Bank of Slovenia: Slovenian banking system stable and resilient to potential environmental shocks

The Central Bank of Slovenia has confirmed that the country's banking system remains stable and resilient against potential shocks from external factors, according to results from macro stress tests conducted recently. The findings come amid heightened concerns over new geopolitical and energy-related risks that could impact both the economic and financial environment. Despite these challenges, the tests indicate that the banking sector continues to meet capital adequacy requirements even under adverse conditions. The stress tests, carried out by the Central Bank of Slovenia, assess the potential impact of systemic risks on the stability of the banking system. These assessments are based on macroeconomic scenarios that simulate unlikely but possible situations. The baseline scenario assumes moderate economic growth and inflation reduction towards the European Central Bank’s target of two percent. In contrast, the stress scenario predicts a significant decline in GDP and increased inflation due to geopolitical tensions affecting commodity prices. This would lead to higher net losses and reserves, increased interest rates for households and businesses, and reduced banking activity. According to the Central Bank of Slovenia, led by Governor Primož Dolenc, the banking system will maintain stable capital adequacy for the next three years. The results of the stress tests show that the capital adequacy of the banking system will remain high in the baseline scenario, reflecting banks' preparedness for potential challenges and contributing significantly to the overall resilience of the system and confidence in its financial stability. Even under the stress scenario, the banking system exceeds minimum regulatory capital requirements, confirming its robustness and ability to manage potential shocks effectively. Despite this resilience, the Central Bank warns that threats related to potential new geopolitical and energy shocks remain elevated. These risks could have significant implications for the economic and financial environment. The stress tests highlight the need for continued vigilance and preparedness among banks to address emerging challenges. In addition to macro stress tests, the Central Bank of Slovenia participated in targeted or thematic stress tests within the framework of the European Central Bank. These tests focused specifically on geopolitical risks and were conducted using a reverse stress testing approach. A total of 110 major banks across the Euro area, including three significant Slovenian banks, were included in the assessment. For other Slovenian banks, similar stress tests were conducted using the same methodology. The exercises required banks to develop scenarios that would result in a decrease in their capital ratio by a predetermined number of basis points. The purpose was to deepen understanding of the effects of geopolitical risks on bank portfolios and operations, formulate internal scenarios and quantify them, identify potential measures to mitigate negative impacts, and primarily develop reverse testing methods. According to the Central Bank, the scenarios developed by banks varied in quality but were generally meaningful and credible. Similar exercises conducted in the Central Bank of Slovenia showed comparable results for smaller banks and savings institutions. The targeted stress tests highlighted the importance of preparing for geopolitical risks and developing strategies to mitigate their potential impact. Banks were encouraged to create detailed scenarios and implement measures to reduce vulnerabilities. The exercises aimed to enhance awareness and readiness among financial institutions to handle unexpected challenges arising from geopolitical tensions and energy-related disruptions.