Financial Stability Review

Banka Slovenije finds that the financial system remains stable in Slovenia’s strong economy, but the systemic risks to financial stability over the coming quarters are rising as a result of the Russian military aggression and the related effects and uncertainties. 

With macroeconomic risks strengthening, we have also identified a further rise in banks’ interest sensitivity as a result of a large increase in fixed-rate housing loans in particular. The risks inherent in the real estate market are also highlighted. We have seen high growth in real estate prices, which in our assessment are now overvalued, and also in housing lending. 

Banka Slovenije is therefore introducing measures to curb the transmission of risks from the real estate market to the banking system on one side, and to strengthen bank resilience to any realisation of the risks on the other. At the same time we are partly relaxing the existing restrictions on household lending by modifying the conditions for exemptions. Banka Slovenije is specifically warning that the general regulation of the housing market needs a systemic approach at the national level.

Key systemic risks to the Slovenian banking system

The economic slowdown in the early part of the year that followed the rapid recovery as the pandemic waned was exacerbated by the Russian military aggression, and its knock-on effects and related uncertainties. This slowed economic growth, and brought an increase in macroeconomic risk amid the uncertainty of how the crisis will affect the future performance of exposed firms.

There has been a pronounced increase in the risk inherent in the Slovenian real estate market over the last year. Housing price inflation has risen sharply over the last year, taking prices past their previous record highs from 2008 in nominal and real terms. Growth in housing loans for households has strengthened sharply: from a modest average of 4.8% in the first half of 2021, it had risen to 9.1% by the end of the year and fully 10.2% by February of this year. With the balance sheets of banks and savings banks having seen a significant rise in the share of household loans over the last decade as the share of corporate loans has declined, the banking system’s vulnerability to a potential correction in residential real estate prices has increased.

The large increase in fixed-rate lending, particularly in the housing segment (where fixed-rate lending has risen by more than a half), is increasing interest rate risk. We are warning banks that this risk must be properly managed.

Banka Slovenije is also highlighting that the uncertainty related to the Russian invasion of Ukraine could additionally strengthen the risks to the Slovenian economy over the coming quarters, and consequently to the banking system. With liquidity still high, the capital resilience of the banking system remains medium, but any downturn in the situation could see it worsen. It should also be noted that there are significant variations in capital adequacy between individual banks in Slovenia.

The impact of the war was seen right away in liquidity difficulties at Sberbank banka, but Banka Slovenije was quick to find a successful solution for the bank to promptly stop the risks to financial stability from escalating.

Banka Slovenije actions

Banka Slovenije has responded to the rising risks to financial stability inherent in the real estate market by making adjustments to our macroprudential policy. We note that the comprehensive regulation of the housing market needs a systemic approach at the national level. On the supply side Slovenia has seen a lack of residential real estate investment for decades now compared with other euro area countries, which has had a profound impact on real estate prices. 

Our actions will ensure that the banking system has sufficient capital to face the increased risks, while at the same time we will curb the transmission of risks from the real estate market to the banking system. The actions aim to further prevent the excessive growth in housing lending from leading to a relaxation in credit standards.

The key points of our actions are:

-  Introduction of a sectoral systemic risk buffer: To increase their resilience to the growing risks inherent in household lending and developments on the real estate market, it is vital that the banks have sufficient capital at their disposal. This is the aim of the sectoral capital buffer, which enters into force next year. 
-  As of 1 July of this year we are reducing the recommended LTV for housing loans by 10 percentage points (from 80% to 70%). The previous recommendation of an LTV of no more than 80% will continue to apply to first-time buyers. 

At the same time Banka Slovenije is slightly relaxing other restrictions on household lending:

-  As of 1 July banks will also be able to lend to customers whose residual monthly income after paying the loan instalment is less than the prescribed amount (76% of the gross minimum wage plus family maintenance). Banks will be able to apply this exemption to no more than 10% of loans. 
-  Loan agreements for residential real estate fully backed by government guarantee will be exempted from the restrictions on household lending.

We are also making certain other minor adjustments; a description of these can be found in the publication.

Figure: Risk and resilience dashboard