APPENDIX II: STRESS TESTS: OVERVIEW OF THE SHOCKS AND RESULTS
The stress tests conducted during the FSAP update were based on methodology
and scenarios proposed by the FSAP team and discussed with NBS. Using the data as of end-September 2006, the tests were conducted individually for all 17 commercial banks incorporated in the Slovakia. The stress tests included sensitivity analysis of the banking sector exposure to interest rate, exchange rate, real estate price, credit, and liquidity risks. Macroeconomic scenarios involving a combination of shocks were also considered based on a vector autoregression model, but given the shortage of time-series data the model was not sufficiently robust and therefore the results of these scenarios are not reported here. The size of the various shocks used in the stress testing exercise was chosen based on both historical
and hypothetical changes in the shocked key variables.
The results of the tests can be summarized as follows:
Credit risk potentially has a relatively large impact on banks. An increase in NPLs under assumptions of either no growth in total credit or credit boom with relaxed lending standards, or a outright doubling in NPLs, would lead to a decline in the aggregate Tier I capital adequacy ratio by 16 to 21 percent. All tests use a conservative assumption of loss given default of 100 percent.
Banks become increasingly sensitive to a large koruna interest rate shock, especially to a steepening in the koruna yield curve. This sensitivity can be attributed to an increase in the banks’ portfolios of fixed interest rate debt securities with long maturities.
Exposures to exchange rate risk and foreign interest rate risk are insignificant. This is not surprising, given the relatively low share of foreign currency-denominated assets and liabilities.
Direct losses arising from a collapse in the real estate market would be negligible for almost all banks. A 50 percent fall in the property prices would lead to a decline in the Tier I capital adequacy ratio by only 5 percent. Despite the stagnation of the real estate market following the EU entry in 2004, after strong rises in the immediately preceding period, such a small impact may be attributed to prudent (albeit increasing) loan-to-value ratios and a still relatively small penetration of mortgages.
Effects of stress scenarios on liquidity ratios are not significant. A depreciation of government bonds would not have any major effect on banks’ liquidity ratios, and the exposure to liquidity risk is related mainly to the possibility of sudden deposit withdrawals.