Financial stability

Macroprudential restriction on banks' profit distribution

As a result of the Covid-19 epidemic, the economic and financial uncertainty remains high in Slovenia and in most other EU Member States, for which reason recommendations were adopted at the level of the ESRB and ECB in December 2020 to extend the restrictions on profit distributions of banks, with certain exceptions. The Bank of Slovenia has followed the recommendations of the ESRB (ESRB/2020/7 and ESRB/2020/15), the ECB (ECB/2020/62), and also the Financial Stability Board (OFS/2021/1), and on 9 February 2021 extended and adjusted the macroprudential measure temporarily restricting profit distributions by banks and savings banks during the crisis brought by the Covid-19 epidemic.

The aim of the measure is increasing the resilience of the financial system to financial shocks, maintaining financial stability, preventing disruptions to the financial system and reducing the build-up of systemic risks from the Covid-19 epidemic. The purpose of the measure is to retain capital at banks so that the Slovenian banking system is better able to withstand potential losses, and to continue supplying credit to businesses and households. The macroprudential measure pursues an intermediate objective of macroprudential policy, namely to limit the systemic impact of misaligned incentives with a view to reducing moral hazard.

The Bank of Slovenia issued the macroprudential measure pursuant to Article 13 and the first paragraph of Article 31 of the Bank of Slovenia Act (Official Gazette of the Republic of Slovenia, Nos. 72/06 [official consolidated version], 59/11 and 55/17), points 4, 16 and 17 of the first paragraph of Article 19 of the Macroprudential Supervision of the Financial System Act (Official Gazette of the Republic of Slovenia, No. 100/13), Recommendation ESRB/2020/7 (OJ EU 2020/C 212/01) of 27 May 2020, Recommendation ESRB/2020/15 (OJ EU 2021/C 27/1) of 15 December 2020 and Recommendation OFS/2021/1 of 25 January 2021.

The Regulation on the macroprudential restriction on profit distribution by banks (Official Gazette of the Republic of Slovenia, No. 21/2021) temporarily prohibits the following until 30 September 2021:

a. the payment of dividends in cash or the giving of irrevocable commitments to pay dividends,

b. the buyback or purchase of own shares or other capital instruments referred to in point (a) of Article 26(1) of Regulation (EU) No 575/2013,

c. the use of the distributable profit for other purposes referred to in the sixth paragraph of Article 230 of the ZGD-1, except for the payment of the variable component of remuneration to staff whose professional activities have a material impact on the bank’s risk profile (hereinafter: identified staff) pursuant to Delegated Regulation (EU) No 604/2014 of 4 March 2014 supplementing Directive 2013/36/EU of the European Parliament and of the Council with regard to regulatory technical standards with respect to qualitative and appropriate quantitative criteria to identify categories of staff whose professional activities have a material impact on an institution’s risk profile.

As of 10 April 2021 a bank may exceptionally carry out the aforementioned activities, provided that its cumulative profit in the first quarter of 2021 is positive. In so doing, the payment may in no instance exceed the lower of the following caps:

  • 15% of the bank’s cumulative profit on an individual basis from the 2019 and 2020 financial years, or
  • 0.2% of the bank’s common equity Tier 1 capital on an individual basis as at the end of 2020.

A bank that decides to make a profit distribution in accordance with the caps must notify the Bank of Slovenia in writing at least 30 days before publishing the notice to convene the general meeting at which the intended payment of distributable profit will be decided on. If on the day that the regulation enters into force there are less than 30 days remaining until the intended publication of the notice to convene the general meeting, the bank must notify the Bank of Slovenia accordingly within two business days of the entry into force of the regulation. The bank’s notification of the projected size of the dividend payment or of the other restricted activities may be used by the competent supervisory authority in its subsequent supervisory activities, should it judge this appropriate. Banks shall not be permitted to pay out interim dividends under Article 232 of the ZGD-1.

The Bank of Slovenia further recommends that banks refrain from the payment of variable remuneration to identified staff and the use of distributable profit for the purposes of paying variable remuneration to identified staff. A bank that decides to pay the variable component of remuneration to identified staff must notify the Bank of Slovenia at least 30 days before confirming the decision to pay the variable component of remuneration to identified staff allocated in previous years and in 2021.

The Bank of Slovenia may rescind the measure early if the risks decline significantly, or extend the measure in the event of increasing risks.

The regulation on the macroprudential restriction on profit distribution by banks enters into force on the fifteenth day after its publication in the Official Gazette of the Republic of Slovenia, and begins to be applied on 10. April 2021. On the day that this regulation begins to be applied, the Regulation on the macroprudential restriction on profit distribution by banks published in Official Gazette of the Republic of Slovenia, No. 49/20 shall cease to be in force.