Macroprudential restrictions on household lending
Pursuant to 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, 55/17 and 5/18), and Articles 4, 17 and 19 of the Macroprudential Supervision of the Financial System Act (Official Gazette of the Republic of Slovenia, No. 100/13), the Governing Board of the Bank of Slovenia has passed the following: Regulation on macroprudential restrictions on household lending.
In light of the increased risks to financial stability inherent in the excessive growth in consumer lending, the Bank of Slovenia is introducing binding macroprudential restrictions on household lending. The aim of the measure is mitigating and preventing excessive credit growth and excessive leverage. The regulation applies to banks, savings banks, branches of Member State banks and branches of third-country banks in Slovenia (hereinafter: banks). The restrictions enter into force on 1 November 2019.
The regulation sets out two binding macroprudential instruments:
(a) a cap on the ratio of the annual debt servicing costs to the consumer’s annual income (DSTI) when the loan agreement is concluded,
(b) limits on maturity,
and a non-binding macroprudential instrument:
(c) a recommendation with regard to a cap on the ratio of the amount of a credit agreement for residential real estate to the value of the real estate pledged as collateral (LTV) when the credit agreement is concluded.
Through these two macroprudential instruments the Bank of Slovenia is applying binding minimum credit standards to housing loans and consumer loans, although banks are still responsible for assessing the creditworthiness of the borrower themselves, and are responsible for the take-up of the risks inherent in newly approved loans.
Cap on DSTI
The cap on DSTI applies to all household loans (consumer loans and housing loans). The DSTI ratio is calculated as follows:
The annual total debt servicing costs include the costs of servicing the loan that is the subject of the new credit agreement, and the amounts of all other outstanding credit agreements, including lease agreements, other than debts related to credit cards and credit limits. The consumer’s annual net income includes earnings from all income sources defined by the law governing personal income tax that are not exempted from attachment, with the exception of one-off and occasional earnings (e.g. jubilee benefits and extraordinary bonuses).
The cap on DSTI instrument sets the highest allowed DSTI. It depends on the consumer’s income, and the make-up of the household. When a new credit agreement is concluded, the DSTI ratio (at a monthly level) may not exceed:
a) 50% for net monthly income of no more than twice the minimum gross wage, and
b) 67% for the portion of the net monthly income that exceeds twice the minimum gross wage.
c) Notwithstanding the income level, an amount of at least 76% of the minimum gross wage must remain for the consumer each month after the payment of all instalments under credit agreements. If the consumer is supporting a family member or another person that he/she is required to support by law, the amount of income stipulated for the person that he/she is supporting according to the criteria for allocating cash social assistance set out by the law governing social security benefits must also remain for the consumer.
Up to 10% of consumer loans and 10% of housing loans approved by a bank each quarter may have a DSTI that exceeds the prescribed cap on DSTI. The DSTI may not exceed 67%, and the transactions must also comply with the limits on maturity. Furthermore, the exemptions do not apply to loans that do not comply with point c). The exemptions are computed on the basis of loans that comply with the maturity limits and the cap on DSTI.
When a credit agreement has been concluded with multiple borrowers, the DSTI is calculated for each of them separately.
Limits on maturity
The regulation also sets out the maximum maturity of consumer loans that are not secured by residential real estate. This may not exceed 84 months (seven years).
Up to 15% of consumer loans (relative to the amount of loans that comply with the limit on maturity and the cap on DSTI) approved by a bank each quarter may have a maturity of more than seven years. The maturity of such loans may not exceed 120 months (10 years), and they must also comply with the cap on DSTI.
Recommendation with regard to LTV
The recommendation with regard to LTV applies to all loans secured by residential real estate (consumer loans and housing loans). The LTV ratio is calculated as follows:
When residential real estate is already encumbered by a mortgage, the value of the residential real estate is reduced by the amount of the loan secured by the mortgage on the real estate.
It is recommended that the LTV does not exceed 80% when a credit agreement secured by residential real estate is concluded.
Due to the CODIV-19 epidemic, the income of some borrower decreased. In many cases, a temporary decrease in the borrower's income does not affect its long-term credit worthiness. In May 2020 Bank of Slovenia passed a Regulation amending the Regulation on macroprudential restrictions on household lending (unofficial translation is available here). The new Regulation allows the banks to exclude income for months when COVID-19 epidemic was declared, if the income was lower than before the epidemic. Banks may use the previously described flexibility only when they have at least one figure for accounted and paid monthly income that shows that the consumer’s income is no longer affected by the epidemic.
We have prepared answers to some of the most frequently asked questions (FAQ) which are available on this link.
Macroprudential recommendation in force until 31 October 2019
On 31 October 2019 the Macroprudential recommendation for household lending of 22 October 2018 ceases to be in force. The recommendations in force until 31 October 2019 are available on this link.