Financial Stability Review: Systemic risks to the Slovenian financial system remain low to moderate
Banka Slovenije assesses that the general level of systemic risks to the banking system continues to decrease and is currently at a low to moderate level. Resilience to systemic risks has further increased. Due to weak economic activity in the euro area and external, especially geopolitical, tensions, the level of uncertainty remains high. Under these conditions, we have increased the level of cyber risk compared to the last review. Among systemic risks, we have lowered the assessment of interest rate risk, while keeping the others unchanged.
Due to record high profits of the banking system, the assessment of resilience in the area of solvency and profitability has been upgraded to high, with a stable outlook for future quarters. The current macroprudential instruments continue to be oriented especially towards strengthening the banking system's resilience.
These are the key findings of the Financial Stability Review published today. The review begins by establishing that Slovenian economic activity remains higher than the euro area average. The fall in domestic inflation has lost momentum, while the higher interest rates have not for the moment had a major negative impact on economic activity.
Key systemic risks to the Slovenian banking system
Under the current relatively favourable conditions for the Slovenian banking system, Banka Slovenije assesses most risks as moderate, including the funding risk. The increase in deposits by the non-banking sector in 2023 was smaller than in the previous years, but they remain a stable source of funding for banks. Dependence on other funding remained low. The banks raised their interest rates on deposits, albeit more slowly and to a lesser extent than in other euro area countries, but this was enough to encourage savers to fix some of their savings.
The assessment of the risk to financial stability inherent in the real estate market also remains moderate. Amid an ongoing decline in the number of sales, growth in residential real estate prices again strengthened slightly in the final quarter of 2023. A major fall in residential real estate prices is not anticipated for now.
The assessment of interest rate risk was lowered from increased to moderate, with a stable outlook. The risk level declined in the second half of 2023, amid a tangible slowdown in lending, a moderate increase in the share of fixed-rate loans, a significant increase in holdings of the most liquid assets, and a gradual increase in the share of funding accounted for by fixed-term deposits. The rise in interest rates on loans and deposits had petered out by the end of the year.
The assessment of credit risk also remains moderate. The portfolio quality indicators remain favourable and stable at the level of the entire portfolio, while higher shares of non-performing claims are present in manufacturing. A risk of a deterioration in portfolio quality continues to be posed by the rise in debt servicing costs, particularly at non-financial corporations, almost 80% of whose financing carries a variable interest rate.
The assessment of income risk remains low, with the situation remaining favourable for income generation at banks. The near-doubling of net interest income in 2023 was reflected in a sharp increase in gross income and net income alike. This was attributable to higher interest rates on the asset side of the banking system’s balance sheet, and the slower and relatively modest rise in interest rates on the liability side. Once the interest rates begin to fall, banks will have difficulty maintaining the income levels achieved. In addition, in the next few years their operating costs will increase due to the planned introduction of the tax on banks' total assets.
The rising number of cyberattacks meant that the assessment of cyber risk was raised to elevated with a stable outlook, while the assessment of climate risks remains moderate.
Banks' resilience to systemic risks
The resilience of the banking system in terms of solvency and profitability was raised to high. This was driven by the ongoing favourable developments in net interest income, which were reflected in high profitability. Certain banks have already allocated some of their profits to their reserves, which has also been reflected in a rise in capital ratios. The resilience of the banking system in terms of liquidity remains high. Even though the values of various liquidity indicators further improved at the level of the banking system, it must be noted that differences in the liquidity surpluses between banks remain considerable.
Action to address risks in the financial system
Macroprudential policy is focused primarily on strengthening the banking system’s resilience, and also on limiting the risks to which the banks are exposed. In light of the banks' high profitability, we decided to introduce a positive neutral countercyclical capital buffer rate last year. This is a preventively pitched instrument, which aims to increase the resilience of the Slovenian banking system.
Figure: Banka Slovenije's risks and resilience within the Slovenian financial system
Note: The risk and resilience dashboard is based on an analysis of key risks and resilience in the Slovenian banking system, and is defined as a set of quantitative and qualitative indicators for defining and measuring systemic risks and resilience. The colour code in the risk and resilience dashboard relates to the assessment for up to one quarter in advance. The arrow illustrates the expected change in risk or resilience in the scale (up or down) over a slightly longer horizon of around one year. For risks, an up arrow means an increase in risk, and vice-versa, while for resilience it means strengthening, and vice-versa.
*Transition risks are taken into account under climate risks.
Source: Banka Slovenije