The Slovenian banking sector has undergone extensive changes in the past few years that were mainly driven by the international financial crisis and EU measures as a response to it.
As a comparatively small and specific market, Slovenia had (and to certain extent still has) a relatively fragmented banking sector with a vast number of relatively ‘small’ banks. Not only those smaller banks but also the banks with systemic importance (NLB dd, Nova KBM dd) faced severe solvency and liquidity problems. This led to the introduction of the Bank Assets Management Company (BAMC) in 2013. By the end of 2013, a substantial part of the non-performing assets of the two largest Slovenian banks (NLB dd, Nova KBM dd) had been transferred to BAMC (followed by the transfer of the non-performing assets of Abanka Vipa dd and Banka Celje dd in 2014), and the ‘bail-in’ action was introduced by the Bank of Slovenia in December 2013 concerning extraordinary measures ordering five banks to write off certain types of liabilities (share capital, hybrid capital and subordinated debt instruments).
The bail-in measures were challenged in front of the Constitutional Court of the Republic of Slovenia, and following the preliminary ruling of the Court of Justice of the European Union dated 19 July 2016,2 the Constitutional Court issued its decision dated 19 October 2016,3 in which it decided that the bail-in measures were constitutional, while at the same time giving shareholders and holders of hybrid capital and subordinated debt instruments an option to challenge the bail-in measures in front of courts on grounds of damages liability. A new special law is in the process of adoption that will regulate such procedures.
Although it can be claimed that owing to the above-described measures the overall financial (banking) sector is currently stable, it is still, to a certain extent, subject to overall restructuring. Mergers of banks during 2016 continued, and the number of banks incorporated in Slovenia fell to 12.
The top five Slovenian banks by market capitalisation4 are NLB dd, followed by Nova Kreditna Banka Maribor dd, Abanka dd, Unicredit Banka Slovenija dd and SKB dd.
II THE REGULATORY REGIME APPLICABLE TO BANKS
i The Banking Act
On 13 June 2015 the Banking Act entered into force, which currently regulates the establishment, management and supervision of banks in Slovenia. With the Banking Act, EU Directive 2013/36/EU has been fully implemented and EU Directive 2014/59/EU has been partly implemented. The Banking Act is also in accordance with Council Regulation (EU) No. 1024/2013 implementing Basel III. On 25 June 2016, the Resolution and Compulsory Dissolution of Credit Institutions Act entered into force, partially amending the Banking Act and implementing EU Directives 2001/24/EC and 2014/59/EU, and in detail regulates the execution of Directive 806/2014/EU.
The main objectives of the new Banking Act are the regulation of stable internal administration comprising a stable organisational structure, effective risk management structures and rehabilitation plans, adequate internal control mechanisms, and adequate policies and rules on benefits. The Bank of Slovenia has been granted greater ‘supervision leverage’, and can impose a fine of up to twice the annual profit obtained from a breach if said breach can be established, or 10 per cent of the company’s gross yearly income. In addition, a fine of up to €5 million or up to twice the annual profit obtained from the breach, if it can be established, can be imposed on a member of the management or supervisory board. When establishing the credit risk, the bank cannot rely exclusively on external credit ratings, but should also take into account other information and use external credit ratings as one or more factors in the process of decision-making on loans. Several buffers are regulated by the Banking Act and, as a pillar, certain competences of the Bank of Slovenia have been transferred to the European Central Bank (ECB).
The main new features introduced by the Banking Act are as follows:
- a banks should prepare, publish and execute policies for the selection of appropriate candidates for members of management and supervisory boards of banks, and a bank should implement a procedure of checks to evaluate such candidates prior to their appointment and thereafter at least once annually;
- b banks should appoint special risk commission committees and supervisory boards of ‘significant’ Slovenian banks, and also committees for appointments and benefits;
- c the ECB has exclusive authority over all banks to decide on the granting and withdrawal of licences for the incorporation of banks and licences on qualified investments in banks;
- d the ECB has supervisory authority over ‘significant’ Slovenian banks, while the Bank of Slovenia has supervisory authority over ‘less significant’ Slovenian banks; in addition, the ECB has the authority to give instructions to the Bank of Slovenia in relation to the execution of its supervisory authority over ‘less significant’ Slovenian banks, and can even decide that such supervision in relation to a particular ‘less significant’ Slovenian bank will be performed by the ECB itself;
- e the Bank of Slovenia should establish a system for reporting breaches of regulations in the area of banking (intended mainly for bank employees, i.e., a whistleblowing system); and
- f the Banking Act provides for additional supervisory measures or the ‘early prevention of consequences’ in the event that there is a rapid deterioration in the financial position of a bank.
ii The Slovenian regulatory regime for banks
The Banking Act regulates the conditions for carrying out business and the regular liquidation of banks with their seat in Slovenia, as well as the conditions under which foreign credit institutions (with their seat outside Slovenia) can perform business in the territory of Slovenia. It further regulates the competent supervisory authorities, measures and powers in the process of supervision. The Banking Act also regulates measures and powers for the management of macroprudential and systemic risks in relation to credit institutions with their seat in Slovenia.
