As Slovakia's economic transformation gathers speed, some of the country's troubled smaller banks are falling off the pace. Hamstrung by insufficient liquidity, several domestic banks in the last month have either lost their license, been placed under a caretaker administration or had their ratings downgraded. Banking professionals warn that other bankruptcies and takeovers may follow in the months to come, as the country's once coddled financial sector turns into a contest for survival of the fittest.
The tiny AG Banka of Banská Bystrica became the first bank in Slovak history to lose its license on December 1 when the National Bank of Slovakia (NBS) finally tired of AG's inability to repay creditors or depositors and its violations of NBS criteria on prudent banking practices.
Prior to that, Košice's Priemyselná Banka had been placed under a caretaker administration by the NBS in mid-November for similar transgressions. And on December 3, ratings agency Thomson Bankwatch decreased the rating of the medium-sized Poštová Banka due to its high volume of classified loans; Poštová ended the first nine months of 1999 with a loss of almost 337 million Slovak crowns [$7.9 million] after turning a profit of 59 million crowns [$1.4 million] in the same period last year.
As the woes of minor banks pile up, other small fish are looking over their shoulders in fear; several medium-sized banks like Poľnobanka have been forced to issue large amounts of new equity through bond issues and taking credits to maintain the 8% capital adequacy ratio set by the NBS.
According to government officials and financial analysts, the problems of these banks lie in their shareholder structures, more particularly in their low amounts of foreign capital, and in the poor banking practices they followed under the previous government of Vladimír Mečiar, when banks were frequently managed by business circles close to the Mečiar government.
Now, with 24 banks still active on the Slovak banking market, many are even questioning the need for such diversity.
"I don't see any fundamental reason why these banks should exist," said Ján Tóth, a senior analyst with Dutch investment bank ING Barings. Tóth explained that most of the country's smaller banks had been founded by corporate executives to help the managers strip assets from their own firms.
The 'good riddance' theme was echoed by Katarína Mathernová, an advisor to Deputy Prime Minister for Economy Ivan Mikloš, who said that even under Mečiar, the suspicious client portfolios and the quality of management at these banks had given vital clues as to their deteriorating financial situations. "They [the banks] were lying and providing loans on grounds which were far from economic," Mathernová said.
Indeed, given the view of some officials that the damage at small banks has already been done, the government may be content next year to sit on its hands and let the cards fall as they may.
Juraj Renčko, an advisor to Finance Minister Brigita Schmögnerová, said that liquidity problems at many small and medium-sized banks could be traced back to the reason for their founding - to sponsor various business groups. "In the current unstable economic environment, such banks have only little ability to cover their risks," Renčko mused.
Looking for a saviour
In the wake of the recent banking mini-crises, however, some financial professionals have called for the NBS to improve its supervisory role and to give the victims more help in avoiding trouble.
Martin Barto, the head of the strategy division at state-owned bank SLSP, said he considered the NBS to be partly responsible for the deteriorating situation in the banking sector. "I think that the NBS Banking Board didn't consider the bad situation in some banks properly," Barto said. He added that the regulatory role of the NBS should be more precisely defined. "The NBS should have more opportunities to control the functioning of banks, and apart from that it should really be apolitical," Barto said.
The NBS, for its part, has said it has few tools to help small banks avoid their fates. "We believe that only shareholders and managers, not the NBS, are responsible for the economic and financial situations in the troubled banks," said NBS spokesman Ján Onda. According to Onda, the NBS is not a shareholder in these private banks, so its position is restricted to giving a final verdict on the future of banks facing collapse.
Onda added that the situation was somewhat different when the NBS owned a stake in a bank. "There are banks like Československá Obchodná Banka [ČSOB] in which the NBS has its stake, and that is something that changes the whole situation. Private banks, however, are a totally different kettle of fish."
Mathernová agreed that the role of the NBS was simply a regulatory and supervisory one. "Neither the government nor the NBS has a mechanism through which they could directly influence the situation in the troubled banks," Mathernová said.
However, Renčko said that if the NBS really wanted to change the course of events in the banking sector, its reputation alone was sometimes enough to influence the policies of troubled banks."The NBS is the main player on the field," he said. "It's the main authority, and when it says something, it's certainly not lost in the wind."
Renčko cited the Bank of England as an example of the power that central banks wielded. "When the governor of the Bank of England invites somebody for coffee, it means something. I'm not saying that the NBS is as influential as the Bank of England, but it is the most influential and most powerful banking institution in Slovakia," he said.