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Impact of Euro Introduction and Global Financial Crisis on Slovak Banking Sector

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The introduction of the euro and the global financial crisis had a profound impact on the Slovak banking sector. Here are some key points that summarize the effects of these events.

Euro Introduction

Challenges Faced by Commercial Banks

  • Profitability declined: Commercial banks’ profitability declined by more than 50% in 2009 due to costly measures and a decline in revenues from exchange operations.
  • Interbank market cessation: The introduction of the euro led to the cessation of the separate interbank market in Slovakia, forcing banks to raise short-term loans at the European interbank market with EURIBOR as the basic rate.
  • Decline in exchange operation revenues: Revenues from exchange operations declined by 77% in 2009.

Global Financial Crisis

Limited Impact on Slovak Banking Sector

  • Limited exposure to foreign financial markets: The crisis had a relatively low impact on the Slovak banking sector due to its limited exposure to foreign financial markets and innovative instruments.
  • Recession’s effect on demand: However, the recession led to a decline in demand from Germany and surrounding countries, affecting the Slovak economy and increasing the risk of mortgage defaults.
  • Banks increased own funds: Banks increased their own funds to cover potential credit losses, leading to higher capital adequacy but lower dividends.

Banking Sector Response

Shift towards Riskier Assets

  • Lending focus: Lending activities focused on loans with high repayment probability, and corporate financing concentrated on less risky sectors and enterprises.
  • Investment in safer assets: Banks invested in safer assets like government bonds and grew loans to households.
  • Differences between banks emerged: Differences in effectiveness between individual banks became more apparent, particularly in loan portfolio quality and financial condition.

Recovery

  • Moderate recovery: Positive trends emerged in 2010, including a moderate recovery in the global economy and economic growth in Slovakia.
  • Improvement in banking sector: The banking sector began to show signs of improvement, but differences between individual banks persisted.