The Banking Act defines three main areas of services: banking services, financial services, and additional and other financial services.
Banking services are defined as accepting deposits and other returnable assets from the public and granting of credits5 for own account. Financial services are more broadly defined as:
- a accepting deposits and other returnable assets;
- b granting of credits (which includes consumer loans, mortgage loans, factoring and financing of commercial deals);
- c financial leasing;
- d payment services and issuance of electronic funds;
- e issuance and management of other payment instruments;
- f issuance of guarantees and other warranties;
- g trade for its own account or for accounts of clients with monetary market instruments, foreign payment currencies, including the exchange business, standardised features and options, with currency and interest financial instruments and bearer securities;
- h cooperation in issuance of securities and connected activities;
- i advising undertakings with regard to capital structure, business strategy and connected matters and services with regard to mergers and acquisitions;
- j money broking on interbanking markets;
- k management of investments and connected advising;
- l storage of securities and connected services;
- m credit rating services;
- n lending of safe deposit boxes; and
- o investment services and business as well as ancillary investment services. The mutually recognised services under the Banking Act are banking services and financial services.
Only the following entities can perform banking services on the territory of the Republic of Slovenia: a bank that has obtained a licence in accordance with the Banking Act; an EU Member State bank that incorporates a branch office in Slovenia in accordance with the Banking Act or that is entitled to directly perform banking services on the territory of Slovenia; or a non-EU Member State bank (i.e., third-country state bank) that incorporates a branch office in Slovenia in accordance with the Banking Act.
A company with its seat in Slovenia may start providing banking services on the territory of Slovenia after it obtains a licence to provide such services from the ECB in accordance with the Banking Act and EU Regulation No. 1024/2013. A bank may commence providing financial services and ancillary financial services in Slovenia once it has obtained a licence from the Bank of Slovenia to provide such services in accordance with the Banking Act (certain ancillary financial services can be provided by a bank after giving notice to the Bank of Slovenia, accompanied by a three-year business plan).
In addition, an EU Member State bank may provide mutually recognised financial services in Slovenia via a branch office or directly provided that the Bank of Slovenia receives proper notice from the bank’s home Member State banking supervision authority (passporting) and after the Bank of Slovenia has replied with a notice to the bank’s home Member State banking supervision authority explaining certain aspects of mandatory Slovenian law.
A Slovenian bank can only be organised as a joint-stock company or as a European joint-stock company (Societas Europaea). Minimum share capital of a bank is €5 million (which should include one or more items from points (a) to (e) of the Paragraph 1 of Article 26, EU Regulation No. 575/2013). Shares of a bank can only be issued as registered shares and can only be paid in in cash.
III PRUDENTIAL REGULATION
i Relationship with the prudential regulator
Slovenian banking regulation closely follows EU legislation in the field with only certain carveouts and national exceptions.
Regulatory and supervision authority over Slovenian banks is in general divided between:
- a the Bank of Slovenia (as the prudential regulator for banks); certain tasks have now (with the adoption of the Banking Act) been shifted to the ECB;
- b the Securities Market Agency, whose basic mission is to maintain a safe, transparent and efficient market in financial instruments by exercising control over brokerage companies, banks engaged in investment transactions and services, management companies, investment funds, mutual pension funds, public companies and public-limited companies governed by the Takeovers Act, and by performing other regulatory tasks; and
- c the Insurance Supervision Agency (ISA), whose main responsibility is supervising insurance undertakings, insurance agencies and insurance brokerage companies, and insurance agents and brokers. ISA also supervises legal persons related to the insurance undertaking, if necessary for the purpose of supervising the insurance undertaking’s operation, as well as additional control of the insurance undertaking within an insurance group, insurance holding company and joint-venture insurance holding company.
The Bank of Slovenia is the prudential regulator of banks in accordance with EU Regulation No. 1024/2013, with the exception of tasks and competences in relation to credit rating supervision, where competence is, in accordance with EU Regulation No. 1024/2013, shifted to the ECB (Article 9(1) of the Banking Act). In addition, the Bank of Slovenia is competent and responsible for supervision over entities that, in breach of the Banking Act, take deposits or other returnable assets from the public.
