Slovene banking sector leads in green finance

Slovene banking sector leads in green finance

Stanislava Zadravec Caprirolo, Managing Director, Bank Association of Slovenia, talks about the local banking sector’s role in supporting the economy during the COVID-19 crisis and its exemplary position in sustainable finance.


How has the COVID-19 pandemic highlighted the robust nature of Slovenia’s financial sector?

While the Slovenian banking sector has a 30-year long history in our independent country, the banking system goes much farther back. We celebrated its 200-year anniversary at the end of 2020. The banking sector plays an important role in supporting economic growth and the financial needs of society. The key differences when comparing the financial crisis in 2007-2008 and up to 2013 with the COVID-19 pandemic are the bank’s strong capital and liquidity and low leverage and non-performing assets. Another difference is the progress made and achieved through our high level of digitization in processes related to banking services.

This strong position enabled a swift reaction to the COVID-19 crisis and support of the economy, especially for corporates and households. The capital and liquidity position has remained level from the beginning of 2020 until now. Our liquidity position—which was at a similar level to other European banking systems prior to the pandemic—strengthened due to low credit demand and high growth rates in savings. Slovene households are risk averse in such circumstances. Additionally, companies increased savings due to global economic uncertainty and temporary cuts to investments. Our banking system is one of the top systems in Europe in terms of excess liquidity. This is quite a challenge in the current low to negative interest rate environment. Household deposits have increased more than 10 percent year over year and non-financial corporation deposits have increased almost 20 percent. The saving rate of Slovene households, which was very high comparatively across EU countries before the crisis, has further increased during the COVID-19 pandemic. The banking sector entered this crisis in a good position in terms of non-performing loans following a cleaning of the balance sheet in the previous financial crisis. The level of non-performing loans was around 2 percent. This gave a lot of space to react swiftly and support the economy when major economic shutdowns took place. The response consisted of a commercial moratoria and provision of liquidity. These measures were later replaced and expanded by fiscal support schemes and other monetary policies and regulatory measures. Because of this swift reaction, the share of moratoria in the Slovenian banking system was among the highest in Europe. Nevertheless, economic activity and growth rate picked up at faster and higher rates than expected. The International Monetary Fund is forecasting a growth rate of 4.4 percent for Europe, with Slovenia close to the average at 3.7 percent.

Key challenges to the banking system are the overall macroeconomic environment, weak credit demand in a low interest rate environment and excess liquidity resulting in strong pressure on intermediation margins. For overall development of the financial sector in Slovenia and Europe there is need for further regulatory harmonization. This will bring an equal-level playing field and raise efficiencies for not only the financial sector but consumers and the economy.


What is your forecast for Slovenia’s economy in the short term?

As a result of economic activity less than 10 percent of companies and households that requested moratoria at the outbreak of the pandemic are requesting further prolongation. However, there is uncertainty in how this will affect the banking sector when the fiscal, monetary and supervisory measures are gradually phased out. While this may result in an increase of provisioning, the banking sector has strengthened its capital and issued hybrid instruments. The Slovenian national supervisor, the Bank of Slovenia, was more stringent and restrictive than the European Systemic Risk Board’s, European Central Bank’s and Single Supervisory Mechanism’s recommendations to refrain from or limit dividends. This national measure has helped to increase the robustness of its capital position. The Slovenian banking system is slightly above the average of the EU or Eurozone in terms of capital adequacy. That said, we are hoping for the central bank to release this measure and make it equal to that of recommendations put down by the European Systemic Risk Board and Single Supervisory Mechanism since having an equal-level playing field is important from investors’ point of view.

A major consolidation took place in the Slovene banking system during the last decade, similar to the European banking system as a whole. The number of banks in the system decreased by around 30 percent as well as the number of employees. On the other hand, digitization and structural changes that took place before the COVID-19 pandemic have increased and enhanced efficiencies. The cost efficiency of the banking system in Slovenia compares quite well to the average European banking system. Nevertheless, further consolidation is expected to take place.

Economic activity has rebounded in certain sectors, such as manufacturing and construction.  Exports grew above expectations during the period of the shutdown. Overall, confidence indicators are improving, signaling relative optimism in terms of rising investment, particularly in light of the European recovery plan. The EU recovery plan will give an opportunity for the banking sector to participate in the financing of important projects. The banking system is expected to complement public investments as large infrastructure projects are envisaged. Opportunities for small and medium-sized enterprises will emerge as the pandemic comes under control. The banking sector is well equipped to support and finance the envisaged investment needs of green and digital transformations.


