## _cr07243 - Executive Summary

## Source details

**Canonical URL:** [_cr07243 - Executive Summary](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07243.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07243.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07243.pdf.json)

---

### Overview
- Slovak financial sector growing rapidly and trending towards developed country norms following bank restructuring and privatization in the early 2000s.
- Commercial banks are dominant; non-bank financial institutions (pension funds, insurance companies, securities companies) have grown faster recently but banks still account for more than 80 percent of financial system assets as of end-September 2006.
- Securities markets remain small and illiquid.

### Banking sector: strengths, structure, and indicators
- Aggregate capital adequacy ratio (CAR) around 13 percent (Regulatory capital to risk-weighted assets: 13.0, Dec-06).
- Regulatory Tier I capital to risk-weighted assets: 14.2 (Dec-06).
- Return on equity (ROE) after tax: 16.6 percent in 2006.
- Return on assets (ROA) after tax: 1.3 (2006 annualized).
- Nonperforming loan (NPL) ratio: 3.2 percent (Dec-06).
- NPLs to gross loans: 3.2 (Dec-06).
- Ratio of NPLs net of provisions to capital: 7.9 percent (end-2006).
- Liquid assets to total assets: 36.5 (Dec-06).
- Foreign currency-denominated loans to total loans: 27.1 (Dec-06).
- Annual growth of bank loans: 20.1 (2006 annualized).
- Sector concentration and ownership:
  - Of 17 banks registered in September 2006, only two very small institutions were locally owned; sector almost entirely foreign owned.
  - Three banks (Erste Bank, Raiffeisen Zentral Bank, Bank Intesa) hold a combined market share of around 50 percent of total banking system assets.
  - As of end-2006 there were 24 commercial banks; three largest banks around 50 percent market share; five largest banks around 65 percent.

### Credit growth, household and corporate exposures
- Bank credit growth rapid; annual growth of bank loans 20.1 (2006 annualized).
- Credit to households grew by 32 percent in 2006 versus overall private sector credit growth of 20 percent.
- Household debt to GDP: 22 percent in 2005.
- Less than 2 percent of all household loans are in foreign currencies.
- Most household credit increase for mortgages, concentrated in Bratislava region; interest rate subsidies on mortgage loans abolished in 2005.
- Corporate loans declined as a share of total loans from about 75 percent end-2002 to a little over 60 percent by end-2006.
- Around one third of loans to corporates are denominated in foreign currencies; majority reportedly go to exporters.
- Domestic deposits growth: 9 percent annual rate as of October 2006.
- Slovak banks have limited reliance on funds from foreign banks for financing domestic loans.

### Stress testing and resilience — methodology and key findings
- Data as of end-September 2006; tests conducted individually for all 17 commercial banks incorporated in Slovakia.
- Sensitivity and scenario stress tests covered interest rate, exchange rate, real estate price, credit, and liquidity risks; all tests use conservative loss given default assumption of 100 percent.
- Broad finding: system could withstand substantial market or credit shocks; none of the sensitivity and scenario stress tests considered would bring the average Tier I capital adequacy of the system below 10 percent.
- Most significant effect from substantial shock to credit quality: increase of NPLs to over 7 percent (doubling) with loss given default 100 percent results in aggregate loss of 21 percent of Tier I capital.
- Banks’ incomes would likely provide additional buffer.
- Increased sensitivity to koruna interest rate rises due to faster growth of fixed interest rate bonds with longer maturities than liabilities’ duration.
- Note: NBS developing a macroeconomic-credit-loss model; not yet robust due to absence of full-cycle time-series data.

### Stress test results — selected quantitative outcomes (based on September 30, 2006)
- Aggregate impacts on Tier I capital (negative = decrease):
  - Parallel upward shift in the SKK yield curve by 500 bp: -23.2 (Aggregate); Best bank 37.6; Worst bank -74.0
  - Slopening of the SKK yield curve 1/: -0.8 (Aggregate); Best bank 1.3; Worst bank -2.8
  - Steepening of the SKK yield curve 2/: -18.1 (Aggregate); Best bank 31.3; Worst bank -68.3
  - Parallel upward shift in the Euro yield curve by 150 bp: -1.8 (Aggregate); Best bank 0.0; Worst bank -6.5
  - Parallel upward shift in SKK and EUR interest rates by 200 bp: -13.3 (Aggregate); Best bank 15.8; Worst bank -34.5
  - Depreciation of the SKK/Euro rate by 4.10 percent 3/: -0.2 (Aggregate); Best bank 1.0; Worst bank -1.6
  - Depreciation of the SKK/US$ rate by 7.86 percent 4/: 0.0 (Aggregate); Best bank 3.6; Worst bank -1.7
  - Depreciation of the SKK against all currencies by 20 percent: -0.8 (Aggregate); Best bank 1.4; Worst bank -3.3
  - Fall in residential and commercial real estate prices by 50 percent: -5.0 (Aggregate); Best bank 0.0; Worst bank -18.5
  - No credit growth 5/: -17.1 (Aggregate); Best bank -0.2; Worst bank -102.1
  - Granting of loans with highest default rate 6/: -16.4 (Aggregate); Best bank 0.0; Worst bank -66.0
  - Increase in NPLs by 100 percent: -21.2 (Aggregate); Best bank -0.1; Worst bank -73.8
- Memorandum: Baseline Tier I Capital Ratio (in % of risk-weighted assets): 13.8 (Aggregate); 26.2 (Best bank); 7.5 (Worst bank)

Notes:
- 1/ Increase in short-term SKK interest rates by 500 bp.
- 2/ Increase in long-term SKK interest rates by 500 bp.
- 3/ Equivalent to the largest increase in the SKK/Euro rate within 10 business days during 2004-05.
- 4/ Equivalent to the largest increase in the SKK/US$ rate within 10 business days during 2004-05.
- 5/ Largest monthly absolute increase in NPLs during January-September 2006, multiplied by a coefficient of 5 (corresponding to increase in NPLs by 80%).
- 6/ Increase in loans by the average monthly increase in 2006 multiplied by a coefficient of 12 (i.e. annualized), with a highest share of NPLs recorded in 2006, multiplied by a coefficient of 3 (corresponding to increase in NPLs by 80% and increase in tot...).