When executing its tasks and competences under the Banking Act and EU Regulation No. 1024/2013, the Bank of Slovenia should assure that the subjects of supervision act in accordance with:
- a the Banking Act and EU Regulation No. 575/2013 and subordinated legislation;
- b provisions of regulatory and implemental technical standards, adopted by the European Commission in accordance with EU Regulation No. 1093/2010;
- c guidelines, recommendations, regulations and other legal acts, issued by the ECB in accordance with EU Regulation No. 1024/2013;
- d guidelines, recommendations and other legal acts, issued by the European Banking Authority in accordance with EU Regulation No. 1093/2010;
- e warnings and recommendations issued by the European Systematic Risk Board in accordance with EU Regulation No. 1092/2010;
- f other binding legal acts, including the acts issued by the European Commission or other EU authorities on the basis of EU Directive No. 2013/36 and EU Directive No. 2014/59/EU and international standards and recommendations in relation to the operation of credit institutions and the prudential supervision of credit institutions; and
- g guidelines issued by the Bank of Slovenia in relation to the implementation of rules from points (a) to (f) above and in relation to Article 10 of the Banking Act.
The Bank of Slovenia is also competent for the implementation of Article 458 of EU Regulation No. 575/2013, for the implementation of measures to limit macroprudential or systematic risk in relation to banks, and for setting the requirements in relation to capital buffers.
ii Management of banks
With the adoption of the Banking Act, Slovenia has implemented the CRD IV Directive.
A Slovenian bank is free to decide whether it will adopt a one-tier or two-tier management system (although it is still common in Slovenia for banks to be managed under the two-tier system).
Special general rules exist that lay down basic rules for the governing bodies of a bank (covering the management board in a one-tier system and the management and supervisory boards in a two-tier system). The rules, inter alia, provide that a governing body, as a whole, should be comprised in such a way that it possesses the required knowledge, skills and experience that are required for the understanding of the banking activity and risks the bank is exposed to. A bank should implement and execute a process of evaluation of adequacy of candidates prior to appointment and after appointment, if required, but at least once every year. The Banking Act further regulates the incompatibility of management involvement of members of a managing body of a bank in other entities. Under the Banking Act, the Bank of Slovenia is empowered to issue further rules and regulations in relation to governing bodies.
Where a bank is managed under a one-tier system, the management board should consist of at least two executive directors, who can be appointed solely from among the members of the management board. More than half of the management board cannot be appointed as executive directors. Naturally, members of management board that are not executive directors are not entitled to run the business of the bank. The president of the management board cannot at the same time be appointed as an executive director in the bank, unless the Bank of Slovenia issues such a permit based on reasonable grounds to be provided by the bank. The law regulating workers’ participation in management in relation to workers’ representatives in governing bodies does not apply in relation to banks.
Where a bank is managed under a two-tier system, the management should consist of at least two members who can only jointly represent the bank and who are employed by the bank under a full-time employment agreement. At least one member of management should be fluent in Slovenian. The Banking Act provides several requirements that a management member should fulfil to be eligible as a member of management of a bank. Only a person who has obtained a special licence from the Bank of Slovenia (or the ECB where the supervisory authority over the bank has been shifted to the ECB in accordance with EU Regulation No. 1024/2013) can be appointed to the management of a bank. Prior to a management candidate filing for the licence, this candidate should be confirmed by the supervisory board.
A management member should at all times fulfil conditions set by the Banking Act determining the eligibility criteria for members of management and should in addition:
- a act in accordance with professional care, and assure that the management at all times act in accordance with Article 136 of the Banking Act;
- b act openly, honestly and independently to effectively evaluate and adjudicate decisions of higher management in relation to the business of the bank;
- c act in accordance with the highest ethical corporate governance standards taking into account the prevention of a conflict of interest; and
- d dedicate sufficient time to his or her function as a management member with the aim of carrying out management duties effectively.
Management members are jointly and severally liable for damages occurred as a consequence of breach of their duties, unless they are able to prove that they have prevented conflicts of interest and have acted in accordance with the law and due professional care.
Eligibility criteria for members of a supervisory board are similar to those for management members of a bank. A supervisory board has certain further competences in addition to those under the general corporate law. A supervisory board should establish a revision commission and a risk commission, and, in the case of an important bank, a benefit commission and an appointment commission. The tasks of such commissions are defined in detail in the Banking Act.
