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State readies banking lifeline

IF SLOVAK banks begin to drown, the government will throw them a lifeline. In return, the state would assume shares in the rescued bank: at least this is how the recent draft legislation pertaining to the banking sector envisions a rescue operation working. The Slovak parliament passed the draft to a second reading on June 17. At the same time Ivan Šramko, the governor of Slovakia’s central bank (NBS), confirmed that currently Slovakia’s banking sector is not suffering from any aches which would require such legislation to be used. He stressed that the proposed law is only precautionary.

Will banks in Slovakia need packages of help? (Source: ČTK)

IF SLOVAK banks begin to drown, the government will throw them a lifeline. In return, the state would assume shares in the rescued bank: at least this is how the recent draft legislation pertaining to the banking sector envisions a rescue operation working. The Slovak parliament passed the draft to a second reading on June 17. At the same time Ivan Šramko, the governor of Slovakia’s central bank (NBS), confirmed that currently Slovakia’s banking sector is not suffering from any aches which would require such legislation to be used. He stressed that the proposed law is only precautionary.

So said Finance Minister Ján Počiatek, too: “The state is not primarily interested in taking over the banks as such.”

According to Počiatek, the legislation would provide only temporary help, lasting three years, during which time the bank would need to settle its obligations. He said it is only a precautionary move which will boost the government’s readiness to solve a potentially critical financial situation in banks only if warning signs emerge. Počiatek added that banks do not currently require the helping hand of the state.

The Slovak Banking Association (SBA) has confirmed Počiatek’s words and said that the banking sector is fit.

“The banking sector in Slovakia is profitable and has been showing enough liquidity and long-term stability and thus any kind of help from the state is not needed,” the spokesman for the SBA, Marcel Laznia, told The Slovak Spectator.

The SBA perceives the draft law as a precautionary measure, prepared in line with recommendations made by the European Commission last October.

The NBS and the Finance Ministry want the law approved in fast-track legislative procedure but Laznia said that the association sees no reason for this kind of special treatment of the draft.

The authors of the draft are the Finance Ministry and the NBS. The SBA has been informed about the intentions of the law but has not participated in preparing the legislation, according to Laznia. It has entered the process only by reviewing the draft.

As for the way the process should work, the finance ministry said that the state would provide what it calls “stabilising assistance” in the form of deposits of financial assets into the share capital of a bank in trouble, the SITA newswire wrote. The assistance would be provided based on a request for assistance from a bank.

Šramko stressed that the process will work on a voluntary principle and a bank must decide whether it wants to solve its problems in this way. The cabinet would make the final decision about providing help and the actual financial injection would be provided through the Finance Ministry.
The administrative process of submitting and evaluating a request should last four days, SITA wrote.

A bank, as a beneficiary of this assistance, is obliged to pay compensation for the loan either in the form of interest or through a fee. The banks are also required to ensure that the assistance would not be used in a way that would restrict economic competition. Only banks operating on the territory of Slovakia which hold a license to perform banking activities here would be eligible for the help.

“The banking sector is currently in good condition in Slovakia,” Laznia said. “The greatest risk for the upcoming period will be the growing volume of unpaid loans due to the worsening macro-economic situation, the drop of industrial production, and the growth of unemployment.”

According to Laznia, the banks are preparing for this situation by cutting expenses and creating enough reserves.

“According to stress scenarios which the market regulator, the NBS, conducts, the banking sector is sufficiently prepared even in the event of unfavourable developments in the economy,” said Laznia.
However, the president of the SBA, Igor Vida, recently said in an interview with the Sme daily that the worst times are yet to come for the banks.

The growing wave of slack work for many businesses, layoffs of employees who might then be unable to pay their loans and declining interest in real estate will be reflected only next year, Vida told Sme.

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