Macroprudential recommendation for household lending
Pursuant to the Macroprudential Supervision of the Financial System Act (Official Gazette of the Republic of Slovenia, No. 100/13), the Governing Board of the Bank of Slovenia, at its 610 th meeting of 22 October 2018, approved the following:
The intermediate objective of the macroprudential recommendation is to prevent excessive credit growth and leverage.1 Its aim is to prevent the relaxation of credit standards, and it is precautionary in nature. The expansion of the existing macroprudential recommendation2,3 does not alter the existing recommendations for housing loans. It expands the DSTI recommendation to consumer loans, and recommends maturity limits for these loans.4
The macroprudential recommendation sets the highest recommended ratio between the housing loan amount and the value of residential real estate pledged as collateral (i.e. the LTV ratio). It also sets the highest recommended ratio between the annual total debt servicing costs and the annual net income of the individual (i.e. the DSTI ratio). For consumer loans, it also recommends the highest loan maturity.
The highest recommended LTV is 80%.
The highest recommended DSTI is:
- for borrowers with monthly income of EUR 1,700 or less: 50%; and
- for borrowers with monthly income of more than EUR 1,700: 50% for the portion of income up to EUR 1,700 inclusive, and 67% for the portion of income exceeding EUR 1,700.
The highest recommended maturity of consumer loans is 120 months.
The Bank of Slovenia assesses the risks in the consumer loan market as moderate and manageable. This is partly attributable to the favourable economic climate, which is reflected in low default rates. However, the long maturities of new loans mean that they will remain on bank balance sheets after the reversal of the economic cycle. If macroeconomic risks are realised, default rates could rise rapidly.
The Bank of Slovenia assesses the risks in the housing loan market as moderate and manageable. They could however quickly increase. The LTV and DSTI ratios for new housing loans have remained stable, and are in line with the existing macroprudential recommendation. Growth in housing loans remains moderate and stable. It declined slightly in late 2017 and early 2018. If real estate prices continue to rise quickly, cyclical risks from the real estate market could migrate to the banking system, especially if credit standards are reduced.
In the future, we expect high growth in consumer lending, due to favourable factors on the supply side (low interest rates, banks’ high capital adequacy, etc.) and the demand side (low household indebtedness, good economic climate, etc.).
The macroprudential measure protects banks. It also encourages consumers to be prudent when taking loans.
In the event of increased systemic risk, or large deviations from the recommended values of the recommendation, the Bank of Slovenia may modify the parameters of the recommendation or introduce a binding measure.
Banks must still assess the creditworthiness of the borrower, and are responsible for the risks inherent in the newly approved loans.
Upon the publication of this recommendation, the Macroprudential recommendation for housing loans of 19 June 2018 ceases to be in force. Prior microprudential recommendations are accessible at the following link.
Page last updated: 26 October 2018.
1 Objectives and examples of instruments were listed in the Guidelines for the macroprudential policy of the Bank of Slovenia approved by the Governing Board of the Bank of Slovenia at its meeting of 6 January 2015 and updated on 10 January 2017.
2 This was adopted by the Governing Board of the Bank of Slovenia at its 561 st meeting of 30 August 2016 and amended at its 603 rd meeting of 19 June 2018.
3 Following the extension, the existing macroprudential recommendation has been renamed the Macroprudential recommendation for household lending.
4 A consumer loan is any loan to an individual that is not a housing loan.