Press release: Banks’ non-performing exposures
The management of non-performing claims at banks plays a key part in the stability of the entire banking system, and the strengthening of its role in supporting the real sector. Studies by a number of international institutions (IMF, EBA, ECB) confirm that a high level of non-performing claims at banks has an adverse impact on bank lending activity and consequently on the recovery of the economy, which is the result of the numerous constraints on balance sheets, profitability and capital that banks with high levels of non-performing claims face.
The current environment of low and even negative interest rates is further reducing the ability of these banks to generate income, and is consequently having an adverse impact on their profitability and on their long-term viability.
In addition to the impairments and provisions that they are required to maintain for such claims, banks with high levels of non-performing claims are also burdened by the resulting need for higher capital. This proves to be particularly problematic during stress tests, where under the adverse scenario banks with high levels of non-performing claims face incomparably higher credit risk losses at the end of the stress test horizon than banks with lower levels of non-performing claims, and consequently higher capital requirements.
Measures in Slovenia
The relevant institutions in Slovenia (the Bank of Slovenia, the commercial banks, the Bank Association of Slovenia, the ministries and economic associations) have been involved in activities in the restructuring of non-performing claims since 2012 (initial action). The Bank of Slovenia has always played a leading role in this area.
Since December 2014 in particular the Bank of Slovenia has taken a number of supervisory actions for the restructuring of the banks’ non-performing claims and has actively participated in other systemic action in connection with restructuring.
The best practice in the area of systemic measures (in addition to the establishment of the BAMC) includes the issue of the Slovenian principles of financial debt restructuring in the corporate sector, the Guidelines for the restructuring of micro, small and medium-size enterprises and the Principles of responsible corporate lending. The BAMC allowed for the elimination of a significant amount of non-performing claims from bank balance sheets, while the aforementioned guidelines and principles adopted by the BAS gave the banks the tools to embark on wider-ranging, coordinated restructuring.
In parallel with the above, the Bank of Slovenia established the right environment within the framework of its supervisory activities, and through requirements for the implementation of best practice guided the banks towards the faster reduction of non-performing claims. The most notably positive of the latter has been the issue of guidelines for the banks to put in place appropriate organisational structures for the management of non-performing claims and an early warning system for increased credit risk in connection with corporate clients (Guidelines for monitoring customers and early warning systems for increased credit risk, in slo. lang.). The Bank of Slovenia required the banks to draw up a strategy for the management of non-performing claims and three-year action plans for reducing non-performing claims. The Bank of Slovenia monitors the fulfilment of the requirements within the framework of its regular supervisory dialogue with the banks. All the banks are meeting the requirements by the expected deadlines.
A special manual for the restructuring of non-performing claims against micro, small and medium-size enterprises, intended for practical application at the banks, is currently under preparation in conjunction with the World Bank. The manual will provide for the operational implementation of the aforementioned Guidelines for the restructuring of micro, small and medium-size enterprises (in slo. lang.).
Non-performing claims: a global challenge
The issue of restructuring non-performing claims is not pertinent solely in Slovenia, but also throughout the European Union, where the relative level of non-performing claims at banks is higher than in other comparable economies (US, Japan).
Over the last year non-performing claims have also become an important element of banking supervision activities within the framework of the Single Supervisory Mechanism (SSM). The ECB created a special task force at the end of 2015 to put in place the systematic and standardised treatment of non-performing claims at supervised banks. Bank of Slovenia representatives were active participants in the task force, and to the greatest possible extent transferred best practice that is already being carried out in Slovenia and, judging by the decline in non-performing claims (see below), is having the appropriate effect.
The main objectives of the task force at ECB level were as follows:
- analysing the situation in the area of non-performing claims in the most exposed countries, and
- formulating guidelines for bank action in the area of non-performing claims.
The analysis of the situation in the area of non-performing claims covered the eight most exposed countries (Greece, Cyprus, Italy, Portugal, Spain, Ireland, Slovenia and Germany) in the SSM.
In the analysis Slovenia is ranked in the top half of the most successful countries (behind Ireland and Spain), where it proved to be the most successful in the area of the preparation and implementation of supervisory guidelines for the management of non-performing claims.
The ECB recently released draft guidance to banks in connection with non-performing loans for public debate. The public debate is running from 12 September to 15 November of this year, and the draft has been published on the ECB website in the banking supervision section (Draft ECB guidance to banks on non-performing loans).
The draft guidance covers a number of aspects in connection with the management and resolution of non-performing claims, based on best practice in various countries. Banking supervision at the ECB is consulting on the draft guidance to ensure that it gives proper consideration to all issues of specific relevance to individual markets. The key objective of the guidance is to ensure the equal treatment of all banks, and to transparently present the ECB’s expectations with regard to significant institutions.
The documents related to the open public debate on the draft guidance are available on the SSM website:
https://www.bankingsupervision.europa.eu/legalframework/publiccons/html/npl.sl.html (Slovene version)
https://www.bankingsupervision.europa.eu/legalframework/publiccons/html/npl.en.html(English)
Slovenia: The quality of the banks’ credit portfolio is continuing to improve
There are several definitions and methodologies for measuring banks’ non-performing claims/exposures.
The Bank of Slovenia publishes the stock and proportion of banks’ classified claims more than 90 days in arrears on a monthly basis (in its Monthly information on bank performance, only in slov. lang.). According to the latest figures (for August 2016), claims more than 90 days in arrears amount to EUR 2,205 million or 6.7% of the total claims in the banking system, down EUR 1,019 million and 2.6 percentage points on the end of 2015.
Banks’ classified claims more than 90 days in arrears
| EUR billion | proportion of total classified claims | |
| 30 Nov 2013 | 7.76 | 17.3% |
| 31 Dec 2013 | 5.52 | 13.4% |
| 31 Dec 2014 | 4.45 | 11.9% |
| 31 Dec 2015 | 3.46 | 9.9% |
| 31 Aug 2016 | 2.21 | 6.7% |
Further evidence that the quality of the banks’ credit portfolio in Slovenia is improving comes from the figures for non-performing exposures according to the European Banking Authority (EBA)definition, which includes other categories, most notably forborne exposures, as non-performing exposures alongside claims more than 90 days in arrears (for more, see the website).
The latest figures for the Slovenian banking system’s non-performing exposures in accordance with the EBA definition (released quarterly) reveal the stock and proportion of non-performing exposures to be declining: at the end of June of this year non-performing exposures amounted to EUR 4.3 billion in the banking system, equivalent to 10.3% of total exposure. The proportion of non-performing exposures had declined from 14.2% over the course of one year.
Non-performing exposures according to EBA definition
| EUR billion | proportion of total exposure | |
| 30 Jun 2015 | 5.9 | 14.2% |
| 30 Sep 2015 | 5.5 | 13% |
| 31 Dec 2015 | 4.8 | 11.4% |
| 31 Mar 2016 | 4.5 | 10.8% |
| 30 Jun 2016 | 4.3 | 10.3% |