National Bank Issues Recommendations for Banking Sector
On 26 January 2012, the Financial Market Supervision (FMS) Unit of Národná banka Slovenska issued a Recommendation for banks on supporting the stability of the Slovak banking sector. Issued in response to identified risk factors, and focusing mainly on capital ratios and liquidity, the primary purpose of the Recommendation is to strengthen the stability and self-sufficiency of the banking sector in Slovakia.
According to the evaluations of the FMS Unit, the Slovak banking sector as a whole has been stable, creditworthy and well-functioning for a long period of time. The average Tier 1 capital ratio of the domestic sector is among the highest in the European Union, which means the sector is resilient to possible adverse developments at the macroeconomic level or in financial markets. The banking sector in Slovakia also reports a high degree of self-sufficiency in regard to liquidity, with banks financing their activities primarily from deposits of residents.
A number of trends and new risks have recently emerged which could have implications for the stability of the Slovak banking sector. These developments are seen mainly in the financial markets and relate to the ongoing euro area debt crisis. At the same time, economic forecasts for both Slovakia and its main trading partners have been revised down. One risk is that the special bank levy may be increased, putting downward pressure on banks’ profitability and therefore on their capacity to strengthen their capital position. A further development is the mounting concerns about the stability of banking sectors in central and east European countries, owing to the close links between subsidiaries in this region and their parent undertakings.
Národná banka Slovenska therefore recommends that banks maintain a Tier 1 capital ratio of at least 9%. It further recommends that banks, when distributing profits, have regard to the mounting concerns about economic developments and hence maintain an adequate capital buffer against potential losses. Banks whose Tier 1 capital falls short of ensuring such a buffer should limit their distribution of profits.
In order for banks to continue maintaining their stability and independence, NBS recommends that they strengthen their stable funding by keeping a loans-to-stable funds ratio of not more than 110%. In seeking to meet the recommended Tier 1 capital ratio, or the stable funding ratio, banks should not restrict their lending activities to customers.
At the same time, Národná banka Slovenska hereby gives notice that it will for the time being be paying particular attention to whether banks, when conducting new transactions, are taking due consideration of the risks they undertake and the impact of such transactions on their overall liquidity.
The draft Recommendation was discussed with representatives of the Slovak banking sector and was also sent to selected banking groups’ home supervisors as well as to the European Banking Authority (EBA).
Source National Bank of Slovakia