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Bank loan rates spotlighted

THE FINANCE Ministry has announced that it will conduct a close examination of banking practices in Slovakia. The country’s central bank and antitrust authority will also be taking a hard look at the fees and interest rates that banks operating in the Slovak market charge to lend money, for example to finance home purchases. Finance Minister Ivan Mikloš said in early February that it will be necessary to check whether what he called “high” banking charges are not the result of a cartel agreement across the banking sector. The minister pointed out that mortgages provided by banks in Slovakia are among the most expensive in the whole eurozone. Observers suggest that when, as is the case in Slovakia, three large banks control a majority of the banking market then they do not really need a cartel agreement.

THE FINANCE Ministry has announced that it will conduct a close examination of banking practices in Slovakia. The country’s central bank and antitrust authority will also be taking a hard look at the fees and interest rates that banks operating in the Slovak market charge to lend money, for example to finance home purchases. Finance Minister Ivan Mikloš said in early February that it will be necessary to check whether what he called “high” banking charges are not the result of a cartel agreement across the banking sector. The minister pointed out that mortgages provided by banks in Slovakia are among the most expensive in the whole eurozone. Observers suggest that when, as is the case in Slovakia, three large banks control a majority of the banking market then they do not really need a cartel agreement.

“I consider the price of loans and banking charges to be inappropriately high in Slovakia,” Mikloš said, adding that his ministry intends to examine them together with the National Bank of Slovakia and the Antitrust Office. The banks deny that there is any cartel agreement and say that the issue should be subject to an independent audit.

“We are convinced that there is no cartel agreement through the banking sector; yet this could be either confirmed or denied by an independent body,” Marcel Laznia, spokesman for the Banking Association of Slovakia (SBA), told The Slovak Spectator.

Vladimír Dohnal, director of Symsite Research, a think tank, said he has no information about cartel agreements and does not consider it likely that any formal arrangement exists.

“Banks do not have to create any formal cartel; when three banks control 75 percent of the market they have quite extensive power to control prices and other conditions without formal agreements,” Dohnal told The Slovak Spectator.

The Financial Policy Institute (IFP), a think tank which is part of the Finance Ministry, on February 4 released a report suggesting that Slovakia’s citizens are probably paying too much for their mortgages. It argued that changes might now be necessary.

According to the IFP, property loans make up two thirds of total loans to households and regular monthly mortgage payments significantly burden the budgets of families and individuals. The IFP highlighted what it called a relatively underdeveloped rental housing segment in Slovakia and wrote that for most Slovaks taking out a loan is the only way to buy property.

In long-term loans like mortgages even a small change in the interest rate can mean a relatively large difference in the amount of the monthly payment, the IFP stated.

The IFP also noted that the market is displaying signs of significant concentration among the largest banks.

At the same time, it said, mortgage providers have accumulated an information advantage. And, according to the IFP, banks may have profited to the tune of tens of millions of euros at the expense of clients because of deficiencies in the way rules governing payment of the state subsidy for mortgage loans were drafted.

The IFP compared interest rates in Slovakia and six other countries in the eurozone. The countries were picked based on several criteria such as geographic proximity or similarity in the structure of their economies.

Within this comparison, Slovakia had the highest interest rates for all fixed-rate property loans. The interest rate for loans with one-year fixed-rates in October 2010 stood at 5.7 percent in Slovakia, while the eurozone average was 3.8 percent – and the rate in Austria was only 3.3 percent, the IFP reported.

Interest rates in Slovakia did not mimic trends observed in other countries, where there was a significant drop in interest rates during 2009.

The IFP recommended that setting the interest rate for a loan should be made more transparent by defining it as a market benchmark plus a client risk surcharge based on the applicant’s risk profile.


However, Laznia, representing lenders, cited a European Commission survey from 2009 which he said found bank fees in Slovakia to be among the lowest not just across the European Union but also among the EU’s newer member states.

Nonetheless, Dohnal said that mortgage interest rates here are too high, considering Slovakia’s economic fundamentals.

“A concentrated market does not bode well for competition,” Dohnal said, adding that clients themselves have a way of influencing this situation.

“If clients, in large numbers, started using cheaper offers by smaller banks – because in general it is true that smaller and medium-sized banks offer cheaper loans than the three large banks – the larger banks would have to reduce their prices,” Dohnal said.

Mikloš also said that another problem is a certain “information asymmetry” between a loan applicant and the bank, which puts clients into a rather weak negotiating position in relation to the bank when a new interest rate is being decided, the TASR newswire reported.

Dohnal stated it is necessary to increase the level of public access to information, and said the Finance Ministry can help.

“Increasing the total information literacy of clients would help and here the state could, for example, help by changing the curricula and adding an emphasis on financial literacy at schools,” Dohnal said.

Laznia said that the SBA will not resist the efforts of the Finance Ministry to make clients better informed, as long as the proposal is meaningful.

“However, we think that the state should not forget about activities aimed at increasing the financial literacy of the population,” he said.

To back his point Laznia cited the example of an indicator of annual percentage rate costs which has been used in Slovakia for comparing consumer loans for more than 10 years.


He says that an SBA survey found that less than a fifth of Slovaks were able to understand it.

The Finance Ministry has prepared several changes to the system that subsidises housing loans; these are now undergoing interdepartmental review.

The ministry also intends to foster more competition among the banks, which it says should result in lower banking fees.


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