Remuneration and bonuses of the members of governing bodies and other employees of a bank are not limited by absolute and fixed numbers, but rather by a comprehensive set of general policies and basic principles (Articles 169 and 170 of the Banking Act). For example, the remuneration policy should be consistent with prudent and effective risk management, and considering the business strategy, goals, values and long-term interest of the bank, etc. Special rules apply for:
- a banks with majority ownership held by the state or self-governing local communities (remuneration in the case of such banks is limited as set out in the Act Governing the Remuneration of Managers of Companies with Majority Ownership held by the Republic of Slovenia or Self-Governing Local Communities); and
- b banks receiving extraordinary state aid, where the remuneration and bonuses are again limited by basic principles and should be in line with ‘safe and reliable risk management’ of a bank; in the case of such banks, the Bank of Slovenia (or the ECB where the supervisory authority over the bank has been shifted to the ECB in accordance with EU Regulation No. 1024/2013) can demand a bank to amend its remuneration policy to comply with prudent risk management and assure long-term growth, and may set limitations regarding remuneration of members of governing bodies.
iii Regulatory capital and liquidity
As part of the full implementation of Basel III, the CRR Regulation6 (CRR) is directly applicable in Slovenia, whereas the CRD IV Directive7 (CRD IV) has been implemented into Slovenian law by adoption of the Banking Act (which entered into force on 13 May 2015).
Slovenia implemented certain carveouts and national exceptions offered under CRR and CRD IV. The Bank of Slovenia has published on its website a decision on carveouts and national exceptions (e.g., with regard to CRR, Article 412(5), first sentence (discretion implemented), Article 413(3) (discretion implemented) and certain exceptions in relation to large exposure from Article 493(3), and with regard to CRD IV, Article 74(4), Article 76(3) and Article 152(2)).
A bank shall ensure that it has at its disposal at all times adequate capital to cover the capital requirements set out in Article 92 CRR, requirements based on Paragraph 3 of Article 250 of the Banking Act (regulating the competence of the Bank of Slovenia to implement additional measures) and requirements to maintain capital buffers based on Chapter 7 of the Banking Act, and to ensure internal capital adequacy in accordance with Article 131 or in accordance with the assessment based on Article 183 of the Banking Act.
A bank may include the capital instruments set out in Articles 52 and 63 CRR in its calculation of capital, if it obtains authorisation to include a specific capital instrument in that calculation from the Bank of Slovenia or the ECB, whenever the latter performs the tasks set out in point (d) of Paragraph 1 of Article 4 of Regulation (EU) No. 1024/2013 during the supervision of a bank in accordance with the same regulation (such authorisation shall be issued provided that the capital instrument in question satisfies the conditions set out in CRR).
A bank shall ensure that is it capable, at all times, of meeting the liquidity requirements set out in Part 6 CRR and the regulations issued on the basis of Articles 460 and 510 thereof, and the requirements based on Paragraph 5 of Article 250 of the Banking Act (regulating the competence of the Bank of Slovenia to implement additional measures).
It shall also ensure that it is capable of settling its mature liabilities on time at any given moment.
Internal capital adequacy
A bank shall have appropriate, effective and comprehensive strategies and processes to continuously assess and ensure the amounts, types and distribution of internal capital that it deems necessary as coverage with respect to the characteristics and extent of the risks to which it is or could be exposed in its operations. A bank shall ensure on the basis of regular reviews that these strategies and processes are comprehensive and proportionate to the nature, scale and complexity of the activities it performs, and that it has internal capital adequacy to cover those risks.
In accordance with Article 10 CRR, the Bank of Slovenia may decide to waive in full or part the application of the requirements set out above for an individual bank affiliated with a central body.
Internal capital adequacy for market risk
Based on established market risk management policies and processes, a bank shall take into account significant market risks that are not the subject of capital requirements in accordance with CRR when assessing and ensuring internal capital adequacy in accordance with Article 131 of the Banking Act.
A bank that, when calculating capital requirements for position risk in accordance with Chapter 2 of Title IV of Part 3 CRR, nets its positions in one or more equity instruments that comprise a stock index with one of more positions in a stock-index futures contract or in another stock-index product, shall ensure internal capital adequacy to cover the basic risk of a loss as the result of different movement in the value of futures contracts or other derivatives relative to the movement in the value of the underlying instruments to which they are tied.
A bank shall also ensure internal capital adequacy whenever it holds opposite positions in stock-index futures contracts that do not match in terms of maturity, composition, or both. When applying the procedure set out in Article 345 CRR, a bank shall ensure internal capital adequacy to cover the risk of a loss that exists from the assumption of the associated liability until the next working day.
Level of compliance in relation to internal capital adequacy
A bank that is not a subsidiary bank or parent bank in Slovenia, and a bank that is not included in prudential consolidation in accordance with Article 19 CRR, shall fulfil the obligation to assess and ensure internal capital adequacy in accordance with Article 131 of the Banking Act on an individual basis. A parent bank in Slovenia shall fulfil the obligation to assess and ensure internal capital adequacy on a consolidated basis in accordance with Article 131 of the Banking Act to the extent and in the manner set out in Sections 2 and 3 of Chapter 2 of Title II of Part 1 CRR.
