Press release after the Meeting of the Governing Board of the Bank of Slovenia on 10 September 2013
The orderly winding down of Probanka and Factor banka began on 6 September 2013. The banks’ operations are being managed by the special administration appointed by the Bank of Slovenia. The operations of Probanka and Factor banka continue normally, leaving the position of investors and borrowers completely unchanged. The Slovenian government guarantees that all ordinary creditors will be repaid in full at maturity (principal and contractually agreed interest), with borrowers having to continue to repay their debts in accordance with concluded loan agreements. The banks are operating with the aim of completing previously concluded transactions and will not, as a rule, conclude new transactions, except to improve their financial position.
Due to maturity mismatches between assets and liabilities, the Bank of Slovenia will provide liquidity support to both banks, for which a guarantee was issued in the amount of EUR 1,030 million in accordance with the Government Measures to Strengthen Bank Stability Act (hereinafter: the ZUKSB). The Slovenian government’s actual liabilities from the aforementioned guarantee will be to the extent of the loans raised at the Bank of Slovenia which the banks are unable to repay.
The Bank of Slovenia may only approve loans to the banks if they are solvent. A solvent bank is a bank whose assets are sufficient to settle all liabilities to ordinary creditors. The Bank of Slovenia carried out an assessment of the deficit in assets required to cover all liabilities to ordinary creditors, taking into account certain assumptions regarding the sale of both banks’ assets, both in terms of the amount and deadline for sale. The deficit in assets is assessed at EUR 400 million. An additional assessment will be made by the special administration on the basis of a special audit of the financial position of both banks.
No increased outflow of deposits has been noted at other banks and savings banks, due to investors having been informed of the consequences of the orderly winding down of Probanka and Factor banka. They have also been informed that the banks’ losses will be covered first and foremost by the banks’ owners and the holders of subordinated financial instruments, that the banks’ assets will be sold off efficiently over the next several years and that the Slovenian government will cover any deficit in assets.
Over the last year and a half, the Bank of Slovenia issued a number of measures against both banks and gave their shareholders and the management board the opportunity to stabilise the banks’ operations, including via capital increases. Emergency measures, such as the appointment of the special administration, are implemented when all other possibilities to rescue a bank via private funds have been exhausted, and/or when increased liquidity and capital risk at an individual bank threaten the stability of the financial system. All of the negative effects that could arise from an increase in investors’ lack of confidence in the banking system cannot be foreseen, nevertheless it is clear that in the current climate when access to the foreign financial markets is limited, all necessary steps must be taken to prevent the bankruptcy of any bank. Banks have been rescued in a similar manner in other EU Member States as well. This, however, results in costs that must be limited to the lowest possible level. The European Commission’s rules regarding state aid, which entered into force on 1 August 2013 (published in the Official Journal of the European Union C 216/13 of 30 July 2013), must therefore be taken into account.
While all ordinary creditors will be repaid during the orderly winding down of Probanka and Factor banka, the same can not be said in case of a bankruptcy where investors, except those with guaranteed deposits, would be unable to access their funds at either of both banks. In the context of an adverse liquidity situation faced by the real sector, this would result in a significant deterioration in operating conditions and in the collapse of many companies, with all other known consequences. In the latter case the first payments from the bankruptcy estate could not be expected for about a year, having in mind also that the recovery rate in previous corporate bankruptcy proceedings in Slovenia was only around 40%. The order in which liabilities are repaid is also determined in bankruptcy proceedings, implying that preferential creditors (liabilities to the Eurosystem and other preferential creditors) would be repaid from assets first, and only then would ordinary creditors be repaid but relatively less due to the preferential settlement of the claims of preferential creditors.
All of the potential negative effects that could arise from an increase in investors’ lack of confidence in the banking system cannot be foreseen. Given that the current climate when access to the foreign financial markets is limited necessitates that all necessary steps must be taken to prevent the bankruptcy of any bank.
In case of the initiation of bankruptcy proceedings against Probanka and Factor banka this would cause the payment of guaranteed deposits in the amount of EUR 400 million. Given the general liquidity situation in the banking sector, the government would be expected to temporarily provide the funds required to pay out depositors. In such case payouts would have to begin by no later than the 20th business day following the initiation of bankruptcy proceedings against a bank. Together, the two banks have 35,023 depositors (the banking system’s guaranteed deposits totalled EUR 14.8 billion at the end of June this year, with 2.3 million investors).
Any increase in lack of confidence in the banking system could result in unplanned outflows of deposits, in particular sight deposits that amounted to EUR 9.6 billion at the end of August, representing 40% of all deposits by the non-banking sector. It could also result in a shift in deposits between banks, which would further destabilise some banks' liquidity.
The government, municipalities, SID banka and companies under majority government ownership have total holdings of EUR 640 million at the two banks, the majority of which would be lost in the event of bankruptcy.
During the orderly winding down process, it is possible to objectively expect the efficient sell-off of the banks’ assets, as this is the priority tasks of the special administration, the aim of which is to minimise budget expenditure to cover the deficit in the banks’ assets to settle all liabilities to ordinary creditors.
The management board of a bank is responsible for the secure and prudent operations thereof, while the supervisory board is responsible for supervising how the management board manages transactions. The Bank of Slovenia will continue as before to report all suspected criminal acts to the competent authorities. The emergency management board, which assumed governance of the banks, is obliged to do the same.