1 Financial Sector in Slovakia: Pillar of Stability Martin Barto Sberbank Slovensko, a.s.

2 Some historical remarks Situation in 90s: Large state-owned banks, on-going privatisation into hands of domestic “investors“, Asian crisis Result: Three largest banks on the verge of bankruptcy, without capital, almost 50% of non-performing loans, state was the main owner of these banks Solution: Capital strengthening (620m EUR), bail-out (12% HDP), privatisation Lessons learned: Bank supervision to be strengthened, stricter regulation, role of state is only regulatory and supervisory Legal basis: Amendments to Constitution, NBS Law, Banking Law, NBS by-laws Institutional platform: New Banking Supervision Unit in NBS since 2002, implementing 25 core Basel principles of prudential supervision World Bank and IMF were involved through EFSAL loan conditioned by FSAP (2002, 2006)

3 Financial sector during crisis and euro adoption 2006: NBS became the sole regulator and supervisor of the financial market 2007: New organisational structure, where institutions are supervised within financial groups. Group approach has proved as very efficient. High ROE in financial sector in these years, banks above 15% Slovak financial sector was only marginally negatively influenced by fall of some asset prices, most investments into domestic quickly growing economy Almost none retail loans denominated in FCY, corporate loans usually naturally hedged by company receipts from exports L/D ratio < 1, no dependence on foreign funding Behind this – combination of trustworthy monetary policy (low inflation expectations) as well as prudent and forward-looking FM supervision

4 Financial sector during crisis and euro adoption Slovakia was among few EU member states which did not need to bail-out any financial institution ; although the law was adopted in line with EU demand Other measures were taken: –NBS decree on liquidity and liquidity management in banks and branches of foreign banks –Main shareholders of domestic banks were asked to keep a part of 2008 profits in bank capital funds These measures were meant as prevention against uncontrolled liquidity and capital outflows to mother companies, some of them were under heavy stress, applying for a support from their governments Fully in line with the first stage of Vienna initiative Three negative impacts on banks in 2009: crisis, loss of money market and exchange transactions with very limited new business opportunities (1/7 of total operational income) and decrease in assets (10bn €) as a result of the end of convergence game

5 Financial sector during crisis and euro adoption 2009 banking sector profit halved in comparison with 2008, some banks posted red figures Insurance companies, voluntary pension funds increased their ROE in 2009; asset managements ROE went down by 1/3 NBS stress tests proved a solid resilience of the banking sector despite combined negative factors, as well as other segments of the financial market Stability of the financial system was crucial for all phases of the smooth euro adoption

6 Financial sector at present Financial sector remains the pillar of stability of the Slovak economy NBS stress analysis (2013) says that at maximum 2% of present bank own capital should be added in the case the adverse scenarios realise Main risks: corporate credit risk, household credit risk Other segments: market risks, but impact on economy less important than banks With ECB assuming the supervisory role as home supervisor for 128 main banks in eurozone, the role of NBS will change partially Three largest banks will be supervised directly by ECB, however details are unknown For other banks with mother companies abroad, NBS will be in a role of host supervisor Close co-operation with ECB is expected Full responsibility for domestic banks – PB, Prima, Privatbanka, SZRB

7 Financial sector at present New banking union project underway First element: Single Supervision Mechanism was approved by EP and Council SSM will directly apply to 128 banks under ECB supervision, it will be binding for national authorities, ECB will have access to all data AQR for those banks - before implementation - includes three parts: supervisory risk analysis (liquidity, funding, leverage), asset quality review and stress tests - resilience Recapitalisation needs: 1) markets, 2) national scheme, 3) ESM Second element: Single Resolution Mechanism - framework required: Bank Resolution and Recovery Directive - since 2015, question whether 128 or all ? Single Resolution Authority and Single Resolution Fund Resolution: 1) shareholders and creditors, 2) resolution fund made up by banks, 3) fiscal backstop Each bank will be obliged to have an adequate loss-absorbing capacity – CRD IV

8 Financial sector at present Third element: How to finance failures ? Resolution Fund created by banks More integrated financial market as a shock absorber Insurance scheme for tail and unexpected events ESM to play the role of public finance backstop - lender of the last resort This is a partial answer to the problem of banks too large to fall, single states unable to rescue them or the price is enormous (IRL) Nevertheless, this is not a proper answer to the problem of moral hazard Too much regulation and supervision give managements feeling of ultimate responsibility being with regulator and supervisor Existence of SRM, ESF strengthen this feeling Conclusion: Even Banking Union cannot exclude bank failures