A bank that is controlled by a parent financial holding company or parent mixed financial holding company in Slovenia shall fulfil the obligation to assess and ensure internal capital adequacy in accordance with Article 131 of the Banking Act based on the consolidated financial position of that financial holding company or mixed financial holding company to the extent and in the manner set out in Sections 2 and 3 of Chapter 2 of Title II of Part 1 CRR. If, in addition to the aforementioned bank, other banks or EU Member State banks are subsidiaries of the same parent financial holding company or mixed financial holding company in Slovenia or an EU parent financial holding company or EU parent mixed financial holding company, the previous sentence shall apply in accordance with and in the manner set out in Section 9.3 of the Banking Act. A subsidiary bank that is itself or whose parent financial holding company or mixed financial holding company is the parent of or holds a participating interest in another credit institution, financial institution or management company established in a third country, shall fulfil the obligation set out in Paragraph 1 of Article 133 of the Banking Act on a sub-consolidated basis.
Level of compliance in relation to internal governance arrangements
A bank shall fulfil the requirements regarding the internal governance arrangements on an individual basis, except in cases where the Bank of Slovenia waives the application of those requirements, in part or full, in accordance with Article 7 CRR. A bank that is the subsidiary of a parent financial holding company or parent mixed financial holding company in Slovenia or an EU parent financial holding company or EU mixed financial holding company shall fulfil the requirements regarding the internal governance arrangements set out in Article 128 of the Banking Act on the basis of the consolidated financial position of that financial holding company or mixed financial holding company. If, in addition to the aforementioned bank, other banks or Member State banks are subsidiaries of the same parent financial holding company or mixed financial holding company in Slovenia or an EU parent financial holding company or EU parent mixed financial holding company, the previous sentence shall apply in accordance with and in the manner set out in Section 9.3 of the Banking Act.
A parent bank in Slovenia and its subsidiary banks shall fulfil the requirements regarding internal governance arrangements on a consolidated or sub-consolidated basis. A parent bank in Slovenia and its subsidiary banks shall ensure that the aforementioned internal governance arrangements are appropriately integrated, and that they are consistently implemented at all of their other subsidiaries in such a way that facilitates the compilation of all data and information important for supervision. Notwithstanding the above, a parent bank in Slovenia or a subsidiary bank of an EU parent financial holding company or EU parent mixed financial holding company shall not be obliged to fulfil the requirements regarding internal governance arrangements in connection with subsidiaries established in a third country, if it demonstrates to the Bank of Slovenia that the fulfilment of those requirements would be in contravention of the valid regulations of that third country.
iv Recovery and resolution
A bank that is not part of a group subject to supervision by the Bank of Slovenia or another competent authority on a consolidated basis shall adopt a plan of measures or ‘recovery plan’, which will facilitate the restructuring of the bank in the event of a significant deterioration in its financial position with the aim of maintaining or restoring the viability and financial soundness of the bank. On the other hand, if so demanded by the Bank of Slovenia or another competent authority, a bank that is part of a group subject to supervision by the Bank of Slovenia, the ECB or another competent authority on a consolidated basis, and that is not an EU parent bank, shall adopt an individual recovery plan taking into account circumstances and measures at the level of that bank.
Within the scope of the continuous supervisory review and evaluation process, the Bank of Slovenia shall assess whether a recovery plan submitted by a bank includes all the necessary information and fulfils the requirements set out in Articles 185 to 187 of the Banking Act. As part of its assessment, the Bank of Slovenia shall take particular account of the following:
- a whether the bank’s capital and funding structure is appropriate with respect to the organisational structure and risk profile of the bank;
- b whether the implementation of measures set out in the recovery plan is likely to maintain or restore the viability and stable financial position of the institution or group, taking into account the preparatory measures that the institution has adopted or will adopt;
- c whether the plan and the specific measures envisaged in the plan are likely to be implemented quickly and effectively, including in significant financial distress, thus preventing to the maximum extent possible any significant adverse effect on the financial system, including in scenarios in which other institutions are implementing recovery plans in the same period; and
- d whether measures and activities envisaged in the recovery plan could adversely impact the resolvability of the bank.
