Macroprudential Commentary – March 2023

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The credit market decelerated

Rising interest rates, persisting uncertainty, and increasing prices and living costs are dampening household demand for loans. This is most evident in the slowdown in mortgage lending. Loans to non-financial corporations continue to grow, as rising costs put upward pressure on firms’ financing needs for working capital. On the other hand, firms’ demand for loans for fixed investment has decreased.

Housing prices have declined

The average price of residential properties listed for sale on online portals started to fall gradually in autumn 2022. This trend was seen across all sizes of flats and in most regions of Slovakia. Prospective buyers are no longer under pressure to make a quick purchasing decision, and some are now intentionally deferring their decision to buy a property. As a result, prospective buyers have an increasing number of flats to choose from. Stagnation is seen not only in sales of existing flats, but now already in the new-build market.

The cyclical turn need not imply a reduction in risk

Slower credit growth implies that risks associated with the financial cycle should accrue to banks’ balance sheets at a slower pace. It appears, however, that a proportion of new loans are actually more high risk. An increasing number of loans have a debt service-to-income ratio at the regulatory limit and a short interest rate fixation period, which, in a rising interest rate environment, exposes the borrowers to higher risk. It is worth noting that Slovakia is one of the few European countries where banks have not yet started tightening mortgage credit standards.

No change to the countercyclical capital buffer rate

Domestic banks are sufficiently capitalised, with their capital positions actually exceeding pre-pandemic levels. Moreover, they retain their profit-generating capacity even in these times of elevated uncertainty. Even if banks started making losses, their capital strength should ensure that they can absorb them and maintain lending to the economy.

Also in this edition

• The structure of bank deposits has changed (page 4)
• Do Slovak banks need a systemic risk buffer? (page 4)

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