Two Slovenian banks with minor capital shortfalls in 2016 under the stress tests have their shortfalls covered by means of restructuring and retained earnings

The Single Supervisory Mechanism (SSM) enters into force on 4 November 2014. It is based on jointly agreed principles and standards. The European Central Bank (ECB) is responsible for the effective and uniform functioning of the SSM, which it executes with the competent national authorities in euro area countries.

The single mechanism for banking supervision ensures that the supervision of credit institutions is of the highest quality, while the application of a single rulebook in prudential supervision increases the robustness of the banking system.

Before assuming full supervisory responsibilities under the SSM, the ECB embarked on acomprehensive assessment of the banking system in November 2013. The objectives were to promote transparency, to rectify deficiencies and, above all, to build confidence in the European banking system via capital strengthening. The comprehensive assessment included three main elements: a supervisory risk assessment, stress tests, and a combination of an asset quality review and stress tests. It included 130 systemically important banks. Three Slovenian banks, NLB d.d., NKBM d.d. and SID banka d.d., were included on the basis of the criterion of the three largest banks in a Member State as measured by total assets as at 30 September 2013.

The purpose of the asset quality review was to check the adequacy of internal policies and processes in the area of credit operations, to review exposure to individual clients in selected risk portfolios, including appraisal of collateral valuations and the level of impairments, to review the appropriateness of the calculation of collective impairments, and to assess the appropriateness of the level of impairments in selected risk portfolios. Assessments of impairments derived from a sample of corporates formed the basis for calculating the shortfall in impairments across the entire portfolio and for reviewing the assessments of collective impairments. Additional impairments were primarily required for claims against highly indebted corporates and against restructured corporates, while there was also a need for additional impairments deriving from affiliates. The initial level of capital before the execution of the stress tests was thus reduced in line with the identified shortfall.

The stress tests are used to determine the resilience of the balance sheet in stress scenarios. A baseline scenario and an adverse scenario are envisaged, and the resilience of the balance sheet is determined for a three-year period of 2014 to 2016. In each year credit institutions had to attain a common equity Tier 1 capital ratio of at least 8% under the baseline scenario, and at least 5.5% under the adverse scenario.

The findings of the comprehensive assessment of the banking system, including the asset quality review and the stress tests conducted on the cleaned-up assets, are expressed as capital shortfall or surplus. None of the Slovenian banks would show a capital shortfall at the end of 2016 under the baseline scenario of the stress test. The total capital surplus of the three banks under the baseline scenario amounts to EUR 754.7 million EUR. While two banks (NLB d.d. and NKBM d.d.) would disclose a minor capital shortfall of 65 million EUR under the adverse scenario, SID banka d.d. would disclose a capital surplus under the same scenario. Measures were adopted at the two banks with a small capital shortfall, and the effects of the restructuring improved profitability in 2014 to the extent that the identified capital shortfalls will be covered by retained profits.

A comprehensive review of the banking system was undertaken in Slovenia in 2013, but this year’s comprehensive assessment of the banking system was based on a different starting point. The banks’ consolidated figures as at the end of 2012 formed the basis for the comprehensive review in 2013, while this year’s assessment is based on the figures for the end of 2013. After the asset quality review in 2013, non-performing claims from the portfolios included in the review as at the end of 2012 were mostly transferred to the Bank Asset Management Company (BAMC), but the adverse economic situation meant that NPLs increased sharply in 2013, as a result of which the banks created additional impairments and consequently realised a large loss. Portfolios abroad were included in the assessment alongside other risk portfolios in 2014. European Systemic Risk Board(ESRB) and the ECB Conservative parameters from 2013 (based on the autumn macroeconomic forecasts of the European Commission) were applied in the adverse stress tests. The scenarios deviate markedly from the actual developments in 2014 and from the Bank of Slovenia’s current forecasts.

The findings of the comprehensive assessment of the banking system confirm that last year’s clean-up of bank balance sheets and recapitalisation were executed to the minimum sufficient extent to ensure resilience in the event of the realisation of adverse economic developments, and to an optimal extent from the point of view of public funds. The balance sheet clean-up and recapitalisation are already yielding results: the two banks are profitable and performing well in 2014, including with improved capital positions.

Last year’s recapitalisation was merely a minimum necessary condition for the final recovery of the banking system, not a sufficient condition. A longer-term improvement of the banking system and new impetus in credit and economic growth will only be possible after the realisation of radical measures in the area of the operational, ownership and financial restructuring of the real sector.