A bank shall regularly verify the appropriateness of the recovery measures set out in its recovery plan and shall update its recovery plan at least once a year based on the findings from regular verification. In addition, a bank shall update its recovery plan after every change to its legal or organisational structure or its business or financial situation that could have a material effect on the implementation of envisaged recovery measures or the success of the recovery plan with regard to stabilising the bank’s operations. The Bank of Slovenia or the ECB (where the latter performs the tasks set out in of Paragraph 1, point (i) of Article 4 of Regulation (EU) No. 1024/2013 during the supervision of a bank in accordance with the same regulation) may require a bank to update its recovery plan regularly in periods of less than one year. A bank shall submit its recovery plan in the manner determined by the Bank of Slovenia (where the Bank of Slovenia performs the tasks set out in Paragraph 1, point (i) of Article 4 of Regulation (EU) No. 1024/2013 during the supervision of a bank).
Ordinary measures of the Bank of Slovenia
If, during supervision, the Bank of Slovenia determines that a bank is in breach or is likely to be in breach of banking regulations within the next 12 months, it shall inform that bank in writing of its findings and order it to cease such conduct and rectify the aforementioned breaches, and to submit a written report to the Bank of Slovenia by a specific deadline describing the measures it has taken to rectify the breaches, together with the appropriate evidence. If the breaches are such that they could have material effects on the secure and prudent governance of the bank, it shall, in addition to the requirements set out in the previous sentence, order the bank to implement the additional measures to rectify or prevent breaches (i.e., additional measures).
When imposing additional measures the Bank of Slovenia may, in particular:
- a order a bank to provide capital that exceeds the requirements set out in Chapter 7 of the Banking Act and in CRR in connection with the elements of risks and risks that are not covered by Article 1 CRR;
- b order a bank to implement specific measures to improve the bank’s internal capital adequacy assessment and maintenance process, and its internal governance arrangements;
- c order a bank to submit a detailed plan of measures to rectify breaches of the Banking Act or CRR, including a deadline for the implementation of those measures;
- d require a bank to apply a special policy for the creation of impairments and provisions, or for the treatment of assets in terms of calculating capital requirements;
- e impose measures to reduce the risks a bank takes up in connection with specific transactions, products or systems, including:
• the prohibition or restriction of the expansion of the bank’s branch network, or the requirement to reduce the scope of the bank’s branch network, and
• the prohibition or restriction of the bank’s activities that represent a material risk to the bank’s financial position;
- f prohibit or restrict the conclusion of individual transactions or transactions of specific types, and require a gradual reduction in the number of concluded transactions, taking into account early termination options in accordance with contractual arrangements, including the prohibition or restriction of the conclusion of transactions by the bank:
• with persons who represent increased risk for the bank owing to an unsuitable credit rating or other circumstances; or
• with individual shareholders, members of the management board and supervisory board, undertakings with whom the bank is in a close relationship, investment funds managed by a management company with whom the bank is in a close relationship, or other undertakings and persons who represent increased risk for the bank;
- g prohibit or limit the payment of profits or interest to shareholders or holders of additional Tier 1 instruments, unless that prohibition would result in default by the bank;
- h order a bank to use net profits and retained earnings to improve its capital adequacy;
- i prohibit or limit the use of accounting criteria that would result in the incorrect disclosure of a bank’s financial position or results, and define the appropriate criteria;
- j limit the variable remuneration of employees, applying an appropriate proportion of total revenues for the financial year if the payment of that portion of remuneration would jeopardise the fulfilment of obligations or targets regarding a bank’s capital adequacy;
- k set additional requirements regarding the provision of liquidity, including restrictions with respect to the maturity matching of a bank’s claims and liabilities;
- l require additional and more frequent reporting by a bank, in particular with regard to the capital and liquidity of the bank;
- m require the supervisory board to appoint the relevant committees for specific types of specialised tasks in the scope of the supervisory board’s competences;
- n require additional disclosures from a bank;
- o require a bank’s supervisory board to recall a member or members of the management board who are directly responsible for breaches identified at the bank, and appoint a new member or members to the management board; and
- p require the holders of a qualifying holding to recall a member or members of the supervisory board who permitted breaches identified at a bank to occur, even though they were aware or should have been aware of those breaches, and appoint a new member or members to the supervisory board.
