Gross loans to deposits flows (GLTDF)

The GLTDF macro-prudential instrument  recommended banks with a positive annual increase in deposits of the non-banking sector to have a non-negative annual increase in loans to the non-banking sector (before impairments). The instrument was introduced in June 2014 to slow down the decline in the loan-to-deposit ratio (hereinafter: LTD) in the banking system. In fact, before the great financial crisis, banks financed the growth of their assets to a large extent with wholesale financing. During the crisis, banks faced funding rollover issues, so they shrank loans and total assets.

After 2016 and before the outbreak of the covid-19 epidemic, LTD stabilized at a systemic level of about 80%. However, the GLTDF remained in place with the further aim of preventing the excessive use of volatile wholesale funding. Namely, by limiting banks' ability to shrink loans in presence of a positive increase in deposits, the measure was expected to prevent that credit growth would be over-financed by volatile wholesale funding sources accompanied by rollover risk, and thus the risk that banks could be forced to shrink credit in the future and violating the GLTDF requirement.

In particular, the instrument addressed deleveraging related to banks' difficulties in obtaining financing. However, credit activity may also decline because of reduced demand for credit due to the deteriorating economic situation, as happened after the outbreak of the covid-19 epidemic. In addition, the increase in uncertainty has worsened the creditworthiness of households and businesses, and banks have tightened their credit conditions as they have assessed that the risk has increased and lowered the acceptable level of risk. In a situation of declining demand for loans, the effectiveness of the instrument was limited to signal banks the need not to stop renewing loans used by companies to finance their running costs.

The BLS survey and the loan demand survey, in addition to the regular annual assessment of the instrument in September 2021, showed a realized or at least expected increase in demand for loans. With predominantly deposit funding, the funding risk is assessed as moderate. Furthermore, the assessment showed the current and future insignificance of the risk of deleveraging due to bank funding rollover issues. Therefore, banks can be expected to accommodate loan applications if they meet their credit standards, regardless of the GLTDF recommendation.

As aforementioned, the purpose of the GLTDF was also to prevent high credit growth financed by volatile funding sources. However, until we fully recover from the uncertainty caused by the covid-19 epidemic, the scenario of exceptional credit growth financed by volatile funding sources is unlikely to materialize, and at the same time, a countercyclical capital buffer may address this risk. In view of the above, in October 2021 the Bank of Slovenia decided to abolish the GLTDF instrument.