### Liquidity stress test results (based on September 30, 2006)
- Impact on quick liquidity (median; lower quartile; upper quartile):
  - Depreciation of government bonds by 10 percent: 13.2; 1.1; 41.8
  - Decline in client deposits by 20 percent: 158.4; 51.5; 243.4
  - Outflow of short-term capital from the banking sector by 90 percent: 122.7; 19.2; 255.0
- Impact on liquidity up to 7 days (median; lower quartile; upper quartile):
  - Depreciation of government bonds by 10 percent: 9.2; 3.2; 26.5
  - Decline in client deposits by 20 percent: 97.1; 58.1; 164.3
  - Outflow of short-term capital by 90 percent: 61.3; 2.2; 156.4
- Impact on liquidity up to 3 months (median; lower quartile; upper quartile):
  - Depreciation of government bonds by 10 percent: 9.2; 5.1; 22.7
  - Decline in client deposits by 20 percent: 46.1; 17.5; 121.1
  - Outflow of short-term capital by 90 percent: 1.3; 0.0; 88.8
- Memorandum averages (monthly absolute change):
  - Quick liquidity: 18.4; 14.8; 25.6
  - Liquidity up to 7 days: 19.5; 14.4; 36.7
  - Liquidity up to 3 months: 16.4; 11.7; 32.6

### Insurance sector and pension funds
- Insurance sector assets around 8 percent of total financial sector assets.
- Nearly all insurance companies foreign owned and part of large groups.
- Technical provisions appear too low for some life and MTPL contracts; older life policies with guaranteed capital calculated with higher discount rates leading to insufficient provisions.
- Insurance fraud is a concern; increased cooperation among insurers, criminal police, and NBS recommended.
- Second pillar pension funds (introduced 2005):
  - As at end-2006, approximately two-thirds of the labor force had opted to participate in the second pillar.
  - Second pillar funds generated low real returns—between zero and 2 percent—due in part to heavy investment in bank deposits and government bonds and Slovak government yields converging to Euro-levels.
  - Recommendations: diversify into equities and foreign instruments; review PFMCs’ revenue sources and cross-selling practices; avoid reductions in second pillar contribution rates.

### Capital markets, public debt management, and housing finance
- Domestic securities markets small and illiquid; government bond market most liquid segment but dominated by three to four active banks with little secondary trading.
- Mortgage bond market growing; corporate and municipal bond market liquidity nearly nonexistent.
- Legislation requires banks to issue mortgage bonds for 90 percent of mortgage loans.
- Equity market: only 13 companies listed; estimated free float no more than 15 percent.
- Public debt management improvements:
  - Debt managed by ARDAL; strategic decisions by the Ministry of Finance.
  - Maturities increased; size of bonds on issue at least SKK 40 billion.
  - Yearly calendars for auctions and debt management strategy published.
- Remaining public debt market issues: secondary market illiquid; number of issues large; coordination between MOF, ARDAL, and NBS to improve.
- Housing finance: incentives removed in 2005; new mortgage subsidies under consideration.

### Payment system, DPF, and contingency planning
- Payment system improvements since 2002: strengthened NBS oversight, real time gross settlement subsystem, intraday liquidity support, NBS operational responsibility for Slovakia Interbank Payment Systems, shared ATM network.
- NBS preparing to join TARGET 2 by mid-2008; SEPA national strategy expected by early 2007.
- Deposit Protection Fund (DPF):
  - At 2002 FSAP DPF insolvent; shortfall covered by NBS loan, later taken over by consortium of commercial banks.
  - Loan to consortium to be paid off by end-2010.
  - Contribution rate raised for several years then lowered; currently DPF operating to some extent as an ex-post funded scheme.
  - Consideration could be given to some increase in contribution rate while weighing comparative disadvantage vis-à-vis neighboring EU countries.
- Contingency planning: failures of four local banks and problems at one Austrian parent bank led to thorough contingency planning arrangements and emergency manual; need for improved cooperation with home supervisors.

### Regulatory, supervisory framework, accounting, AML/CFT
- Significant improvements in regulatory and supervisory frameworks since 2002 driven by EU harmonization.
- FSAP assessments indicate general compliance with Basel Core Principles (BCP) and IAIS Insurance Core Principles (ICPs) in virtually all applicable areas.
- NBS prepared for risk-based supervision and to start implementation of Basel II.
- Unification of supervision under NBS in 2006 expected to improve consistency across subsectors.
- Slovakia has fully implemented IFRS for financial institutions; auditing subject to ISAs; system of external quality assurance and disciplinary system in place.
- AML/CFT: regime strengthened; MONEYVAL assessment confirmed remaining gaps and provided practical recommendations; authorities urged to implement MONEYVAL’s recommendations.

### Remaining challenges and supervisory priorities
- Continue upgrading supervisory expertise and focus on risk-based supervision as financial sector evolves.
- Ensure consistent approaches across financial subsectors under integrated supervision.
- Strengthen cooperation and information exchange between host (NBS) and home-country supervisors, especially given largely foreign-owned banking sector.
- Insurance supervision:
  - Strengthen supervision of capital adequacy for life insurance policies and ensure adequate technical provisions.
  - Rebalance supervisory burden by expanding expectations and statutory roles of external auditors and actuaries.
  - Strengthen powers regarding fitness and propriety of insurance owners and supervision of tied agents and market conduct.
- Prudential powers:
  - NBS lacked (as of assessment) explicit power to disqualify executive board members of existing banks and to impose additional capital requirements on a case-by-case basis; legislative amendments (CRD transposition, amendment to Banking Act effective Jan 1, 2007) addressed CP6 and provided authority for enforcement on provisioning and secondary legislation on interest rate risk, effective 15 January 2007.
- Prudential reporting and remedial powers:
  - Prudential reports submitted electronically and in hard copy; NBS verifies via on-site inspections; NBS can reject appointment of a bank’s external auditor.
  - Article 50 of the BA provides comprehensive remedial measures, but limitations noted on powers to remove persons and impose additional capital requirements.

### Main recommendations (selected, from Box 1: FSAP Update Recommendations)
- Short term/ongoing — Regulatory and supervisory framework:
  - Continue integration of supervision through implementation of a risk-based approach for all intermediaries supervised by NBS and by disseminating general supervisory principles across subsectors.
  - Continue close monitoring of prudential indicators and banks’ credit assessment standards and be prepared to act if risks emerge.
  - Strengthen coordination and communication between NBS and home country supervisors, especially on Basel II implementation.
- Short term/ongoing — Insurance sector:
  - Enhance supervision of capital adequacy ratios of life insurance policies.
- Medium term — Regulatory and supervisory framework:
  - Provide NBS with power to bar persons who come into positions of responsibility in existing banks who do not meet fit and proper tests.
  - Ensure fit and proper tests and enforcement for nonbank financial institutions, including insurance companies.
- Medium term — Insurance sector:
  - Ensure adequate technical provisions.
  - Define in law the supervisory responsibilities of external insurance auditors and actuaries.
- Medium term — Financial sector infrastructure:
  - Ensure IFRS financial reporting framework is fully implemented for financial sector entities.
- Medium term — Second pillar pension funds:
  - Provide incentives for diversification of pension fund portfolios.
- Medium term — Capital markets:
  - Develop a debt management strategy that includes fewer but larger bond issues and follow standards established for government bond-issues in large Euro markets.
  - Decide on a strategy for development of the Slovak capital market and the future of the Bratislava Stock Exchange.
- Medium term — Consumer protection:
  - Review and fine tune the legal and institutional structure for consumer protection.

*Source: _cr07243 - Executive Summary; sections 8, 29, 52; Appendix II (IMF staff report content, excerpt).*

### Executive Summary ......................................................................................................

### _cr07243 - Executive Summary

### Overview
- The Slovak financial sector has been growing rapidly and is trending towards developed country norms following bank restructuring and privatization in the early 2000s.
- Commercial banks are the dominant financial institutions; non-bank financial institutions (pension funds, insurance companies, securities companies) have grown faster recently but banks still account for more than 80 percent of financial system assets as of end-September 2006.
- Securities markets remain small and illiquid.

