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increasing ease. While this raises questions regarding the future of the domestic securities market in Slovakia, it does not seem to be a cause for concern.

The supervisory and regulatory framework has been significantly improved since 2002. Although progress has been faster in some areas than others, the gaps that do exist are not likely to undermine the National Banks of Slovakia’s (NBS’s) capability to effectively perform its supervisory responsibilities. The FSAP mission’s assessments of the Basel Core Principles (BCP) for the banking sector and the International Association of Insurance Supervisors (IAIS) Insurance Core Principles (ICPs) indicate that there is general compliance in virtually all applicable areas. The NBS seems prepared for application of risk-based supervision and to start implementation of Basel II. The unification of supervision under the NBS that commenced in 2006 should help to address the areas of supervision where comparatively less progress has been made.

The financial sector infrastructure has also been strengthened. The NBS’ oversight of the payment system has seen further improvements and a real time gross settlement subsystem has been developed. Slovakia has also fully implemented the International Financial Reporting Standards (IFRS) for financial institutions, and auditing is now subject to International Standards on Auditing. While a driving factor for much of the improvement in both supervision and financial infrastructure has been the need to harmonize with EU standards, it also reflects the authorities’ strong commitment to creating a well-functioning and well-supervised financial system.

A few challenges, however, remain to be addressed in the near to medium term, especially in the area of financial institution supervision:

  • There will be a need to continue to upgrade supervisory expertise, and increasingly focus on risk-based supervision, as the financial sector continues to evolve and become more sophisticated;

  • Integrated supervision has the potential to significantly enhance the quality of supervision, but the approaches to supervision across the different financial subsectors will need to integrated well to ensure these gains are achieved; and

  • The problems in late 2005/early 2006 experienced by the foreign parent bank of one of the Slovak banks served to illustrate the supervisory challenges faced by small countries with largely foreign-controlled banking sectors. Resolving these challenges will require strengthened cooperation between home- and host-supervisors. This may be facilitated, at least for European Union (EU) member countries, by greater coordination at the EU level.

The main recommendations from the Slovakia FSAP Update are provided in Box 1.

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