Stress tests: the Slovenian banking system, like the European banking system, remains stable and has sufficient capital adequacy

According to the results of the stress tests, euro area banks have sufficient capital adequacy even in the event of the realisation of adverse macroeconomic shocks. These stress tests are performed every other year under the auspices of the European Central Bank (ECB) and the European Banking Authority (EBA) and included the two significant Slovenian banks. The stability and capital adequacy of the Slovenian banking system are also indicated by the stress tests carried out by Banka Slovenije for other Slovenian banks and savings banks, which followed a similar methodology.

Within the Single Supervisory Mechanism (SSM), bottom-up stress tests were again conducted this year, in line with the European Banking Authority’s (EBA) approach and methodology. On this occasion the stress testing covered 98 significant euro area banks, including the two significant banks in Slovenia.

The purpose of the stress tests was to evaluate the impact on the capital adequacy of individual banks over the 2023 to 2025 horizon from credit risk, market risks and operational risk and also risk to income generation capacity. The stress tests were conducted on the basis of a baseline scenario and an adverse scenario. The latter assumes a long period of low GDP growth and elevated inflation which contribute to a deterioration in the corporate and household sectors, together with a correction in asset prices and a rise in interest rates.

The results confirm that even under the adverse scenario, the banks retain sufficient resilience and adequate capital ratios. The banks have also been found to have made progress since the previous stress tests in 2021. Despite the more restrictive scenario, euro area banks showed a smaller capital depletion compared with 2021. This is mainly due to banks’ better initial position in credit portfolio quality and their higher income as a result of a faster increase in lending rates combined with a slower adjustment of deposit rates.

The capital depletion was mainly due to credit losses and losses arising from market risk – mainly from revaluations of assets – and lower net interest income due to a rise in funding costs. An additional adverse effect came from an increase in operating costs as a result of inflationary pressures.

The two Slovenian banks that participated in the ECB stress tests were placed in bucket 2 (a decline in the common equity Tier 1 capital ratio of between 3 percentage points and 5.99 percentage points) and bucket 3 (a decline in the common equity Tier 1 capital ratio of between 6 percentage points and 8.99 percentage points), where the majority of SSM banks were also placed.

Figure: Distribution of results across capital depletion buckets according to the decline in the CET1 ratio in the third year of the adverse scenario relative to the initial position for the SSM banks that conducted the exercise under the direct supervision of the ECB

Source: ECB

At Banka Slovenije, we also carried out stress tests for 12 smaller banks (smaller Slovenian banks and savings banks, subsidiary banks under majority foreign ownership, and SID Banka) using a similar methodology. These show the banks to show sufficient capital adequacy under both the baseline scenario and under the adverse scenario and a range of outcomes comparable with the SSM. The decline in the ratio under the adverse scenario is mainly due to an increase in credit losses combined with a reduction in banks’ capacity to generate income.

As in previous years, the outcomes of the stress tests at individual banks will be one of the inputs into the supervisory review and evaluation process (SREP) in determining guidance on additional capital requirements (P2G).

More information about this year’s EU-wide stress tests can be found in the press releases on the websites of the EBA and the ECB.