What are the main goals of the 2021 Slovenian Presidency of the Council of the European Union?

The Slovenian presidency is an important opportunity to pursue progress, particularly in speeding up programs involving the trio of Germany, Portugal and Slovenia. The trio program was defined 12 months ago when the trio presidency began. Priorities that were listed for the period of 18 months and further prioritized in detail for the period of the Slovenian presidency are strongly supported by the banking sector, especially in regards to speeding up the harmonization of regulations related to digitalization. These will be key in fostering innovation and innovative growth and provide swift support and equal opportunities for businesses and clients in remote areas. Digitalization is a key area in the economic development program of the European Union in the medium term and a top priority of the Slovenian presidency. Environmental and social sustainability is another priority issue, and the banking sector should play a catalytic role in this process. However, there is a need for further regulatory changes in this area. Important acts were passed in the European legislative processes but there are still forthcoming ones to be designed and implemented. Financing can be, and is going to be, an important catalyst in the process of investing in green and socially responsible growth. Good financing conditions can facilitate the shift to green and socially responsible investments. There are opportunities for the Slovene banking sector to support growth in the region.


How has the pandemic affected the application of digital technologies in industry and government?

Digital trends were already present before the COVID-19 crisis, both globally and in Slovenia. The advanced level of digitization in the Slovenian banking sector helped at the beginning of the pandemic to support the economy and shift—practically overnight—the provision of financial services remotely. While the level of digitization in the country was already high, the COVID-19 pandemic has sped up the process substantially. One policy reaction of Slovenia’s government and its counterparts was to adopt temporary regulatory frameworks to enable digital channels to be used more than before. We are urging policymakers and regulators to transfer temporary frameworks that support the use of digital channels in conducting business into the permanent European regulatory framework. Besides this tremendous short-term change, we are going to confront a long-term structural change. Although, how much of a change depends on the behavior of consumers. Based on the evidence, a permanent structural shift into the digital realm at the magnitude of 200 percent is feasible, but not for all sectors. We still require certain services to be provided in person.


Do you see a potential for Slovenia to take a leading role within sustainable finance?

Even though we are a relatively small financial sector within the European Union, the Slovenian banking sector has been one of the more important players in green finance since 2017 when it supported the first green bond issuance of the Slovene company Gen-I, the electricity provider. Since then, the banking sector has offered a different palette of sustainable, green, social and supportive products not only to companies but also households, especially in the area of housing. There are many examples in Slovenia of partially self-sustainable municipalities in terms of energy and renewable and circular approaches in the provision of different services. The frontrunners in financing sustainable projects were SID Bank and Nova Ljubljanska Banka, both of which take part in a United Nations Environment Programme Finance Initiative project. Nova Ljubljanska Banka also takes part in a shared initiative from the European Banking Federation and United Nations Environment Programme Finance Initiative involving applying European green taxonomy on banking products. All banks in the system have included sustainable finance into their strategic objectives and have designed their products to reflect these objectives.


What kind of services does the Bank Association of Slovenia provide for its clients and the country?

The main task of the Bank Association of Slovenia is to implement activities that are in the interest of its members. As a voice of the sector, we facilitate cooperation between different stakeholders. We facilitate the modernization and standardization of banking operations to the benefit of the banking sector and consumers. One important task is financial education, which we devote a lot of effort towards. We focus on the elderly and other specific groups that have drawbacks in the new digital environment. We cooperate intensely in this area with ministries, schools, libraries and the Consumer Protection Office. During the COVID-19 pandemic, the Bank Association of Slovenia’s role was significant because it provided a platform for fast and efficient communication between different stakeholders. We provided information to the public on how to access financial services and which protective measures apply. We also supported the banking sector’s overnight shift to remote services. Despite the relatively high level of digitization present before the pandemic, there was a need for many operational changes.

Our members consider that our most important roles are facilitating digitalization, sustainability, financial education and cybersecurity. We are a very small association of 11 people along with the training center we have for the Slovenian financial system. Despite being a small team, we are highly motivated and build heavily on the support of members and colleagues from banks. We provide different certificate courses as a member of the European Banking & Financial Services Training Association. Other training includes brokerage and leasing. We also issue a monthly professional financial magazine in Slovenia. The magazine is indexed in the renowned electronic bibliography EconLit produced by the American Economic Association. The global COVID pandemic has shown us how fragile we all are and how important cooperation is. Inclusiveness and social cohesion are key dimensions in coping with a crisis. As a banking sector, we are ready to play our role in supporting the shift to sustainable and inclusive development.