Meeting of the Governing Board of the Bank of Slovenia of 2 August 2011
1) The Governing Board of the Bank of Slovenia was briefed on the Report on Slovenia's Economic Relations with the Rest of the World, May 2011, and on the current operations of banks, developments on the capital markets and developments in the area of interest rates.
2) Similar to previous years, the Bank of Slovenia carried out stress tests again in 2011 to verify the readiness of banks and savings banks (hereinafter: banks) for extraordinary, but highly unlikely events. The following public statement was released:
The purpose of stress tests is to assess the impact of certain adverse events on the capital adequacy of banks with respect to the baseline scenario. The baseline capital adequacy ratio at the end of 2010 was 11.3%, while the Tier I capital adequacy ratio stood at 8.6%.
The Bank of Slovenia sent banks the following five stress test scenarios: a scenario entailing adverse macroeconomic conditions based on the assumption of a European banking authority (EBA), three scenarios entailing the deterioration of the credit portfolio and a scenario entailing a liquidity shock.
The stress test entailing adverse macroeconomic conditions was used to assess the impact of assumed deteriorating macroeconomic conditions on capital adequacy. Should the assumptions from the aforementioned stress test be realised, the overall capital adequacy of the banking system would fall to 11.1% in 2011 and to 10.5% by the end of 2012. Tier I capital adequacy would remain at 8.6% at the end of 2011 and fall to 8.2% by the end of 2012.
The stress test scenarios entailing the deterioration of the credit portfolio was used to assess the impact of such scenarios on the operating results of banks, and consequently on their capital and capital adequacy. The aforementioned scenarios assume the bankruptcy of companies from selected sectors, representing an individual bank's most significant debtors. The following sectors were selected: construction, transportation and storage, and holding companies. In calculating the impact of a deteriorating credit portfolio, the banks were permitted to take into account existing collateral, but under stricter conditions than those set out in valid regulatory rules.
The banks applied the scenario of a deteriorating credit portfolio to data from the financial statements for 2010. If the worst-case scenario were realised, the overall capital adequacy of the banking system would amount to 9.9%, while Tier I capital adequacy would stand at 7.1%. Differences are seen with respect to the impact on operating results, capital and capital adequacy owing to the varying exposure of the banks to the selected sectors.
The stress test entailing a liquidity shock was used to assess the necessary extent of borrowing by the banks at the European Central Bank (ECB) and the required amount of eligible collateral to secure that borrowing. The scenario assumed that the banks were unable to fully rollover existing sources of funding at foreign commercial banks in the context of a decline in funding from non-banking sectors.
The results of the liquidity shock scenario indicate that the banks' dependence on borrowing from the ECB would increase from 1.1% of total assets at the end of 2010 to 4.5% by the end of 2011 and to 7.1% by the end of 2012. The banking system's eligible collateral for borrowing from the ECB would be sufficient to raise the required funding.
The Bank of Slovenia finds that the overall capital adequacy of the banking system would range between 9.9% and 11.1% in all stress test scenarios, while Tier I capital adequacy would range between 7.1% and 8.6%. The banks have been implementing the internal capital adequacy assessment process since 2007, meaning that all material risks to which they have been or could be exposed are covered by capital. In this way, the banks ensure the necessary capital for regulatory risks (e.g. credit, market and operational risks), and for those risks assessed as material with respect to an individual bank's business model (e.g. interest-rate, currency, concentration, reputation and strategic risks).