Slovak Banking Sector Faces New Risks Amid High Financial Stability

As Slovakia navigates the ongoing global challenges of supply chain disruptions, rising energy prices, and inflation, its banking sector is facing new risks despite maintaining a high level of financial stability.

Corporate Loans: A Growing Concern

Firms, which had coped reasonably well with the pandemic crisis, are still vulnerable to shocks. An estimated 17% of corporate loans could become problematic within three years. This highlights the need for careful management and risk assessment by banks and companies alike.

Household Debt: A Worrying Trend

Household debt remains a concern, particularly consumer credit, with delinquency risk on the rise. Housing prices continue to surge, outpacing household income growth, and housing affordability is deteriorating rapidly. If interest rates rise further, housing will become increasingly unaffordable, potentially moderating price growth.

Regulatory Proposals

To address these new risks, the National Bank of Slovakia (NBS) is proposing partial adjustments to regulatory requirements for loans extending beyond retirement age. This move aims to prevent households from increasing their borrowing and shifting housing loan maturities into retirement.

Additionally, the NBS is considering easing regulatory lending requirements for house renovation loans to support financing under Slovakia’s recovery and resilience plan, which includes green projects.

Banking Sector Resilience

Despite the challenges, banks and insurers remain profitable, well-capitalized, and resilient even under adverse stress scenarios. However, with the financial cycle in an expansionary phase, the NBS may consider raising the countercyclical capital buffer rate to ensure the sector remains stable.

Outlook for the Banking Sector

The Slovak banking sector is expected to continue supporting economic growth while navigating the new risks posed by inflation, supply chain disruptions, and rising energy prices. As households face increased pressure on their finances, it is crucial they monitor their spending habits and adjust as needed to maintain financial stability.

In summary, while the Slovak banking sector faces new risks, its resilience and ability to adapt will be crucial in supporting economic growth and maintaining financial stability.