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41.

While there has been significant recent expansion in the extension of credit to

households, the financial condition of the banking system remains sound. However, the

market is competitive and lenders are assuming somewhat higher credit risks in pursuit of

market share. The response of the National Bank of Slovakia (NBS) has been to improve data collection, monitor risk management practices of banks more closely, and to interact regularly with home supervisors of foreign-owned banks. As of end-2006: the aggregate NPL loan ratio was 3.2 percent; the ratio of NPLs net of provisions to capital was 7.9 percent; the

banking system ROA was 1.3 percent; the banking system ROE was 16.6 percent; and the liquidity ratio was 36.5 percent.

Main Findings

Preconditions for effective banking supervision

42.

Substantial progress has been made in the last few years in improving the legal

framework of Slovakia. Tax reform, effective January 1, 2004, introduced a uniform corporate and personal income tax rate of 19 percent. Amendments to the Civil Code,

effective from January 1, 2003, substantially improved the law on collateral and generally on secured transactions. Other improvements concern new investment incentives and legislation and corporate governance changes to the Commercial Code. At the beginning of 2006, a new Bankruptcy Act became effective, establishing a pro-creditor oriented bankruptcy system and emphasis on the restructuring process for insolvent debtors as opposed to bankruptcy proceedings. Several amendments were passed designed to reform the court system and strengthen the status of the courts, the latest effective as of January 1, 2006, with the primary

goal of speeding up the procedure before the civil courts.

43.

The general legal, business, and accounting framework within which banks

operate and banking supervision takes place is developing well. Market discipline is

effective, primarily because the market is well served by participants based in major

economies. The NBS, as supervisory authority, has an array of powers to control the risks assumed by the banks. The independence of the supervisory authority is, in practice, good.

The NBS has extensive authority to license, supervise, and inspect all institutions as well as power to establish prudential safety and soundness standards and regulations. The supervisory authority appears to possess an adequate number of staff to provide timely, comprehensive on- and off-site supervision to the current group of licensees. Sufficient legal

protections are in place to enable NBS supervisory staff to perform their functions effectively.

Objectives and powers

44.

The NBS is empowered as the bank supervisory, regulatory, and licensing

authority in Slovakia by virtue of “The Act on the National Bank of Slovakia” (NBSA).

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