### Banking sector: strengths and indicators
- Aggregate capital adequacy ratio (CAR) has declined from post-recapitalization highs but remains at a satisfactory level of around 13 percent.
- Return on equity (ROE) after tax: 16.6 percent in 2006.
- Nonperforming loan (NPL) ratio: 3.2 percent by end-2006 (decline partly due to methodological change in early 2006).
- Banking sector ownership and concentration:
  - Of 17 banks registered in September 2006, only two very small institutions were locally owned; the sector is almost entirely foreign owned.
  - Three banks (Erste Bank, Raiffeisen Zentral Bank, Bank Intesa) hold a combined market share of around 50 percent of total banking system assets.
- Selected financial soundness indicators (excerpted from Tables):
  - Regulatory capital to risk-weighted assets: 13.0 (Dec-06).
  - Regulatory Tier I capital to risk-weighted assets: 14.2 (Dec-06).
  - NPLs to gross loans: 3.2 (Dec-06).
  - ROA (after tax): 1.3 (2006 annualized).
  - Liquid assets to total assets: 36.5 (Dec-06).
  - Foreign currency-denominated loans to total loans: 27.1 (Dec-06).
  - Annual growth of bank loans: 20.1 (2006 annualized).

### Credit growth and currency exposure
- Bank credit growth has been rapid; the pace is assessed as appropriate given the strong economic outlook but could create fragilities if it continues for an extended period.
- Lending is predominantly in local currency (foreign currency-denominated loans to total loans: 27.1 percent in Dec-06), reducing indirect foreign currency risk compared with some neighboring countries.

### Stress testing and resilience
- Stress tests indicate current resilience: none of the sensitivity and scenario stress tests considered would bring the average Tier I capital adequacy of the system below 10 percent.

### Insurance sector and MTPL concerns
- Overall insurance sector performance has been good.
- Technical provisions for part of the life insurance industry are relatively low, notably for many older life policies with guaranteed capital given lower-than-assumed interest rates since issuance.
- Need for close monitoring of capital adequacy on life insurance policies.
- Highly competitive motor third party liability (MTPL) market limits ability to raise premia; requires close monitoring.

### Pension system (multi-pillar) issues
- New multi-pillar pension system introduced in 2005 aimed to improve sustainability of social security.
- Pillar 2 pension funds have experienced low investment returns to date.
- Suggested actions: encourage higher returns through greater diversification; change regulations covering governance and competition to facilitate higher returns; begin preparations for the payout phase of the pension system.

### Securities markets and capital markets policy
- Domestic securities markets are small and illiquid; deeper integration with the EU will allow Slovak corporate access to Western European markets.
- Recommendation to decide on a strategy for the development of the Slovak capital market and the future of the Bratislava Stock Exchange.
- Debt management recommendation: develop a debt management strategy that includes fewer but larger bond issues and follow standards established for government bond-issues in large Euro markets.

### Financial stability policy framework and infrastructure
- Significant improvements since 2002 in regulatory and supervisory frameworks, driven by EU harmonization and authorities’ commitment.
- FSAP assessments of Basel Core Principles (BCP) and IAIS Insurance Core Principles (ICPs) indicate general compliance in virtually all applicable areas.
- NBS appears prepared for risk-based supervision and to start implementation of Basel II.
- Unification of supervision under NBS in 2006 should help address uneven progress across sectors.
- Financial infrastructure strengthened: NBS oversight of payment system improved; real time gross settlement subsystem developed.
- Slovakia has fully implemented International Financial Reporting Standards (IFRS) for financial institutions; auditing subject to International Standards on Auditing (ISAs).

### Remaining challenges and supervisory priorities
- Need to continue upgrading supervisory expertise and increasingly focus on risk-based supervision as the financial sector evolves.
- Integrated supervision must ensure consistent approaches across financial subsectors to realize benefits.
- Supervisory challenges illustrated by problems in late 2005/early 2006 at the foreign parent bank of one Slovak bank, highlighting issues for small countries with largely foreign-controlled banking sectors; strengthened cooperation between home- and host-supervisors required, possibly facilitated by greater EU-level coordination.
- Insurance sector: strengthen supervision of capital adequacy ratios of life insurance policies and ensure adequate technical provisions.
- Financial sector infrastructure: ensure IFRS financial reporting framework is fully implemented for financial sector entities.
- Second pillar pension funds: provide incentives for diversification of pension fund portfolios.
- Consumer protection: review and fine tune the legal and institutional structure for consumer protection.

### Main recommendations (Box 1: FSAP Update Recommendations)
- Short term/ongoing — Regulatory and supervisory framework:
  - Continue integration of supervision through implementation of a risk-based approach for all intermediaries supervised by NBS, and through creating a common supervisory approach within the NBS through the dissemination of general supervisory principles across different financial subsectors.
  - Continue monitoring closely prudential indicators and banks’ credit assessment standards, so as to be prepared to take such actions as necessary to address any risks that may emerge.
  - Work to strengthen coordination and lines of communication between the NBS and home country supervisors, especially regarding Basel II implementation.
- Short term/ongoing — Insurance sector:
  - Enhance the supervision of capital adequacy ratios of life insurance policies.
- Medium term — Regulatory and supervisory framework:
  - Provide the NBS with the power to bar persons who come into positions of responsibility in existing banks and who do not meet fit and proper tests.
  - Ensure fit and proper tests and enforcement for the nonbank financial institutions, including insurance companies.
- Medium term — Insurance sector:
  - Ensure adequate technical provisions.
  - Define in law the supervisory responsibilities of external insurance auditors and actuaries.
- Medium term — Financial sector infrastructure:
  - Ensure that the IFRS financial reporting framework is fully implemented for financial sector entities.
- Medium term — Second pillar pension funds:
  - Provide incentives for diversification of pension fund portfolios.
- Medium term — Capital markets:
  - Develop a debt management strategy that includes fewer but larger bond issues and following the standards established for government bond-issues in large Euro markets.
  - Decide on a strategy for the development of the Slovak capital market and the future of the Bratislava stock exchange.
- Medium term — Consumer protection:
  - Review and fine tune the legal and institutional structure for consumer protection.

*Source: _cr07243 - Executive Summary*

### 8.      The open nature of the Slovak economy means that international (particularly

### 8.      The open nature of the Slovak economy means that international (particularly 

### External balances and vulnerability to external shocks
- Current account deficit was 8.3 percent of GDP in 2006.
- Exports are expected to pick up strongly as two new export-oriented automobile plants become fully operational from 2007, and as a result, the deficit should narrow substantially by 2008.
- In 2006, the deficit has been largely covered by non-debt creating flows (foreign direct investment), reducing exposure to an increase in global interest rates or an increase in risk aversion of foreign investors.
- The economy will become increasingly dependent on the automobile manufacturing sector, leaving it more vulnerable to global business cycle shocks.
- By the end of this decade, Slovakia is set to become the world’s largest producer of cars on a per capita basis.

