mandate 9. 1. 2019−8. 1. 2025
The central bank’s adaptation to contemporary structural challenges: in the fight against the epidemic
Professionalism, responsibility and transparency: these are the words that best describe the vision that I had when I took office almost three years ago.
I tie these values to Banka Slovenije’s mandate, which we realise through four pillars of action: monetary policy, microprudential supervision, macroprudential policy and bank resolution. These pillars, like the four Atlas figures who adorn the façade of our building, define our everyday decisions.
I devote particular attention to the third part of the vision: transparency. When I began my term, the bank was recovering from the consequences of the previous crisis. I understand transparency in direct relation to agents of the financial environment, and also in relation to the profession and the public at large. While we want to present our decisions to the public and explain the reasoning behind them, I also understand transparency to the public as a responsibility to younger generations. We are therefore putting a good deal of work into strengthening financial literacy, where one of the more visible projects is the opening of the Banka Slovenije museum, which has added richly to our educational programme.
Much of my term to date has fallen under the shadow of the Covid-19 pandemic. This led to the deepest global economic crisis since the Second World War. The strategic challenges that over the last decade have brought significant changes to the make-up and functioning of the Economic and Monetary Union and have strengthened the importance of the European Central Bank and the Eurosystem thus gained a new dimension. I count it a particular achievement that, having remained united and committed to stabilising the European financial system after this extraordinary shock, and protecting our economies and the euro as a global currency, at the ECB level we have responded quickly, decisively and comprehensively to the crisis, with unprecedented monetary policy measures and other measures.
It is a great honour to be at the helm of the bank when it is celebrating this landmark. It gives us an opportunity to take stock of the decisions made over the last 30 years, the second half of which we have spent as part of the euro area. At the same time it reminds us of the importance of independent institutions whose mandate carries the weight of the majority of the public, which are the key to the success and progress of any country.
Global health and economic crisis
When I took office, the euro area economy and the Slovenian economy were at a turning point. The economy was beginning to slow, under the influence of the rising tensions in international trade and other challenges in industry. The economic slowdown, which had thus been expected, was made incomparably worse by the Covid-19 pandemic. Serious disruptions to global supply chains and the shutdown of major parts of the economy in Europe and in many other countries with the aim of protecting health and saving lives were followed by increased uncertainty on the financial markets, and many firms saw their cash inflows dry up practically overnight.
United and committed to stabilising the financial system and protecting the euro area economy and the euro, in the Eurosystem we responded decisively just a few days after the first lockdown of a euro area economy. Having come into the pandemic with extremely low interest rates, we relied on two packages of non-standard measures. The first was extensive securities purchases, primarily government bonds, and the second was abundant liquidity for the commercial banks. In this way we ensured favourable financing conditions in all parts of the euro area, for governments and banks, and thus for businesses and households. Slovenian firms also borrowed at even lower average interest rates than before 2019.
We also responded to the crisis through emergency measures of prudential policy and supervision. Under the aegis of the EBA, we offered banks regulatory relief that allowed them to apply moratoria on a large number of loans, which became one of the key emergency measures. Businesses and households thus found it easier to overcome liquidity difficulties during the shutdown of a large part of the economy.
In a similar way to almost ten years ago, the Eurosystem played a key role in stabilising the financial markets and mitigating the economic impact of the shock, this time a huge health shock, the largest of the last hundred years. Amid the extensive support from monetary, fiscal and other policy, the economic decline in 2020 was significantly smaller than it might otherwise have been, and many firms were protected against insolvency and some even against closure. Confidence in the euro, a symbol of our European identity, further strengthened, and Slovenia has been among the top three countries in the euro area in terms of this metric for five years now.
Our success has also been based on the experience that we gained in earlier crises. On this occasion the various policymakers at the national and European levels were much more decisive and united in their actions than during the previous financial and public debt crisis. Because the shock was driven by external factors, and not the build-up of internal financial risks, and because the experience of the financial crisis a decade earlier was still high in our thoughts, we were quick to reach a broad consensus that the only proper response to such an exceptional shock was extensive support from fiscal and monetary policy alike.
The crisis brought to the fore the question of synergy between the monetary policy stimulus and the fiscal policy stimulus, each of which in their own way are mitigating the impact of the economic shock and also supporting the recovery. The two policies face a major challenge of how we gradually exit the crisis measures with as few adverse effects as possible on the financial markets and the real sector, while maintaining policy independence.
Short-term and long-term challenges to the banking system
Like the entire European system, the Slovenian banking system also came into the crisis better-prepared. Alongside the recapitalisations after the previous financial crisis, another major factor in this was the strengthening of the legislative and institutional framework for banking and banking supervision. Supervision of the banking system became more unified, and conducted on the same principles across the entire euro area. Banking supervision policy became part of the common interest, similarly to what monetary policy had been from the very outset. With more-resilient banks and extensive support from monetary, fiscal and other policy, on this occasion Slovenia and the euro area avoided a credit crunch of the type seen in the previous financial crisis.
