The banking system faces sweeping structural reforms


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The Bank of Slovenia has published the Financial Stability Review which estimates that in addition to the current risks associated with the pandemic, the banking system is also facing significant structural changes.

“Systemic risks to financial stability remain high in the Covid-19 epidemic. Macroeconomic risk remains high, although it gradually decreases as businesses and households gradually adjust. Credit risk is becoming increasingly evident with the regular withdrawal of large-scale government measures to support businesses and households. Income risk remains high. The new Financial Stability Review further finds that the resilience of the financial system to systemic risks remains relatively high, given the good position it has entered into the crisis and the speed and scale of policy measures. economic taken, ”the Bank announced.

He notes in particular that, alongside the current challenges, the banking system is also facing structural reforms which require a clear strategy of action.

Under the aegis of the Governing Council of the ECB, the Bank has put in place important monetary policy measures to alleviate the crisis. The implementation of the emergency purchase program in the event of a pandemic (PEPP) with an envelope of 1,850 billion euros and a horizon until March 2022, the principal of the securities maturing being fully reinvested at least until ‘at the end of 2023, stands out.

In the area of ​​regulatory activities, numerous capital and regulatory reductions have been adopted within the framework of the Single Supervisory Mechanism and the European Banking Authority, facilitating the exercise of banks’ activities and providing support to the real sector.

“All measures applicable to systemically important banks have also been applied to other banks in the Slovenian banking system by the Bank of Slovenia (Banka Slovenije). The frizzy dividend payout measure has been extended and adjusted this year. This helps to ensure that capital is retained in banks, so that the Slovenian banking system is better able to withstand potential losses and can continue to provide credit to businesses and households. The regulations on macroprudential restrictions on consumer credit have been adjusted, so that a temporary drop in consumers’ incomes during an official epidemic period can be excluded from the calculation of their solvency, ”underlines the Bank in the Review.

The Bank asserts that with the recovery process underway in the sectors not directly affected by the containment measures, the economic situation remains difficult. The macroeconomic risk therefore remains high, even if it has started to decline due to the improved outlook for exiting the crisis in the last quarter of 2020.

Credit risk has worsened, as the gradual expiration of extensive government support measures for businesses and households will make the deterioration in the quality of the banking system’s credit portfolio more evident, while this will translate into an increase in non-performing exhibitions. This will end the multi-year period of successful NPE reduction, which will start to increase again.

Conditions for income generation in the banking system have deteriorated further, following the sharp slowdown in bank lending growth last year. The income risk therefore remains high with an upward trend.

Banks’ resilience to systemic risks, which was high throughout most of 2020, has deteriorated in the solvency and profitability segments and is now at mid-level. Amid the anticipated deterioration in the quality of the credit portfolio, banks may also begin to see a decline in their capital ratios. There is also considerable variation in the level of resilience of different banks, given the differences in the structure and quality of their credit portfolios and their capital surpluses. The resilience of banks in the liquidity segment remains high, again with variations between individual banks.

The Bank notes that the last decade has brought structural changes to the balance sheet of the banking system. The particularly pronounced changes observed in Slovenia mainly reflect the shift of banks from loans to businesses to loans to households, so that the current balance between the individual elements of bank balance sheets is not in line with the traditional and predominant concept of financial intermediation. . Therefore, it will be necessary for a new consensus to emerge on the business strategy of the banking sector under the conditions of the new normal. “This reflection must be part of a broader context, and alongside the usual questions around future demand for banking products, target customer groups, digitization, etc., it must also relate to the skills of employees. at all levels, the search for competitive advantage in the banking market, and an assessment of the ability to raise additional capital to ensure the successful future development of banks under these conditions. Only such a thoughtful strategy can guarantee the long-term viability of the banking system, in order to ensure that the economy as a whole is properly served, ”concludes the Bank in its Review. /ibna

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