Furthermore, if a bank is in breach or is likely to be in breach of banking regulations, and in the event of the rapidly deteriorating financial position of the bank, in particular rapidly deteriorating liquidity, or an increase in leverage, the scope of non-performing loans or the concentration of exposures, the Bank of Slovenia may issue an order requiring the bank or its governing body to implement the following additional measures (i.e., early intervention measures):
- a require the bank’s governing body to implement activities in the scope of one or more arrangements or measures set out in the bank’s recovery plan;
- b require the bank’s governing body to update the bank’s recovery plan as appropriate if the circumstances that led to early intervention differ from the assumptions set out in the original recovery plan, and to implement activities for the implementation of arrangements or measures set out in the updated plan by a specific deadline;
- c require the bank’s governing body to submit a detailed plan of measures aimed at preventing or overcoming problems of the bank, including a deadline for the implementation of those measures;
- d require the bank’s governing body to convene the bank’s general meeting by a specific deadline and propose to the latter the adoption of specific measures for the bank’s recovery, including measures to increase the bank’s share capital and measures to decrease share capital due to the coverage of losses or a transfer to the share premium account;
- e require the dismissal or replacement of one or more members of the bank’s governing body or senior management (and appoint special representatives for a maximum period of one year, with a limited possibility of extension);
- f require the bank’s governing body to draw up a plan for negotiations on the restructuring of debt with some or all of the bank’s creditors in accordance with the recovery plan;
- g require changes to the bank’s business strategy;
- h require changes to legal arrangements and operational processes at the bank; and
- i require the bank to ensure the conditions and information that the resolution authority requires to update the resolution plan or to plan resolution measures, including the valuation of the bank’s assets and liabilities for resolution purposes.
As a last resort measure in the scope of the ordinary measures of the Bank of Slovenia, the Banking Act foresees the withdrawal of a bank’s licence.
Extraordinary measures of the bank of Slovenia
Extraordinary measures are regulated in the newly adopted Resolution and Compulsory Dissolution of Credit Institutions Act, which entered into force on 25 June 2016. The law partially amends the Banking Act and implements EU Directives 2001/24/EC and 2014/59/EU, and in detail regulates the execution of Directive 806/2014/EU.
Reorganisation measures in the sense of Directive 2014/59/EU that can be imposed are:
- a write-down and conversion of capital instruments;
- b the sale of all of a bank’s business;
- c incorporation of a bridge bank;
- d exclusion of assets; and
- e write-down and conversion of qualified liabilities.
IV CONDUCT OF BUSINESS
The Slovenian banking sector is subject to great scrutiny from the Bank of Slovenia (and the ECB) on all aspects of its business. A bank shall have stable internal governance arrangements that include:
- a a clear organisational structure with precisely defined, transparent and consistent internal relationships with regard to responsibilities;
- b effective risk management processes for identifying, measuring or assessing, managing and monitoring risks, including recovery plans and the reporting of the risks to which the bank is or could be exposed in its operations;
- c suitable internal control mechanisms that include appropriate administrative and accounting procedures; and
- d appropriate remuneration policies and practices that are in line with prudent and effective risk management, and thus also promote risk management.
Internal governance arrangements shall be comprehensive and proportionate to the nature, scale and complexity of the risks that derive from a bank’s business model and the activities it performs.
A bank is subject to strict reporting obligations to and preventive as well as curative measures by the Bank of Slovenia and other competent authorities.
Slovenian banks should follow strict know-your-client rules with the purpose of prevention of money laundering and financing of terrorism. Banks must also adhere to consumer protection rules.
Slovenian banks shall safeguard all data, facts and circumstances regarding a specific client at a bank’s disposal, regardless of the manner in which the data have been obtained. Furthermore, members of a bank’s bodies, its shareholders and employees, and other persons to whom the confidential data are in any way accessible in the course of their work or while they are providing services for a bank, may not disclose this data to third parties, or enable a third party to make use of it or use it for their own purposes. This obligation does not apply:
- a if a client provides its express written consent to the disclosure of certain confidential data;
- b if the data are required by the Bank of Slovenia, the ECB or a supervisory authority for the supervision of a bank that it manages in the scope of its powers;
- c if such data are requested in writing by an anti-corruption commission, or if requested in writing by a court, state prosecutor or police for pretrial and criminal proceedings, except in cases when the law expressly requires an order by an investigating judge for the forwarding of confidential data;
- d when data are forwarded to parent entities in connection with supervision on a consolidated basis;
- e for the exchange of information regarding client credit ratings for the purpose of credit risk management:
• between members of a system for the exchange of information regarding client credit ratings that was established in accordance with the applicable regulations for the purposes of managing the credit risk to which banks are exposed; and
• with EU Member State banks or systems for the exchange of information regarding client credit ratings organised in other EU Member States with regard to information on the credit ratings of corporate clients; and
- f in other cases where the law expressly sets out a bank’s obligation with regard to the forwarding of confidential data regarding a specific client.
The obligation to safeguard confidential data does not apply if a bank or its officer forwards such data to a prosecutor or the police for the purpose of informing those authorities of reasons to suspect a criminal act has been committed. In addition, a bank may also disclose confidential data if required to carry out negotiations for the conclusion of an agreement or to fulfil an agreement that the bank concludes in the scope of standard banking activities, and if the recipient ensures the appropriate safeguarding of that data. For the needs referred to in the previous sentence, a bank may only disclose confidential data regarding a client that are crucial for the conclusion or implementation of an agreement. Every time those confidential data are forwarded, a bank shall ensure that it is possible to subsequently determine which confidential data were forwarded, and to whom, when and on what basis, for a period of 10 years following the forwarding of that data.