Proceeding from the bad experience in the early part of the previous decade, Banka Slovenije responded to the rapid increase in credit risk and income risk during the pandemic crisis with even closer monitoring of the situation and the measures put in place. This was undertaken systematically, by strengthening the current reporting by banks, setting up a special taskforce to monitor non-performing loans, carrying out additional analysis of bank exposure to vulnerable segments of the economy, and adjusting the stress tests. Irrespective of the loan moratoria and other emergency measures, banks were encouraged to consistently monitor loan quality and to promptly create impairments.
Our use of microprudential measures made a significant contribution to the stability of the Slovenian banking system. There has also been an increasing role for macroprudential supervision and measures by Banka Slovenije. In addition to strengthening dialogue with banks, in recent years we have expanded the toolkit of macroprudential measures to play a larger part in the stability of the banking system and the entire financial system.
We are increasingly focusing on the long-term, structural challenges to the banking system, which are specific to Slovenia and to many other European countries. These include the changes in user habits being driven above all by technological innovation, which the firms in tech sectors were better-prepared for than the banks. They now represent a growing competitive threat. It is also becoming increasingly evident that a fragmented banking system, as seen in the majority of euro area countries, is unable to effectively provide all services, and thus compete in global business. All of these challenges are faced by Slovenian banks too. Consolidation of the banking system, which could be part of the solution, picked up pace last year and has continued this year, but there remain challenges with regard to the viability of Slovenian banks’ business models, the make-up of their product range, and their funding. As the guardian of financial stability and the banking supervisor, we will devote more attention to this subject over the remainder of my term. Monitoring and mitigating short-term and long-term risks and vulnerabilities in the financial system is one of our priorities.
Digitalisation of the financial system, and go-ahead for the digital euro project
Modernising the financial system is an important element of our work. Digitalisation has had a profound impact on financial services in recent years, particularly in the area of payments. Banka Slovenije is also responding to the new paradigm. Since December 2020 we have provided Slovenian banks with access to TIPS, the pan-European instant payments system, which allows customers of banks that are members of the system to make instant payments within any of the 36 European countries making up the SEPA.
The development of cryptoassets, and stablecoins in particular, has encouraged us to seriously examine the possibility of issuing central bank digital currencies. The Eurosystem is thus developing its digital euro project, for a riskless form of central bank money tailor-made for the digital age.
Overhauling Eurosystem monetary policy strategy: responding to contemporary challenges This year we completed the ECB monetary policy strategy review, which was begun at almost the same time as the outbreak of the pandemic. Through it the central banks of the Eurosystem have responded to the structural changes that have had a profound impact on the macroeconomic environment over the last two decades, and have helped bring about a reduction in the natural level of interest rates and a narrowing of the space where monetary policy can act.
The new strategy has introduced a simpler, symmetric inflation target of 2%, which is met over the medium term. We have expanded the toolkit of instruments: instruments previously classed as non-standard (forward guidance, asset purchases, long-term refinancing operations) have been recognised as a standard part of the toolkit. In the implementation of monetary policy a vital role will continue to be played by an assessment of the benefits and side effects of measures over time, which is particularly important from the perspective of maintaining the effectiveness of measures and ensuring financial stability.
The strategy review is also our response to broader societal changes. While the digital euro project represents part of our response to the challenges of digitalisation, the updated strategy also represents our contribution to addressing the issue of climate change. Through the climate action plan we are committing to the systematic consideration of climate factors in monetary policy decision-making.
Transparency: teaching young people responsibility and expertise
In these unusual times we have felt particularly strongly that responsibility and expertise are our duty, and we continually try to transparently convey these values to the broader public. Our actions have had a significant impact on people’s quality of life, and on the performance of firms, and have thus left a major mark on the functioning of the country as a whole during the crisis. An important part our duties has therefore been to make our actions understandable to all.
The transparency of our institution also reaches into the broader social sphere: in addition to numerous public consultations on current issues and a huge number of responses to questions by members of the public, I should also highlight our upgraded financial literacy programmes. These encompass a wide range of education and learning, with an emphasis on young people, including Banka Slovenije’s education days, our in-house production of education materials, and the Generation €uro competition. In a series of exhibitions, the Mala Galerija has worked with key cultural institutions in the country, and to mark the 30th anniversary of Banka Slovenije we have now opened our own museum, where our key areas of work and achievements are presented to the general public.
Great challenges are followed by great opportunities
Allow me to finish with the thought that great challenges also bring great opportunities, to become better, and more accountable: to people, to nature and, above all, to money. We cannot become captives of time, when people “know the price of everything, and the value of nothing”, as Oscar Wilde wrote 130 years ago. Our decisive and effective response to the impact of the global health crisis, at the level of the Eurosystem as a whole and at the level of Banka Slovenije, once again emphasised the importance of the resilience of the Economic and Monetary Union, and the necessity of continuing to deepen it and of facing down current challenges. At the same time it highlighted the importance of bold and decisive action by a strong ECB and Eurosystem to benefit the entire euro area. Banka Slovenije is an active and constructive partner in the search for solutions to the challenges that we face in common.
It should not be forgotten that no institution can succeed without the excellence and commitment of the people who work there. Since the very beginning, Banka Slovenije has attracted the finest professionals, ready to take on the great responsibility entrusted to the institution. I am proud to be able to work with a team like that.