Macro-prudential instruments in Slovakia. Štefan Rychtárik Národná banka Slovenska

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1 Macro-prudential instruments in Slovakia Štefan Rychtárik Národná banka Slovenska Macroprudential policymaking in emerging Europe, Vienna

2 General background Banking: Very short history and experience Loans to households / total assets: 37% Household segment: 50% of net interest income Falling interest margins -> intensifying competition on retail market Traditional model of banking: amplified effect of low interest rates Households: Share of home ownership: app. 90% Housing loans to total debt: more than 74% One of the fastest growing indebtedness within the EU Residential real-estate market Only real and liquid market in Slovakia Growing prices promising yields 2

of low interest rates Households: Share of home ownership: app.

3 Housing loans growth Current trends One of the highest in the EU (around 14 % y-o-y) Absolute growth (in EUR mln.) is the highest in the history Household indebtedness Still relatively low level, but fast growth Household debt concentration (age and income group) 20 Chart: Year-on-year housing loan growth 120% Chart: Household debt to disposable income % 10 80% % 40% 20% EU quartile range Slovakia Euro area Source: ECB 0% * "Old" EU member states "New" EU member states Slovakia Source: ECB, Eurostat 3

Chart: Year-on-year housing loan growth 120% Chart: Household debt to disposable income 15 100% 10 80% 5 0 60% 40% 20% -5 12.09 12.10 12.11 12.12 12.13 12.

4 Housing prices growth (Q4 2015) Current trends Residential real estate prices Historically high volatility (+50% and -20% within 3 years) Actual housing prices growth close to 10% level Price growth is widespread: all regions, apartments types, market types, etc Important impact of low interest rates on REE valuation against fundamentals Chart: Housing loans and housing prices 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% LV IE PT ES CY HR Source: Eurostat, ECB AT BG SI DE EE IT FI FR RO NL PL LT MT SE CZ LU SK (April 2016) -4% -5% 0% 5% 10% 15% Household credit growth (Decemebr 2015) BE SK Chart: Housing affordability index Housing affordability index Source: NBS Crisis period Effect of low interest rates Housing affordability index interest rates 4

6% 4% 2% 0% -2% LV IE PT ES CY HR Source: Eurostat, ECB AT BG SI DE EE IT FI FR RO NL PL LT MT SE CZ LU SK (April 2016) -4% -5% 0% 5% 10% 15% Household credit growth (Decemebr 2015) BE SK 160 140 120

5 Main vulnerabilities overview Borrower stretch: Very high growth of credit / indebtedness Strong demand related to low interest rates Intensive loan refinancing, typically with top-up Lengthening average maturity Collateral stretch: Accelerating housing prices growth Changes in the structure of supply on primary market Growing motivation of buy-to-let Banking sector stretch: Falling interest margins are compensated by larger volume of new loans Already high exposure to households is growing further Intensifying pressure to ease credit standards Business model under pressure 5

structure of supply on primary market Growing motivation of buy-to-let Banking sector stretch: Falling interest margins are compensated by larger

6 Macro-prudential policy standpoint Growing imbalances: Household indebtedness Trends on the housing market Mitigating factors: Improvements on the labour market Extremely low default rates, low NPL ratio Solid capital base (Tier 1 ratio 16%) Major challenges / questions: Debt: strong both demand and supply Credit growth interpretation in deflationary circumstances Capital-based measures vs borrower-based measures (resilience vs. risk taking) 6

base (Tier 1 ratio 16%) Major challenges / questions: Debt: strong both demand and supply Credit growth

7 Measures taken Recommendation (October 2014): LTV caps on new loans (10% of loans between LTV 90% and 100%) DSTI + interest rate shock of 2 p.p. Maturity limits (30 years for housing and 8 years for consumer loans) No loans with deferred payments Refinancing with top-up treated as a new loan Prudent approach to lending through mortgage brokers Capital buffers Capital conservation buffer set to 2,5 % (October 2014) Combined O-SII buffer and Systemic risk buffer up to 3 % for 5 major banks Countercyclical capital buffer 0%, NBS expressed readiness to increase the rate in the near future 7

p. Maturity limits (30 years for housing and 8 years for consumer loans) No loans with deferred payments Refinancing with top-up treated as a new

8 Impact of measures taken Limiting vulnerabilities LTV beyond recommended limits Refinancing with top-up slightly decreased 2 p.p. interest rate test created new buffers Some measures act preventively (maturity, deferred payments, ) Identified weaknesses Increased pressure on appraisal of collateral DTSI definition too soft Chart: Share of refinancing and high LTV loans on new loans 30% 35% 25% 30% 20% 25% 15% 20% 10% 15% 10% 5% Recommended limit 5% 0% 2014Q4* 2015Q1 2015Q2 2015Q3 Refinancing loans with topping-up Refinancing loans without topping-up 0% 2014Q4 2015Q1 2015Q2 2015Q3 Share of new loans with LTV between 99 % and 100 % Share of new loans with LTV between 90 % and 99 % Source: NBS. Note: *Includes only November and December

new loans 30% 35% 25% 30% 20% 25% 15% 20% 10% 15% 10% 5% Recommended limit 5% 0% 2014Q4* 2015Q1 2015Q2 2015Q3 Refinancing loans with topping-up Refinancing loans without topping-up 0%

9 Measures in pipeline Transposition of Recommendation Limits and rules will be transformed into national legislation New legal basis creates a flexible framework to change the parameters of the instruments if needed (sole NBS decision) Enhancement of exiting rules DSTI definition in legislation, possible stricter limit Stricter limits on maturity On-site supervision New rules are expected to be subject to on-site supervision by NBS and SSM Need to set up a channel between macro-prudential authorities and SSM Capital buffers Next decision on counter-cyclical capital buffer (July 2016) 9

legislation, possible stricter limit Stricter limits on maturity On-site supervision New rules are expected to be subject to on-site supervision by

10 Conclusions Analysis: Not every from a low base credit growth is financial deepening Effect of interest rates Process: Long and detailed discussions with the industry prior to implementation Expected leaks Reporting and follow-up is necessary Communicate (potential) impact of macro-prudential instruments Cooperation with micro-prudential supervision Policy: Cover both: risk taking and resilience Home-host issues Choice and calibration of instruments influenced by national legislation Possible interaction with monetary policy 10

(potential) impact of macro-prudential instruments Cooperation with micro-prudential supervision Policy: Cover both: risk taking and

11 Štefan Rychtárik Macroprudential Policy Department National Bank of Slovakia Tel: [email protected]

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