### Major counterparties of Slovak financial institutions — overview
- Since 2002 there have been shifts in counterparties and credit risk structure.
- Credit to households has grown consistently faster than credit to the corporate sector: in 2006, credit to households grew by 32 percent versus an overall growth rate in private sector credit of 20 percent.
- The stock of corporate loans fell from about 75 percent of banks’ total loans as at end-2002 to a little over 60 percent by end-2006.
- There has been an increase in the share of bank loans to non-bank financial institutions (consumer credit companies, leasing companies etc.), often subsidiaries of banks and supervised on a consolidated basis.
- Private sector credit growth reflects robust GDP growth and catching up to developed country intermediation norms; the rate of growth does not seem excessive.

### Household sector — exposures and risks
- Less than 2 percent of all household loans are in foreign currencies.
- Household debt to GDP was 22 percent in 2005.
- Most increase in household credit has been for mortgages, concentrated especially in the Bratislava region.
- Interest rate subsidies on mortgage loans were abolished in 2005.
- Given low foreign currency exposure and current macro environment, a shock (e.g., an increase in unemployment) is unlikely to significantly affect debt servicing capacity.

### Corporate sector — lending patterns and currency composition
- Corporate lending was sluggish from 2003 to early 2005, but picked up more recently.
- Leverage ratio of Slovak non-financial enterprises has been declining in recent years.
- Around one third of loans to corporates are denominated in foreign currencies; a majority of these reportedly go to exporters, providing a hedge to foreign currency revenues.
- Many larger enterprises have multinational owners that arrange financing offshore; some banks have begun lending to SMEs.

### International exposures and funding
- Domestic deposits in Slovak banks were growing at an annual rate of 9 percent as of October 2006.
- Slovak banks have limited reliance on funds from foreign banks for financing domestic loans, reducing direct exposure to external developments.

### Banking system stress tests — methodology and key findings
- NBS carried out stress tests based on scenarios proposed by the FSAP team; Appendix II describes tests, methodology, and results.
- Broad finding: the Slovak banking system could withstand substantial market or credit shocks without facing difficulties.
- Banking system would be able to withstand a significant decline in real estate prices, and direct effects of exchange rate and interest rate volatility.
- The most significant effect would result from a substantial shock to credit quality.
- An increase of NPLs to over 7 percent of total loans (doubling the NPLs), with a conservative assumption of loss given default equal to 100 percent, would result in an aggregate loss of 21 percent of Tier I capital.
- Banks’ incomes would likely provide some additional buffer to offset the impact.
- Tests indicate increasing exposure to koruna interest rate rises because portfolios of fixed interest rate bonds with longer maturities have increased faster than the duration of liabilities.
- Exposure to credit risk has been on a declining trend, reflecting strengthening of banks’ balance sheets.
- Note: assumed shocks for credit risk are rough approximations; NBS is developing a macroeconomic-credit-loss model but it is not yet robust due to the absence of full-cycle time-series data.

### Nonbank financial institutions — insurance and pensions
- Insurance sector assets are around 8 percent of total financial sector assets.
- Nearly all insurance companies are foreign owned and part of large insurance groups or financial conglomerates.
- Technical provisions for insurance appear too low for some life and third-party liability automobile insurance contracts; declining interest rates have contributed to insufficient provisions for earlier guaranteed-capital life policies.
- Insurance supervisors are aware of technical provision deficiencies.
- Private pension funds (second pillar) introduced after 2005 reform; the second pillar is mandatory for new labor force entrants and voluntary for existing workers.
- As at end-2006, approximately two-thirds of the labor force had opted to participate in the second pillar.
- Second pillar funds have generated low real returns—between zero and 2 percent—due in part to heavy investment in bank deposits and government bonds and Slovak government yields converging to Euro-levels.
- Recommendations for the second pillar include diversification into equities and foreign instruments, review of PFMCs’ revenue sources and cross-selling practices, and avoidance of reductions in second pillar contribution rates.

### Capital markets
- Capital markets are small and illiquid; the government bond market is the most liquid segment but dominated by only three to four active banks with little secondary trading.
- Bratislava Stock Exchange (BSSE) is the only operating exchange; a significant number of securities transactions are concluded OTC and reported to the BSSE.
- Mortgage bond market growing; liquidity in corporate and municipal bond markets nearly nonexistent.
- Present legislation requires banks to issue mortgage bonds for 90 percent of the mortgage loans.
- Only 13 companies are listed on the equity market; estimated free float no more than 15 percent.
- A free market from voucher privatization consists of around 300 companies (down from about 800 in 2000); trading activity is mainly pre-negotiated trades and recently falling in value.

### Regulatory and supervisory framework — reforms and remaining challenges
- Regulatory and supervisory frameworks have been strengthened significantly since the 2002 FSAP; financial sector regulations are of a high standard and transposition of European directives is ongoing.
- Reassessment of Basel Core Principles for Effective Banking Supervision showed a high level of observance; only minor shortcomings remain.
- NBS appears well equipped to implement the Basel 2 capital framework and to perform supervisory tasks; cooperation with foreign supervisors has improved and will gain importance.
- Insurance supervision improved impressively and is generally compliant with IAIS Insurance Core Principles.
- Some aspects of regulation of the second pillar pension system need strengthening: governance, risk management, use of databases, and businesses with related parties are rather liberal and impose unnecessary risks on pension funds.
- Maintaining adequate and effective supervision in a fast-changing environment requires continuous upgrading of NBS staff skills and enhanced cooperation across departments and with foreign supervisors.

*From: _cr07243 - 8.      The open nature of the Slovak economy means that international (particularly*

### 29.      Following the broad international trend, in the last four years the NBS began to

### _cr07243 - 29.      Following the broad international trend, in the last four years the NBS began to

### Financial stability reporting
- Two semi-annual reports produced by the NBS:
  - Financial Stability Review (FSR), Research Department, first published in 2003; translated into English once a year.
  - Report on the Results of Slovak Financial System Analysis (RRSFSA), Banking Supervision Department, first issued in 2004.
- Observations and suggested refinements:
  - Both reports present overall assessments of financial sector trends but are lengthy (both well over 100 pages).
  - Consider streamlining:
    - Sharpen the FSR focus on major risks and strengths/vulnerabilities of the Slovak financial system.
    - Center the RRSFSA on analysis of structural developments and financial soundness indicators.
  - Revisit publication frequency:
    - More analytical FSR could be published on an annual basis.
    - More data-oriented RRSFSA could remain semi-annual or become quarterly.

### Payment system
- Recent improvements since 2002 FSAP assessment:
  - Strengthened NBS oversight framework.
  - Development of the real time gross settlement subsystem and intraday liquidity support.
  - NBS assumed operational responsibility for the Slovakia Interbank Payment Systems to ensure smooth, efficient, and safe operations.
  - National standards set and national infrastructure integrated for electronic payment instruments.
  - Shared ATM network now available to credit card users in Slovakia, facilitating potential integration into the single Europe payment area.
- EU integration initiatives:
  - NBS preparations to join the TARGET 2 real time gross settlement systems of the ECB by mid-2008.
  - Active participation in the Single Europe Payments Area Project (SEPA); national strategy for joining SEPA expected to be completed by early 2007.

