Financial Stability Review: general level of risk to the Slovenian financial system declines further

Amid the expected short-term weakness in economic growth, with an improvement likely over the following years, and given the trend of falling inflation, the euro area took the decision in September to lower its key interest rates for the second time this year. The assessment at Banka Slovenije is that the general level of risk to financial stability in Slovenia has declined further since the spring. The risks to the banking system primarily come from the geopolitical tensions in several regions, and their impact on the global economy.

Resilience to the analysed risks continues to be assessed as high, and the macroprudential instruments currently in force are mostly focused on strengthening the resilience of the banking system.

Under these circumstances all systemic risks to the Slovenian financial system are assessed as low or moderate. The assessment of the risk inherent in the real estate market remains moderate, but the risk is strengthening. Real estate prices are continuing to rise. Alongside low unemployment, rising wages and low household indebtedness, all of which are strengthening demand, a major factor in the rising prices is the curtailed supply, following decades of comparatively very modest investment in residential construction. With interest rates falling, the stock of housing loans is once again rising quickly.

Funding risk in the banking system remains moderate with a stable trend, with the repricing gap at banks remaining almost unchanged. Sight deposits, which account for the majority of household deposits and deposits by non-financial corporations, remain the key factor in the maintenance of the large gap. The deposits of the aforementioned sectors remain the most important and stable source of funding for Slovenian banks.

The assessment of interest rate risk remains at moderate with a stable trend, in the wake of merely minor changes in interest-sensitive categories. The onset of cuts in interest rates also slightly reduced the spread between interest rates on loans and interest rates on bank deposits.

In a change since the previous report, the assessment of credit risk was reduced to the lowest level in the second quarter of this year. NPE ratios remain low, while the banking system’s exposure to firms in bankruptcy remains negligible.

Income risk also remains low. Slovenia having previously recorded among the highest rates in the euro area and the EU, growth in net interest income began to gradually slow as the interest rate hikes came to an end. Our expectation is that bank income over the remainder of the year will not be down significantly on the level recorded last year, despite further cuts in interest rates and the prepayment of the tax on total assets, which is raising operating costs in the banking system.

The global rise in cyber threats meant that the assessment of cyber risk was held at elevated with a stable trend, while the assessment of climate risks was held at moderate.

Resilience of the banking system

The resilience of the banking system from the perspective of solvency and profitability remains high. Our assessment is that the banks will continue to enjoy good profitability in the second half of this year amid unchanged conditions. The favourable developments in profitability might also be reflected in the total capital ratio at the end of 2024, should the banks again allocate some of their profits to reserves this year. Resilience in the segment of liquidity also remains high and stable.

Action to address risks in the financial system

Macroprudential policy remains focused on maintaining the resilience of the banking system, and also limiting the risks to which banks are exposed. Given the banks’ high profitability, we are making use of capital-based measures to improve their level of resilience both to unpredictable economic shocks and uncertainties, and to systemic and other risks. Through the measure restricting household lending we are encouraging sustainable household borrowing, thus increasing the resilience of borrowers, which is reducing the credit risk faced by banks.

Figure: Risk and resilience dashboard for the Slovenian financial system

Note: 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. The risk and resilience dashboard is based on an analysis of key risks and resilience in the Slovenian banking system, and is defined as the set of quantitative and qualitative indicators for defining and measuring systemic risks and resilience.
* Transition risks are taken into account under climate risks.

 Source: Banka Slovenije