The National Bank of Slovakia (NBS) is ready immediately to offer 7.6 billion Sk ($211 million) for the recovery of the banking sector. However, the central bank must wait for the new Slovak government to take the necessary legislative steps, NBS vice governor Jozef Mudrík said in an interview with the domestic SITA news agency on November 4.
In accordance with the law, the central bank has created provisions for credits extended by the troubled IRB (Investment and Development Bank) and Konsolidačná banka (Consolidation Bank - KBB), stated Mudrík. He said that the central bank was ready to provide these sources as soon as this year. Nevertheless, it required a change in legislation, because the law stipulated the use of reserves and provisions for purposes other than those for which the NBS would like to use them in this case.
Martin Barto, an analyst for Dutch investment bank ING Barings, said that bank sector recovery was "the key to healing the entire national economy," as vital corporate restructuring could not take place until state financial houses were healthy.
Mudrík, however, predicted that the need for legislative change would slow down the restructuring process, and said that banks could not expect to get the sources from the NBS reserves until sometime next year. "The new government and parliament should adopt a law that would give an exemption to many other laws, so that the above financial sources could be used for the recovery of transforming banks," stressed the NBS vice governor.
Barto, for his part, predicted that the coalition would move with all possible haste to make the necessary changes. "The new government has declared that one of its priorities is healing the loan portfolios of the state-run banks. A shortened legislative procedure in this case would be both helpful and reasonable."
Mudrík admitted that the proposed NBS assistance would be only a small part of the money necessary for the basic recovery of transforming banks. "Next year's state budget should provide the money for the remaining part of this basic recovery," said Mudrík. As he explained, uncovered losses of banks under transformation keep on growing, and if the NBS reserves and provisions were dispersed for the purpose of recovery, the situation could radically change and banks could start meeting the capital adequacy requirement.
"The central bank will have to wait for the attitude of the new government. We have already held talks with members of the new cabinet and MPs, and we roughly familiarized representatives of the ruling coalition with these problems. The former government took over obligations it did not fulfill. It approved a paper on the recovery of transforming banks in October, just shortly before its resignation."
Mudrík stressed that banking sector recovery was vital to the credibility of the new coalition. "If the basic recovery of banks were undertaken, it would be the first signal to the world that the new government and the NBS want to make principal changes towards restructuring the bank sector. It is the inevitable first step, and one we cannot make headway without," underlined Mudrik.
Mudrik stressed that the former government of premier Vladimír Mečiar had abrogated its responsibilities in the banking sector. The volume of classified loans and uncovered losses of state banks like IRB and VÚB (Všeobecná úverová banka) has been permanently increasing, he said, and the NBS had reminded the government of the worsening situation at the turn of 1996 and 1997.
The failure of the government to take action, however, eventually led to a downgrading of the rating of Slovak banks by global ratings agencies like Standard & Poor's and Moody's. Mudrík said that the downgrades were a reflection of the ratings agencies' conviction that the government was not interested in solving banking problems.
The outgoing Mečiar cabinet approved a draft bank revitalization program at one of its last sessions before it formally handed in its resignation in late October. The program is to be implemented in selected state banks - Slovenská Sporitelňa (SLSP), IRB and KBB - in which the state, specifically the national privatization agency (FNM), has an important share of their registered capital.
According to the plan, the NBS should contribute 7.6 billion Sk to the revitalization process from its reserves and provisions fund. The Finance Ministry proposed that the central bank transfer these funds through the state budget or the KBB.
However, the NBS desires to make the transfer of these funds conditional on a guarantee signed by the ministry , ensuring that the banks themselves will bear the biggest share of the revitalization of their loan portfolios by writing-off non-performing loans and dissolving their provisions and reserves.
"Inevitably, further resources will have to be found," agreed Barto, adding that the coalition had already indicated it would like some of the amount to come from foreign sources.