### Systemic liquidity management and safety nets
- Liquidity management and market activity:
  - Modalities similar to 2002 FSAP; banking system remains very liquid, due in part to NBS’s sterilized purchases of capital inflows.
  - Alternative liquidity channels (money and securities markets) have grown since 2002 but remain not very active or liquid.
- Deposit Protection Fund (DPF) status and financing:
  - At time of 2002 FSAP, DPF was insolvent due to payouts to depositors of four failed banks in the 1999–2001 period; shortfall covered by a loan from the NBS.
  - Loan later taken over by a consortium of commercial banks; amortization payments made from the banking system’s current contributions to the DPF.
  - Contribution rate to the DPF was significantly increased for several years to speed loan repayment, but was recently lowered to avoid comparative disadvantage for Slovak banks vis-à-vis neighboring EU member countries.
  - The loan to the consortium will only be paid off by end-2010.
  - In the event of a payout before the DPF rebuilds significant funds, shortfalls would likely be covered by either the NBS or the rest of the banking system.
  - Current operation: although designed as a fully funded scheme, the DPF is operating to some extent as an ex-post funded scheme.
  - Consideration could be given to some increase in the contribution rate to build up the DPF more quickly, while bearing in mind the comparative disadvantage issue.
- Contingency planning and resolution:
  - Failures of four local banks and financial problems of one Austrian bank with a Slovak subsidiary contributed to development of thorough contingency planning arrangements and a manual of emergency procedures.
  - Critical need for close cooperation with home country supervisors for systemic cases; experience with the Austrian bank showed room for improvement, but main impetus must come from home supervisors.

### Accounting and auditing
- Accounting standards:
  - Slovakia has fully implemented International Financial Reporting Standards (IFRS) for financial sector entities, as recommended by the 2002 FSAP.
  - New decrees, compliant with EU versions, mandate IFRS for preparation of individual and consolidated accounts of banks, insurance intermediaries, and listed companies.
  - The IFRS framework includes a significant degree of professional judgment, which may result in differences in views on accounting treatments between supervisors, reporting companies, and auditors, posing new challenges.
- Auditing standards and quality assurance:
  - Quality of auditing in the financial sector is covered by International Standards on Auditing (ISAs).
  - System of external quality assurance and a disciplinary system in place.
  - Slovakia Chamber of Auditors received donor funding to help adopt all ISAs, the IFAC code of ethics, and relevant International Audit Practice Statements for bank financial statements.
  - By the end of 2006, all licensed audit firms will have been subject to quality controls/assurance and the disciplinary system has been renewed.

### AML/CFT (Anti-Money Laundering / Combating the Financing of Terrorism)
- Strengthening and remaining gaps:
  - AML regime has been strengthened in recent years.
  - Recent MONEYVAL assessment confirmed that some gaps remain and provided a number of useful and specific practical recommendations.
  - Authorities are urged to implement MONEYVAL’s recommendations.

### Annex — Basel Core Principles (BCP) assessment: institutional and supervisory findings
- Assessment context:
  - Detailed assessment of observance of the Basel Core Principles undertaken in December 2006 and reflecting practices as of end-November 2006.
- Market structure and recent history:
  - Commercial banks constitute nearly 88 percent of the financial sector’s assets.
  - Banking sector underwent structural changes between 2001 and 2004: elimination of weak banks, privatizations, resolution of nonperforming loans by the Slovak Consolidation Agency, and reforms to align with EU standards.
  - As of end-2006, there were 24 commercial banks.
  - Market shares: three largest banks around 50 percent; five largest banks around 65 percent.
- Key systemwide statistics as of end-2006:
  - Aggregate NPL loan ratio: 3.2 percent
  - Ratio of NPLs net of provisions to capital: 7.9 percent
  - Banking system ROA: 1.3 percent
  - Banking system ROE: 16.6 percent
  - Liquidity ratio: 36.5 percent
- Preconditions and legal framework improvements:
  - Tax reform effective January 1, 2004: uniform corporate and personal income tax rate of 19 percent.
  - Amendments to Civil Code effective January 1, 2003 improved law on collateral and secured transactions.
  - New Bankruptcy Act effective at beginning of 2006, establishing pro-creditor oriented bankruptcy system and emphasis on restructuring insolvent debtors.
  - Court system reforms effective as of January 1, 2006 aimed at speeding civil procedures.
- Supervisory powers and organization:
  - NBS empowered as bank supervisory, regulatory, and licensing authority by “The Act on the National Bank of Slovakia” (NBSA).
  - In January 2006, supervision of the entire financial sector was unified under the NBS.
  - NBS operates a comprehensive, transparent system for licensing, supervision, and enforcement; independence of supervisory authority is, in practice, good.
  - NBS has adequate staff to provide timely, comprehensive on- and off-site supervision.
- Licensing and ownership controls:
  - “Act No. 483/2001 Coll. on Banks and Amending and Supplementing Certain Acts” (the “Banking Act” or “BA”) defines permissible banking activities and use of the term “bank.”
  - NBS can require prior review and approval for proposed acquisition of a significant shareholder interest; can require disclosure of source of acquirer’s funds and apply a “fit-and-proper” test.
  - NBS lacks power to require changes in composition of statutory body and senior management to address prudential concerns; no requirement that banks notify NBS when they become aware of material evidence that may negatively affect “fit and proper” status of statutory body, supervisory board, or senior officer.
  - No requirement to notify NBS for acquisitions of subsidiaries in banking-related businesses if aggregate investment is below 20 percent of “own funds” of the investee bank.
  - NBSA prohibits a bank from taking a control position in a nonfinancial company and limits investment in one such enterprise to 15 percent of own funds, with an aggregate limit of 60 percent.
- Prudential regulations and risk management:
  - Market risk computations, capital charge, and reporting requirements are in force.
  - Risk-weighted capital adequacy requirements applied on both “solo” and “consolidated” basis.
  - Uncertainty exists whether NBS can impose additional capital requirements on a case-by-case basis to address particular risk profiles.
  - NBS decree on risk management and risks stipulates general requirements for risk management processes and procedures.
  - Credit risk is predominant though still relatively modest; market risks are low; country and transfer risk are almost nonexistent.
  - No specific regulatory requirements for management of interest rate risk in the banking book, though NBS verifies proper management of interest rate risk.
  - Liquidity risk management covered by a special NBS decree.
  - NBSA requires senior management to address significant internal operations to create an effective internal control system, but NBS has not yet issued a decree on internal control; NBS uses detailed inspection procedures to assess adequacy of banks’ internal control systems.
- AML implementation and procedures:
  - Slovak Republic has implemented relevant EU anti-money laundering legislation and observes most FATF 49 Standards as a MONEYVAL member.
  - Financial Intelligence Unit: Financial Intelligence Unit of the Bureau of Organized Crime (SJFP-UBPOK), member of the Egmont Group.
  - Reporting obligations: financial professions required to report suspicious transactions to SJFP-UBPOK.
  - Account opening: formal identification of account holder required.
  - Banks must refuse execution of transactions from clients on an anonymous basis and must determine ownership of funds for transactions in excess of EUR 15,000.
  - MONEYVAL peer review indicated some gaps in the AML framework that should be addressed.
- Supervision methods:
  - Off-site supervision and on-site inspections based on appropriate procedures; on-site inspections planned from off-site analysis of regulatory reporting and extended auditor reports, using standardized written procedures.
  - Recent enhancements allowed shift from comprehensive to more targeted inspections.
  - NBS has a standardized system for rating overall condition of a bank.
  - Regular formal contacts between NBS and bank management are not integral but meetings held on an “as required” basis.
  - NBS has full authority to request any information needed for supervision.

