IMF published its staff report in context of the 2019 Article IV consultation with Slovak Republic. IMF Directors noted that the banking sector is stable and well-capitalized, but profitability is under pressure and segments of vulnerability exist. Proactive macro-prudential measures have moderated credit growth and reduced credit risks of new loans. The incremental use of countercyclical capital buffers (CCyB) and supervisory capital requirements have been appropriate in ensuring adequate capital buffers for banks. Strong vigilance of smaller banks, including through reduction of non-performing loans (NPLs), is important and further increase in capital buffers may be needed, given their higher vulnerability.
The staff report highlighted that the banking sector is stable but less systemic institutions are vulnerable to economic downturns. The overall capital levels are well above the regulatory minimum while the liquidity position remains comfortable, with most banks still largely relying on deposits for funding. The overall NPL ratio has declined to a post-crisis low of 3% at the end of 2018; however, less systemic banks and building societies show higher average NPL ratios as well as lower coverage ratios. The staff analysis shows that these institutions, which constitute roughly a fifth of banking sector assets, could lose all or a large part of the capital buffers if their NPL ratios double. Profitability has been robust but faces risks from compressed lending margins. Declining risk-weight estimates in the internal models and low credit risk spreads, reflecting historically low default rates on mortgages, have resulted in significant compression of lending margins in the mortgage market—the largest in the EU.
The report also mentions that the authorities’ proactive macro-prudential policy stance is welcome and could be strengthened as follows:
- Reduce NPLs of less systemic institutions. The authorities’ initiative to require banks with high NPL ratios to develop an NPL-reduction strategy is welcome and their efforts to reduce NPLs should be sustained. To contain credit risks, building societies should be required to increase the NPL coverage ratio. The recently introduced regulatory cap on the share of long-maturity loans in new loans extended by building societies should be complemented by a cap on the share of uncollateralized loans in total loans.
- Enhance capital buffers of weaker banks. The staff supported incremental use of CCyB and supervisory (Pillar II) capital requirements to enhance resilience of banks to shocks and the authorities’ readiness to further increase CCyB. In addition, considering the uneven asset quality across banks, the authorities should strongly consider imposing non-zero Pillar II capital guidance for less systemic institutions in 2019, taking into account the supervisory stress test results.
- Better internalize mortgage credit risks. The average risk-weights in the internal models of systemic foreign bank subsidiaries in Slovakia are lower than in most other EU peers, reflecting the historically low default rates. To discourage excessive risk-taking, the authorities should strongly consider introducing a risk-weight add-on on housing loans to require banks to better internalize credit risks, which can be complemented with a floor on risk-weights on housing loans.
Given the dominance of foreign banks in the Slovak banking system, strong home-host cooperation is critical. With limited domestic capacity to absorb bail-in-able bonds, encouraging banks to have higher non-regulatory capital buffers may also help them meet minimum requirement for own funds and eligible liabilities (MREL). To fill the gaps identified at the European level regulations by the recent euro area Financial Sector Assessment Program (FSAP), the domestic regulatory regime should require banks to obtain authorities’ pre-approval in acquiring qualifying holdings of non-bank entities and to periodically report the ultimate beneficial owners of their qualifying holdings.
Related Link: Staff Report
Keywords: Europe, Slovak Republic, Banking, Securities, Article IV, FAP, CCyB, NPLs, Macro-Prudential Policy, MREL, Credit Risk, Pillar 2, Capital Requirements, IMF
Previous ArticleOCC Proposes Innovation Pilot Program for Supervised Financial Firms
The Hong Kong Monetary Authority (HKMA) revised the Supervisory Policy Manual module CG-5 that sets out guidelines on a sound remuneration system for authorized institutions.
The European Banking Authority (EBA) published the final guidelines on the monitoring of the threshold and other procedural aspects on the establishment of intermediate parent undertakings in European Union (EU), as laid down in the Capital Requirements Directive (CRD).
In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations.
The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.
The European Banking Authority (EBA) proposed regulatory technical standards that set out criteria for identifying shadow banking entities for the purpose of reporting large exposures.
The Board of the International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on the environmental, social, and governance (ESG) ratings and data providers.
The European Securities and Markets Authority (ESMA) published recommendations from the Working Group on Euro Risk-Free Rates (RFR) on the switch to risk-free rates in the interdealer market.
The European Central Bank (ECB) published a paper as well as an article in the July Macroprudential Bulletin, both of which offer insights on the assessment of the impact of Basel III finalization package on the euro area.
The International Swaps and Derivatives Association (ISDA) published a paper that explores the impact of the Fundamental Review of the Trading Book (FRTB) on the trading of carbon certificates.
The Prudential Regulation Authority (PRA) published the remuneration policy self-assessment templates and tables on strengthening accountability.