About financial stability

Financial stability is a state where the financial sector as a whole is able to smoothly fulfil its basic functions even at times of major negative shocks in either the external or domestic economic and financial environment. Financial sector stability is correspondingly seen as a prerequisite for the healthy functioning of the real economy, while the behaviour of the financial sector should not deepen the economic cycle. The National Bank of Slovakia contributes to the stability of the financial system as a whole, principally by exercising supervision over financial market.

While financial stability is contingent on the financial health and sound internal processes of financial institutions, it is also significantly affected by other financial market participants – non-financial corporations, households and government – as well as by the legislative and regulatory environment. For this purpose, the National Bank of Slovakia publishes twice yearly a Financial Stability Report, which is concerned primarily with identifying the main risks to the stability of the financial sector in Slovakia.

Financial market supervision focuses on the stability of individual financial institutions and the exposure of individual financial entities to individual risks. The financial crisis of recent years has, though, shown that supervision defined in such narrow terms is unable to ensure financial stability. Therefore, a new policy has been developed with the aim of ensuring the financial stability of the financial system as a whole.

The role of macroprudential policy is to identify, monitor and mitigate systemic risks to the financial system. This duty to mitigate risks is what sets macroprudential supervision policy apart from supervision focused primarily on monitoring and identifying risks.

The core and strategic objective of macroprudential policy is to contribute to maintaining the stability of the financial system as a whole. This includes, in particular, strengthening the resilience of the financial system and reducing systemic risk, thereby ensuring the financial system’s sustainable contribution to economic growth. This core objective can be broken down into the following intermediate objectives:

• to mitigate and prevent excessive credit growth;
• to limit direct and indirect concentration risk;
• to mitigate and prevent market illiquidity and excessive maturity mismatches in bank balance sheets;
• to limit the systemic impact of misaligned incentives, with a view to reducing moral hazard;
• to strengthen the resilience of financial market infrastructure.

In Slovakia macroprudential policy is implemented by the National Bank of Slovakia as a component of financial market supervision. This power was vested in the NBS by way of an amendment to the Financial Market Supervision Act of 15 March 2013.

The NBS is also responsible for several areas that are closely linked to macroprudential policy, in particular supervision of individual financial market institutions, and the fields of regulation, currency, financial market operations, and payment systems, etc.

The implementation of macroprudential policy is the responsibility of the Macroprudential Policy Department, while the highest decision-making authority in this field is the NBS Bank Board.

Under the EU’s Single Supervisory Mechanism Regulation, the ECB is also involved in the implementation of macroprudential policy and has the power, when necessary, to impose policy settings stricter than those applied by the NBS.nástrojov makroprudenciálnej politiky nad rámec stanovený NBS.

Mitigating risks of a systemic nature and their impact is one of the core elements of macroprudential policy. The actual implementation of the policy involves relatively many areas. The most important part of policy implementation is the application of legislative instruments. This is a relatively strong form of response to the existence of risks, but there are also other instruments and approaches.

For a start there is active communication toward the public through the publication of reports and analyses. Communication may include commentary, reviews or recommendations for the financial sector. Policy implementation may include also direct communication with financial institutions with a view to influencing their behaviour. A separate form of policy implementation consists in initiatives for on-site inspections, or off-site supervision in response to facts learnt, or initiatives for regulatory changes. Internal responses may include changes to risk-measurement models. Furthermore, the NBS may respond to certain trends or risks by introducing new reporting requirements for financial institutions.

Since some instruments, for example the countercyclical capital buffer, require quarterly review, the NBS will take decisions regarding macroprudential policy on a quarterly basis. However, it retains the option to change the policy whenever necessary.

Macroprudential policy has a direct impact on financial institutions. More stringent requirements or new duties increase financial institutions’ costs. Conversely, relaxing requirements lowers these costs. Increased costs can be transferred into prices or the affordability of services provided to clients and, therefore macroprudential policy can indirectly impact all financial market participants. These costs are easily apparent.

On the other hand, macroprudential policy brings positive effects in the form of mitigating systemic risks, as well as making financial institutions more resilient. These benefits will later be experienced in the form of no or low costs connected with periods of financial or economic crisis. These positive effects will be felt only in the future and it is difficult to measure or visualise them in any way.

It is thus a challenge for macroprudential policy to introduce at a time of growth, when vigilance is low and costs are apparent, measures whose benefits will be experienced only in the future and are not so apparent.

The NBS seeks to ensure that implementation of macroprudential policy is as transparent as possible. Financial market participants feel the application of instruments immediately, whilst positive impacts in the form of systemic risk mitigation are difficult to measure or visualise. Therefore, the NBS considers it of key importance that both the professional and lay public have a proper understanding of the implementation of macroprudential policy.

The methodology for individual macroprudential policy instruments can be found in the section Financial stability instruments, including individual decisions.

At the European level macroprudential policy is defined primarily by Regulation (EU) No 1092/2010 of the European Parliament and of the Council of 24 November 2010 on European Union macroprudential oversight of the financial system and establishing a European Systemic Risk Board, and two ESRB recommendations – Recommendation ESRB/2011/3 on the macroprudential mandate of national authorities and Recommendation ESRB/2013/1 on intermediate objectives and instruments of macroprudential policy.

In Slovakia macroprudential policy is laid down mainly in the following laws:

• Act No 747/2004 Coll. on financial market supervision requires that macroprudential supervision be performed by the NBS and that the NBS, in the framework of this supervision, identify, monitor, assess and mitigate risks;
• Act No 566/1992 Coll. on the National Bank of Slovakia sets the NBS the general task of contributing to financial stability;
• The amendment to Act No 483/2001 Coll. on banks, implementing the CRD IV Directive and the CRR Regulation into Slovak legislation, grants the NBS powers to use legislative macroprudential policy instruments

More details may be found in the Financial stability legislation.

In the framework of the implementation of macroprudential policy at the European level, the European Systemic Risk Board (ESRB) was created in 2010. The ESRB’s mission is to contribute to the prevention or mitigation of systemic risks to financial stability in the Union that arise from developments within the financial system and taking into account macroeconomic developments, so as to avoid periods of widespread financial distress. Since its founding, the ESRB has issued two recommendations regarding the organisation of macroprudential policy in EU Member States.

For those countries participating in the Single Supervisory Mechanism, responsibility for macroprudential policy is shared between the respective national authority and the ECB. National authorities have the power to fully implement policy, as defined in EU legislation. ECB decisions on macroprudential policy may only increase requirements above the framework of national authorities’ decisions. In other words, the ECB may intervene only in cases where it considers that the national authority has not acted sufficiently, but it cannot cancel or moderate national authorities’ decisions.

Other systemically important banks (O-SIIs) are banks, which are relevant to domestic financial system and to domestic economy. Default of O-SIIs can significantly disrupt safe functioning of the financial sector and thus have negative consequences also for the real economy. For this reason, it is possible under the macroprudential policy to require O-SIIs to hold additional capital buffers, which should contribute to a higher resilience of these institutions and thus to strengthen financial stability.

For the Slovak banking sector, the EBA methodology has been used to identify O-SIIs. Given the characteristics of the Slovak banking sector as well as the domestic economy, O-SIIs are required under decisions of NBS to hold additional capital buffers from 1 January 2016. More detailed methodological information is available here. The list of identified O-SIIs and the O-SII buffers rate for individual O-SIIs are reviewed annually.