*Source: _cr07243 - 29.      Following the broad international trend, in the last four years the NBS began to (IMF PDF).*

### 52.      The various prudential reports are submitted both in electronic (online) and

### _cr07243 - 52.      The various prudential reports are submitted both in electronic (online) and

### Prudential reporting, verification, and external audit
- Prudential reports are submitted both in electronic (online) and hard copies, promptly reviewed for accuracy, and used as inputs by the off-site supervision section for analysis and any required follow-up.
- The NBS ensures that information provided from bank records is verified periodically through on-site inspections.
- The NBS uses extended format reports which require banks to commission annually from their external auditors as a significant source of supervisory information.
- Licensees are required to produce audited financial statements and annual reports pursuant to special regulations—Regulation (EC) 1606/2002 of the European Parliament and Council on the application of International Accounting Standards (IFRS).
- The NBS has power to reject the (annual) appointment of a bank’s external auditor.

### Remedial powers and limitations of the NBS
- Article 50 of the BA provides the NBS a comprehensive array of remedial measures in the event a bank fails to comply with prudential rules.
- Limitations noted:
  - The NBS does not have the power to disqualify executive board members and members of senior management of existing banks.
  - The NBS lacks the legal power to impose additional capital requirements on an institution to make adjustments to unusual risk profiles or deficiencies of risk management.
  - It is unclear if and to what extent the lack of these legal powers might be compensated by the use of moral suasion.

### Consolidated supervision and cross-border cooperation
- The NBS has sufficient legal powers and resources to exercise supervision on a consolidated and sub-consolidated basis.
- Consolidated supervision is not of major importance due to transparency and limited complexity of groups supervised by the NBS.
- Cross-border cooperation and exchange of information with other relevant supervisors are of vital interest for the NBS as the host supervisor of a relatively small banking sector that is almost fully owned by foreign banks.
- The BA provides the legal framework to cooperate with foreign supervisors, exchange information, and share supervisory tasks in ongoing supervision and in crisis situations.
- The NBS has authority to supervise the overseas activities of locally incorporated banks, but this is not presently of importance given the lack of such activity.
- Local branches of foreign banks are, in principle, subject to the same prudential, inspection, and reporting requirements as domestic banks; however, most branches are from other EU countries and are subject to the home supervisors’ prudential supervision according to the Single European Passport Regime.

### Recommended Action Plan to Improve Compliance of the Basel Core Principles (selected)
- CP6. Capital Adequacy
  - Provide clear statutory power to NBS to impose additional regulatory capital requirements to deal with particular risk profiles or to reduce regulatory capital (e.g., for non-arm’s length exposures or “hidden” losses, or other situations where “prudential filters” are required) on a case-by-case basis.
  - Note: It is understood that such power will be granted as a result of the transposition of the CRD into Slovak law. However, it has to be closely monitored whether such power is sufficiently defined to avoid legal challenges and whether it is executable in practice.
- CP9. Problem Assets, Provisions, and Reserves
  - Reduce ambiguity from the lack of a clear segregation of responsibility between the NBS and the external auditors.
  - Make a clear distinction between capital provisions/reserves for accounting and regulatory purposes.
  - Closely monitor the effect of IFRS on provisioning.
- CP16. Interest Rate Risk in the Banking Book
  - Consider addressing interest rate risk in the banking book explicitly through secondary legislation.
- CP17. Internal Control and Audit
  - Provide the NBS power to remove persons who are subject to fit-and-proper testing according to the Banking Act to address prudential concerns resulting from such persons’ integrity or performance of their duties immediately.

### Authorities’ response on banking supervision recommendations
- The Slovak authorities were in broad agreement with the assessment.
- They noted that the legislation implementing the EU Capital Requirements Directive in Slovakia (the amendment to the Banking Act), which took effect from January 1, 2007, addressed the FSAP mission’s recommended action as regards capital adequacy (CP6).
- The amendment also addressed the FSAP mission’s recommendation related to CP9 because it provides a new, specific, authority for enforcement to the NBS, under which a bank is obliged to reassess its provisioning if the NBS finds that the level of provisioning does not reflect the factual situation.
- The amendment impacts CP16: the Banking Act, as now amended, provides the NBS with the authority to issue specific secondary legislation, which has since been done and which took effect from 15 January 2007, clarifying the issue of interest rate risk in the banking book.

### Summary assessment of observance of the Insurance Core Principles (ICP)
- The ICP assessment was conducted in December 2006 based on IAIS principles approved in October 2003 and reflected practices as of end-November 2006.
- Since the 2002 FSAP, insurance supervision has shown an impressive improvement; most 2002 recommendations have been followed up by implementing the European Union insurance directives in national legislation.
- Insurance supervision is generally compliant with the ICP.
- Institutional changes:
  - Initially, insurance supervision was the responsibility of the Ministry of Finance, later moved to the Financial Market Authority (FMA), and from January 2006 absorbed into the NBS.
  - Further reorganization within the NBS was expected to take place in 2007, with regulatory resources expected to be allocated functionally rather than on a sectoral basis.
- Market context and risks:
  - As of end-September 2006, there were 24 insurance companies operating in Slovakia.
  - Two largest companies have a combined market share of over 50 percent of the total gross written premium.
  - Nearly all insurance companies are foreign-owned and often part of large insurance groups or financial conglomerates.
  - Premium growth per capita aligns with general expectations and is seen as a consequence of economic growth.
  - Technical provisions for many older life policies with guaranteed capital were calculated assuming higher (less prudent) discount rates, leading to insufficient provisions; solvency requirements for these life insurance policies should be enhanced.
  - Insurance fraud is a concern; it is recommended that the association of insurers, the criminal police, and the NBS cooperate more intensively.

### Main findings and supervisory capacity recommendations for insurance
- Internal and external auditors and actuaries currently play limited roles, placing a heavier supervisory burden on the NBS compared to other jurisdictions.
  - Recommendation: Rebalance supervisory work by defining and expanding expectations from external auditors and actuaries, potentially by establishing in legislation the statutory role of these professionals (obligations, legal immunities, fit and proper criteria, code of conduct, NBS power to approve and remove).
- The NBS’s powers to supervise the fitness and propriety of owners of insurance companies need strengthening.
- Strengthen supervision of tied agents by focusing on market conduct of intermediaries according to EU laws; set requirements applicable to cross-border sales and domestic consumer protection.

