Press release after the Bank of Slovenia Governing Board meeting on 20 December 2012
1) The Governing Board of the Bank of Slovenia discussed current supervisory matters.
2) Amendments to secondary legislation in connection with the calculation of own funds and capital requirements.
At today’s meeting the Governing Board of the Bank of Slovenia adopted amendments to three pieces of secondary legislation governing the calculation of own funds and capital requirements for credit risk, namely the Regulation on the calculation of the own funds of banks and savings banks, the Regulation on the calculation of capital requirements for credit risk under the standardised approach for banks and savings banks, and the Regulation on credit protection.
These are counter-cyclical regulatory incentives aimed at supporting the process of restructuring the real sector within the framework of discretionary options, and comprise the following:
- an extension of the period during which banks are not required to deduct capital investments in other credit and financial institutions and management companies that they have acquired in a financial restructuring procedure from own funds (the period is being extended from three to five years); currently this allowance is not used at banks;
- the introduction of a discretionary measure by which parent banks in a banking group are not required to include investments in institutions included in consolidation as deduction items in the calculation of own funds on a solo basis, and are allowed to include such investments in the calculation of risk-weighted assets; calculations show that this amendment of the regulation will bring an improvement in the overall capital adequacy ratio on a solo basis for banks at the head of banking groups. The requirements to meet the overall capital adequacy ratio on a consolidated basis remain unchanged for the parent bank, which is the key to ensuring capital integrity in the banking group;
- the acceptance of provisional registrations of a mortgage as evidence of legal certainty in the recognition of the effects of real estate collateral; the procedures for registering a mortgage are still excessively lengthy, as while waiting for a final resolution on the registration of a mortgage banks are unable to include real estate as eligible collateral in the calculation of capital requirements for credit risk;
- the use of the Surveying and Mapping Authority’s generalised market value as the basis for the valuation of real estate in the calculation of capital requirements for credit risk; the option of using a generalised market value, which represents a simplification in the procedure for determining the value of real estate, is limited to residential real estate valued at up to EUR 500,000;
- an end to the use of mortgage loan value in the determination of exposure secured by commercial real estate in Slovenia; mortgage loan value represents the estimated long-term market value of real estate, which is difficult to determine in an instable economic situation and can consequently lead to errors in the valuation of real estate over time.
3) The Governing Board of the Bank of Slovenia discussed the December 2012 Stability of the Slovenian Banking System, and the December 2012 review of bank performance in the current year, developments on the capital market and interest rates.
The decline in domestic economic activity and the mounting debt crisis and decline in economic growth in the EU have had an adverse impact on performance and the development of risks at the banks this year. The adverse business conditions are being reflected in rising cost and the difficulty with which banks access funding on international markets, and in further declines in loans to the non-banking sector, corporates in particular.
Given the difficulty of refinancing debts on the financial markets, in four years banks have more than halved their liabilities from wholesale funding (which declined by EUR 7 billion or 20% of GDP in just over two years), compensating for just part of the decline via an increase in exposure to the Eurosystem. Refinancing risk remains significantly dependent on the sovereign credit rating and thus on the government’s access to the financial markets. Liabilities to the rest of the world falling due for payment in the future are declining, but the unencumbered pool of eligible collateral for ECB operations is also declining.
The government must endeavour to maintain the sovereign credit rating through credible structural reforms, thereby ensuring access to the international financial markets for itself, and indirectly for the banks. Opposition to certain adopted measures in the form of referendum initiatives has provoked a lack of confidence in the government’s ability to use economic policy measures to adjust to the deterioration in the economic situation or even to reverse it, while it has also had an impact on investors in their assessment of the risk in investing in the government sector and the banking sector. More active support from banks for firms with good prospects by means of the coordinated management of their financial restructuring would encourage economic recovery, thereby ending the feedback of negative economic growth into a contraction in lending activity and an increase in credit risk. The key objective of economic policymakers, banks and other stakeholders must be to keep firms with a sustainable business model in business. Current legislation should to a greater extent allow and encourage timely ownership and financial restructuring at debtors, with a more active role for the banks. A clear definition of state aid to stabilise the banking system is also important for economic recovery. The oft-simplified reasoning that the Government Measures to Strengthen Bank Stability Act will regulate the transfer of bad assets from the banks to the Bank Asset Management Company neglects the other content of the aforementioned act that provides for a wide range of other government measures to stabilise the banks as envisaged at EU level, their purpose being to reduce risk to allow the banks to lend to businesses. The main measures are capital support, guarantees for issued financing instruments and guarantees for corporate loans.