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7

    • I.

      BACKGROUND

    • A.

      Summary of the 2002 FSAP Findings

  • 1.

    The 2002 FSAP team noted a number of regulatory and supervisory challenges,

but concluded that the overall challenges for the next period were more of a developmental than a stability nature. The FSAP team recommended that the Slovak authorities should emphasize risk-based supervision and improvement of supervisory practices; foster close cooperation among supervisory agencies including home country supervisory authorities; improve efficiency of exit processes and strengthen the collateral and insolvency regimes; improve the quality, breath, and depth of financial intermediation; and strengthen the financial sector infrastructure. With the country well along in preparation to join the EU, the 2002 FSAP team concluded that the Slovak financial system was not vulnerable to immediate macro-economic or financial sector shocks, but that some political and implementation risks were still present.

2.

Most of the issues identified by the 2002 FSAP team have since been addressed.

The regulatory framework has been improved, in order to address identified weaknesses as well as to achieve harmonization with the EU directives. Progress in adopting risk-based supervision has been somewhat uneven across sectors, but this is expected to be addressed by the unified supervisory framework established under the National Bank of Slovakia (NBS) in 2006. The financial sector infrastructure has been strengthened, including the legal framework for lending, and through the development of credit bureaus. There have also been significant improvements in accounting and auditing practices. Subsidies on mortgage interest rates were abolished in 2005. Appendix I summarizes how the key recommendations

made by the 2002 FSAP have been addressed.

  • B.

    Recent Developments in the Financial Sector

    • 3.

      Total assets of the Slovak financial sector have significantly expanded since 2002

(Figure 1 and Table 1). The system has become more diversified, as non-bank financial institutions (primarily pension funds, insurance companies, and securities companies) have grown faster than the banks, but the banks still remain by far the dominant institutions, accounting for more than 80 percent of financial system assets as of end-September 2006. The financial stability assessment presented in this report is therefore focused on banks and their counterparties.

4.

Following the clean-up of banks’ balance sheets in the early 2000s, the banking

sector has been in a sound position (Tables 2 and 3). The aggregate capital adequacy ratio has been on a declining trend from the high level that prevailed after the recapitalization of banks, but it remains at a satisfactory level of around 13 percent. Profitability indicators are good, with an overall return on equity of 16.6 percent in 2006 that provides a further cushion to absorb any negative shocks that might arise. The nonperforming loan (NPL) ratio declined

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