### Recommended Action Plan to Improve Observance of IAIS Insurance Core Principles (selected)
- Conditions for effective insurance supervision (CP 1)
  - Expand the mandate of insurance companies’ external auditors to provide information to the NBS, in line with requirements placed on external auditors of banks.
- Suitability of persons (CP 7)
  - Provide the NBS with strengthened powers to take actions against new owners of existing insurance businesses, including the power to require that owners dispose of their interests.
- Internal control (CP 10)
  - Introduce through legislation a stronger statutory role for actuaries and auditors in the supervisory process including legal requirements for information disclosure to the supervisor by actuaries and internal auditors.
- Risk assessment and management (CP 18)
  - Strengthen requirements covering risk assessments by insurance companies; starting in 2008, all insurers will be required to calculate a wider selection of risk ratios.
- Investments (CP 21)
  - Strengthen expertise within NBS regarding assessment of market, credit, matching and operational risks; cooperate with investment experts within NBS consistent with the philosophy of Solvency II.
- Derivatives and similar commitments (CP 22)
  - Require insurance companies to adopt and clearly disclose comprehensive policies on the use of derivatives and to have appropriate risk management systems and internal controls in place.
- Capital adequacy and solvency (CP 23)
  - Consider establishing and communicating a solvency control level in excess of the minimum solvency margin, particularly if the implementation of Solvency II will need to be delayed.
- Consumer protection (CP 25)
  - Allocate sufficient resources to enable the NBS to adequately supervise the market conduct of intermediaries and agents that sell insurance products.
  - Ensure that insurance companies, intermediaries and consumers are fully aware of legal conditions concerning market conduct and disclosure requirements for insurance products.

### Authorities’ response on insurance recommendations
- The Slovak authorities were in broad agreement with the assessment.
- Regarding suitability of persons (CP7), authorities noted that each new owner of an existing insurance undertaking must have prior approval by the National Bank of Slovakia; if a share is obtained without prior approval, the NBS has the power to suspend the exercise of rights to participate in and vote at the General Meeting of the insurance company.
- The NBS is collaborating with the Ministry of Finance to change the Insurance Act to implement some FSAP recommended actions as soon as possible.
- From February 1, 2007, a new section was formed within the National Bank of Slovakia's structure responsible especially for supervision of insurance mediation.

### Appendix I: Selected status of main recommendations of the 2002 FSAP (snapshot)
- Strengthen cross-border prudential supervision: Ongoing
- Strengthen the supervision of nonbank financial institutions, which are modest in size but growing rapidly: Ongoing
- Apply same standards of disclosure and transparency to supplementary pension insurance fund management companies and to pension management companies (second pillar): A new regulation on voluntary pension schemes was approved in 2005 that addressed most of the regulatory issues raised in the 2002 FSAP; a law approved in December 2006 leaves some providers of voluntary savings in a less competitive situation.
- Adopt new comprehensive insolvency legislation: At the beginning of 2006, the new Bankruptcy Act came into effect which is more creditor friendly and emphasizes restructuring of insolvent debtors as opposed to bankruptcy proceedings; several amendments have been passed to reform the court system—including a January 2006 amendment to speed up court proceedings—but it remains inefficient.
- Bring Slovak accounting standards and practices in line with International Accounting Standards: FSAP recommendations on IFRS have been fully implemented; applicable regulations require the use of IFRS, as endorsed by the European Union, for the preparation of individual and consolidated accounts of banks, insurance and listed companies.
- Deposit Protection Fund (DPF): Funding for the SDIF funds shortfall is currently provided by a consortium of banks (previously by the NBS). In the event of a need for further funding, the expectation is that this would in the first instance come from the NBS or commercial banks. The improving financial position of the SDIF enabled a reduction in premiums from

*Source: _cr07243 - 52.      The various prudential reports are submitted both in electronic (online) and (IMF PDF chapter/section).*

### 0.75 percent of protected deposits to 0.2 percent in 2006.

### _cr07243 - 0.75 percent of protected deposits to 0.2 percent in 2006.

### Exit Policies
- Strengthen exit policies for financial institutions and private enterprises more generally.
- Exit policies for financial institutions, as well as private enterprises more generally, have been significantly improved.

### Credit Bureaus
- Develop credit bureaus to facilitate the expansion in consumer finance, small sector lending, and leasing and housing finance.
- The regulatory framework has been modified.
- The corporate credit registry operated by the NBS has been reorganized and subject to major improvements.
- The three largest banks have established a commercial register for retail finance with open access.
  - This register has 16 participants and is based on a state of art software and communications platform.

### Public Debt Management
- Develop the primary and secondary markets for government securities through strengthening public debt management by:
  - reducing the number of issues,
  - bringing the issue policy in line with the overall objectives of debt management, and
  - increasing the role of the Ministry of Finance (MOF) in guiding the market through regular dialogue.
- Important improvements since 2002:
  - Debt is managed by a specialized agency (ARDAL), and strategic decisions are taken by the MOF.
  - Maturities have increased significantly, and the size of bonds on issue is at least SKK 40 billion.
  - Yearly calendars for auctions and types of bond issues are published as is the debt management strategy.
- Remaining issues:
  - Secondary market of government securities has remained illiquid.
  - The number of issues is rather large.
  - Coordination between the MOF, ARDAL, and the NBS should be improved.

### Housing Finance
- Rationalize fiscal incentives to encourage housing finance.
- The incentives were removed in 2005, but introduction of new incentives in this area (mortgage subsidies) is being contemplated.

### Appendix II: Stress Tests — Overview of the Shocks and Results
- Stress tests conducted during the FSAP update used methodology and scenarios proposed by the FSAP team and discussed with NBS.
- Data as of end-September 2006; tests conducted individually for all 17 commercial banks incorporated in the Slovakia.
- Tests included sensitivity analysis to interest rate, exchange rate, real estate price, credit, and liquidity risks.
- Macroeconomic scenarios based on a vector autoregression model were considered but not reported due to insufficient time-series robustness.
- Size of shocks chosen based on historical and hypothetical changes.

### Stress Test Findings (summary)
- Credit risk:
  - An increase in NPLs under assumptions of either no growth in total credit or credit boom with relaxed lending standards, or a doubling in NPLs, would lead to a decline in the aggregate Tier I capital adequacy ratio by 16 to 21 percent.
  - All tests use a conservative assumption of loss given default of 100 percent.
- Interest rate risk:
  - Banks are increasingly sensitive to a large koruna interest rate shock, especially to a steepening in the koruna yield curve.
  - Sensitivity attributed to an increase in banks’ portfolios of fixed interest rate debt securities with long maturities.
- Exchange rate and foreign interest rate risk:
  - Exposures are insignificant given the relatively low share of foreign currency-denominated assets and liabilities.
- Real estate price risk:
  - Direct losses from a collapse in the real estate market would be negligible for almost all banks.
  - A 50 percent fall in property prices would lead to a decline in the Tier I capital adequacy ratio by only 5 percent.
  - Small impact attributed to prudent (albeit increasing) loan-to-value ratios and still relatively small penetration of mortgages.
- Liquidity risk:
  - Effects of stress scenarios on liquidity ratios are not significant.
  - A depreciation of government bonds would not have any major effect on banks’ liquidity ratios.
  - Exposure to liquidity risk is mainly related to the possibility of sudden deposit withdrawals.

