Press release from the meeting of the Governing Board of the Bank of Slovenia on May 14, 2012
1) The Governing Board of the Bank of Slovenia discussed and approved the May 2012 Financial Stability Review. The findings of the review, the executive summary and the chronological review of the Bank of Slovenia’s measures to mitigate the consequences of the financial turmoil have been published at www.bsi.si under the heading “New” (in Slovenian language).
The continuing uncertain situation on international financial markets, the mounting debt crisis in the euro area and the contraction in domestic economic activity are having an impact on bank performance. The contraction in economic activity in particular is resulting in a deterioration in the quality of the banking system’s credit portfolio, which via increased impairment costs is being reflected in operating losses. Last year the banking system recorded a loss for the second consecutive year, which affects the capital and is making access to funding on international markets more difficult and more expensive. The banks are consequently reducing lending to non-banking sectors, corporates in particular, which is increasing income risk this year as net interest income declines. However, relatively over-indebted corporates are failing to deleverage, partly as a result of the lack of development in the domestic capital market and the poor access to alternative sources of financing. The simultaneous repayment of debt by banks and corporates, which will be joined by further debt repayment by the public sector, is increasing the problem of insolvency between corporates.
The deterioration in the quality of the credit portfolio is a critical process in this situation, and is difficult to limit under the conditions of contracting balance sheets and insufficient active participation by the banks in the financial and business restructuring of the corporate sector. Without the requisite recapitalisation of the largest banks and changes to the structure of corporate financing, the continuing impairment of loans and write-off of bad claims alone will not put in place the necessary conditions for the beginning of a new lending cycle.
With refinancing on international markets limited, the banks secured sufficient funding to repay maturing liabilities to the rest of the world via LTROs at the ECB. However, it is important in the long term for the banks to reduce their dependence on wholesale funding and on ECB funding, and to reduce the LTD ratio for non-banking sectors. The keys to a long-term improvement in bank performance will be changes to bank governance, more activity on the part of owners with the capacity to provide sufficient capital, and consolidation in the banking system.
The process of re-establishing a stable financial system with well-functioning banks will be lengthy, as the banking sector and the corporate sector both need to be restructured. The easing of the European debt crisis will also play a major role. An active role on the part of economic policymakers will be the key to speeding up this process.
2) The Governing Board discussed the current performance of banks, developments on the capital markets and developments in the area of interest rates.
3) The Governing Board adopted the Regulation amending the regulation on the tariff for charging fees for Bank of Slovenia services.
4) The Governing Board adopted the Regulation on the issue of collector coins (gold coins, silver coins and 3-euro coins) for sale and circulation to mark the 100th anniversary of Slovenia’s first Olympic medal.