there are signs of a slowdown on the residential real estate market. Growth in residential real estate prices slowed slightly, but remained relatively high, while the number of sales fell. Demand for housing loans is being reduced by high inflation and the rise in interest rates. Household resilience to rising debt servicing costs has increased in recent years, thanks in part to the macroprudential restrictions on household lending.

The banks’ exposure to interest rate risk increased slightly in the second half of 2022 in the wake of monetary policy measures, and while the risk assessment remained elevated, the outlook is no longer for a further increase.

The credit risk assessment also remains elevated. The indicators of credit portfolio quality mostly remained favourable in 2022, but a number of small segments of the portfolio have showed signs of deterioration in recent months. NPE ratios in the sectors that were hit hardest by the pandemic rose in the final months of the year. Credit risk also remains elevated on account of the adverse impact of inflation and interest rates on the debt sustainability of debtors, in the non-financial corporations and household portfolios alike. The uncertainty in the international environment is also a factor in credit risk remaining elevated.

The other risks to financial stability are assessed as moderate by Banka Slovenije.

Resilience of the banking system

The banking system’s resilience from the perspective of solvency and profitability remained medium in 2022, with retained earnings and additional issuance of capital instruments helping to maintain resilience in connection with solvency. The banking system’s resilience to systemic risks remained high in the liquidity segment. There remain considerable variations from bank to bank in their liquidity surpluses, and with it their capacity to cover the consequences of any realisation of funding risk in the form of a sudden large withdrawal of deposits by the non-banking sector.

Action to address risks in the financial system

Banka Slovenije is addressing the aforementioned risks by means of adjustments to its macroprudential measures. They aim not only to limit excessive credit growth and excessive exposure, but also to increase the resilience of the banking system and thus to act as a buffer to financial cycles.

Adjustments to the current arrangements in the area of macroprudential supervision of household lending are in progress. At the proposal of Banka Slovenije and the Ministry of Finance, in April the National Assembly amended the Macroprudential Supervision of the Financial System Act, to ensure that creditworthiness is no longer tied to legislation relating to enforcement. In the wake of the most recent rise in the minimum wage in January, there was a significant deterioration in the creditworthiness of borrowers with income below the average wage. The amendment made to the law allows Banka Slovenije to adjust the measures in the area of household lending. Our objective remains putting in place minimum credit standards for new loans while ensuring the proper protection of consumers and banks. Until the measures are adjusted, the current measure remains in force, to make it easier to adjust lending to the specific circumstances. Since its adjustment in May of last year the aforementioned measure has allowed banks to lend to customers who have less than the prescribed amount of income remaining after paying the monthly instalment. Banks may exercise this exemption in no more than 10% of their loan operations.

At the end of last year, similarly to a number of other European countries, Slovenia also raised its countercyclical capital buffer for exposures to Slovenia from zero to 0.5% of the total risk exposure amount. Banks will therefore have to provide more capital for exposures to the domestic economy within 12 months.

Figure: Risk and resilience dashboard for the Slovenian financial system

Source: Banka Slovenije

Publication Financial Stability Review, May 2023, is available here.