### Stress Test Results — Key Quantitative Outcomes (based on September 30, 2006)
- Aggregate impacts on Tier I capital (impact on Tier I Capital, negative value means decrease) — selected tests:
  - Parallel upward shift in the SKK yield curve by 500 bp: -23.2 (Aggregate); Best bank 37.6; Worst bank -74.0
  - Slopening of the SKK yield curve 1/: -0.8 (Aggregate); Best bank 1.3; Worst bank -2.8
  - Steepening of the SKK yield curve 2/: -18.1 (Aggregate); Best bank 31.3; Worst bank -68.3
  - Parallel upward shift in the Euro yield curve by 150 bp: -1.8 (Aggregate); Best bank 0.0; Worst bank -6.5
  - Parallel upward shift in SKK and EUR interest rates by 200 bp: -13.3 (Aggregate); Best bank 15.8; Worst bank -34.5
  - Depreciation of the SKK/Euro rate by 4.10 percent 3/: -0.2 (Aggregate); Best bank 1.0; Worst bank -1.6
  - Depreciation of the SKK/US$ rate by 7.86 percent 4/: 0.0 (Aggregate); Best bank 3.6; Worst bank -1.7
  - Depreciation of the SKK against all currencies by 20 percent: -0.8 (Aggregate); Best bank 1.4; Worst bank -3.3
  - Fall in residential and commercial real estate prices by 50 percent: -5.0 (Aggregate); Best bank 0.0; Worst bank -18.5
  - No credit growth 5/: -17.1 (Aggregate); Best bank -0.2; Worst bank -102.1
  - Granting of loans with highest default rate 6/: -16.4 (Aggregate); Best bank 0.0; Worst bank -66.0
  - Increase in NPLs by 100 percent: -21.2 (Aggregate); Best bank -0.1; Worst bank -73.8
- Memorandum items:
  - Baseline Tier I Capital Ratio (in % of risk-weighted assets): 13.8 (Aggregate); 26.2 (Best bank); 7.5 (Worst bank)

Notes for tests (as reported):
- 1/ Increase in short-term SKK interest rates by 500 bp.
- 2/ Increase in long-term SKK interest rates by 500 bp.
- 3/ Equivalent to the largest increase in the SKK/Euro rate within 10 business days during 2004-05.
- 4/ Equivalent to the largest increase in the SKK/US$ rate within 10 business days during 2004-05.
- 5/ Largest monthly absolute increase in NPLs during January-September 2006, multiplied by a coefficient of 5 (corresponding to increase in NPLs by 80%).
- 6/ Increase in loans by the average monthly increase in 2006 multiplied by a coefficient of 12 (i.e. annualized), with a highest share of NPLs recorded in 2006, multiplied by a coefficient of 3 (corresponding to increase in NPLs by 80% and increase in tot

### Distribution of Banks by Tier I CAR (selected scenarios)
- Baseline (before shocks):
  - Number of banks by Tier I CAR: < 6%: 0; 6-8%: 1; 8-10%: 0; > 10%: 16
  - Share of banks in %: < 6%: 0.0; 6-8%: 5.0; 8-10%: 0.0; > 10%: 95.0
- Parallel upward shift in the SKK yield curve by 500 bp:
  - Number of banks: < 6%: 1; 6-8%: 2; 8-10%: 3; > 10%: 11
  - Share of banks in %: < 6%: 5.0; 6-8%: 20.5; 8-10%: 44.2; > 10%: 30.3
- Steepening of the SKK yield curve 2/:
  - Number of banks: < 6%: 1; 6-8%: 1; 8-10%: 4; > 10%: 11
  - Share of banks in %: < 6%: 5.0; 6-8%: 0.7; 8-10%: 63.9; > 10%: 30.3
- Fall in residential and commercial real estate prices by 50 percent:
  - Number of banks: < 6%: 0; 6-8%: 1; 8-10%: 2; > 10%: 14
  - Share of banks in %: < 6%: 0.0; 6-8%: 5.0; 8-10%: 28.1; > 10%: 66.9
- No credit growth 5/:
  - Number of banks: < 6%: 3; 6-8%: 0; 8-10%: 4; > 10%: 10
  - Share of banks in %: < 6%: 9.3; 6-8%: 0.0; 8-10%: 44.6; > 10%: 46.1
- Granting of loans with higher default rate 6/:
  - Number of banks: < 6%: 0; 6-8%: 3; 8-10%: 2; > 10%: 12
  - Share of banks in %: < 6%: 0.0; 6-8%: 30.8; 8-10%: 21.8; > 10%: 47.5
- Increase in NPLs by 100 percent:
  - Number of banks: < 6%: 1; 6-8%: 2; 8-10%: 2; > 10%: 12
  - Share of banks in %: < 6%: 3.7; 6-8%: 29.4; 8-10%: 21.8; > 10%: 45.1

### Liquidity Stress Test Results (based on September 30, 2006)
- Impact on quick liquidity (in %) — median, lower quartile, upper quartile:
  - Depreciation of government bonds by 10 percent: 13.2; 1.1; 41.8
  - Decline in client deposits by 20 percent: 158.4; 51.5; 243.4
  - Outflow of short-term capital from the banking sector by 90 percent: 122.7; 19.2; 255.0
- Impact on liquidity up to 7 days (in %) — median, lower quartile, upper quartile:
  - Depreciation of government bonds by 10 percent: 9.2; 3.2; 26.5
  - Decline in client deposits by 20 percent: 97.1; 58.1; 164.3
  - Outflow of short-term capital by 90 percent: 61.3; 2.2; 156.4
- Impact on liquidity up to 3 months (in %) — median, lower quartile, upper quartile:
  - Depreciation of government bonds by 10 percent: 9.2; 5.1; 22.7
  - Decline in client deposits by 20 percent: 46.1; 17.5; 121.1
  - Outflow of short-term capital by 90 percent: 1.3; 0.0; 88.8
- Memorandum items:
  - Average monthly absolute change of ratio of quick liquidity: 18.4; 14.8; 25.6
  - Average monthly absolute change of liquidity up to 7 days: 19.5; 14.4; 36.7
  - Average monthly absolute change of liquidity up to 3 months: 16.4; 11.7; 32.6

Note:
- Impact on liquidity ratios is measured by comparing (i) the percentage change in the value of the liquidity ratio under different shocks and (ii) the average monthly percentage change in the value of the same ratio during January-September 2006.
- Calculated including branches of foreign banks except Banco Mais.

### Stress Tests, 2004–06 (Losses in percent of Tier I capital)
- Parallel upward shift in the SKK yield curve by 500 bp:
  - Dec-2004: n.a.
  - Jun-2005: 17.2
  - Dec-2005: 19.5
  - Sep-06: 23.2
- Depreciation of the SKK against all currencies by 20 percent:
  - Dec-2004: 1.7
  - Jun-2005: 3.1
  - Dec-2005: 3.1
  - Sep-06: 0.8
- Increase in NPLs by 100 percent:
  - Dec-2004: n.a.
  - Jun-2005: 29.4
  - Dec-2005: 26.8
  - Sep-06: 21.2

*IMF staff report content (excerpt).*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07243.pdf_