A bank is subject to general rules on civil and criminal liability. The same applies to the members of a bank’s bodies and its employees. The Banking Act provides for special liability of management and supervisory board members. Management members are jointly and severally liable for damage that has occurred as a consequence of a breach of their duties, unless they are able to prove that they have prevented conflicts of interest and have acted in accordance with the law and due professional care. Furthermore, the same special liability applies for supervisory board members.
Banks’ funding in Slovenia is based on the typical methods of funding of banks, such as deposits, capital market products, interbank lending and ECB lending.
VI CONTROL OF BANKS AND TRANSFERS OF BANKING BUSINESS
i Control regime
The Acquisitions Directive (2007/44/EC) was implemented into the Slovenian legal system in 2009.
The Banking Act provides that any entity (or entities that act in accord) holding a ‘qualifying holding’ in a Slovenian bank should obtain authorisation from the Bank of Slovenia prior to acquiring such a holding in a bank. The definition of ‘qualifying holding’ is applied directly from CRD IV, and means a direct or indirect holding in an undertaking that represents 10 per cent or more of the capital or the voting rights or that makes it possible to exercise a significant influence over the management of that undertaking.
To ensure the secure and prudent management of the bank in which a future qualifying holder intends to acquire a qualifying holding, the Bank of Slovenia shall assess the suitability of the future qualifying holder on the basis of the following criteria, taking into account the influence that the future qualifying holder would likely have on the bank’s management if the qualifying holding that is the subject of the request is acquired:
- a the reputation of the future qualifying holder;
- b the reputation, knowledge, skills and experience of all members of management and supervisory bodies and all senior management staff who will be afforded the opportunity to manage the bank or to otherwise influence the bank’s operations if the future qualifying holder acquires the qualifying holding that is the subject of the request;
- c the financial soundness of the future qualifying holder, particularly in connection with the types of transactions that the bank executes or is planning; and
- d the likely consequences, should the future qualifying holder acquire the qualifying holding that is the subject of the request, for the bank’s ability to act in accordance with risk management rules, and to meet the requirements and restrictions set out in the Banking Act, CRR and other regulations that apply to the bank.
When assessing the suitability of a future qualifying holder based on the criterion from (d) above, the Bank of Slovenia shall also assess the organisational structure, processes and systems within the group that the bank will become part of when the qualifying holding that is the subject of the request is acquired by the future qualifying holder, and the likely consequences for the possibility of effective supervision, the efficient exchange of information between the competent supervisory authorities, and the segregation of supervisory powers and responsibilities between the competent supervisory authorities.
When assessing the suitability of a future qualifying holder, the Bank of Slovenia shall also assess whether there are any reasons to suspect that an act of money laundering or terrorist financing, as set out in the Prevention of Money Laundering and Terrorist Financing Act, was or will be committed, or an attempt to commit such an act was or will be carried out in connection with the acquisition of a qualifying holding; or that the acquisition in question will increase the risk of money laundering or terrorist financing as set out in the Prevention of Money Laundering and Terrorist Financing Act.
The Bank of Slovenia may not assess the suitability of a future qualifying holder in terms of the economic needs of the market. If the Bank of Slovenia processes two or more requests to acquire a qualifying holding in the same bank at the same time, it shall treat all future qualifying holders in a non-discriminatory manner.
In connection with the assessment of the suitability of a qualifying holder based on the request to issue authorisation to acquire qualified holding status, the Bank of Slovenia shall consult with the competent authority of an EU Member State if the future qualifying holder is:
- a a bank in that EU Member State;
- b an insurance undertaking, reinsurance undertaking, investment firm or management company in that EU Member State;
- c a parent to the entities set out in (a) and (b) above; or
- d a legal person or natural person who controls the entities set out in (a) and (b) above.
Furthermore, in connection with the assessment of the suitability of a qualifying holder, the Bank of Slovenia shall consult with a supervisory authority in Slovenia or another Member State if the future qualifying holder is:
- a an insurance undertaking, reinsurance undertaking, brokerage company or management company in Slovenia;
- b a parent to the entities set out in the previous point; or
- c a legal person or natural person who controls the entities set out (a) above.
The Bank of Slovenia shall consult and exchange information with the competent authorities and supervisory authorities of Member States regarding the suitability of qualifying holders, and the reputation, knowledge, skills and experience of members of the management boards of undertakings within the same group, and other information necessary for determining whether a future qualifying holder meets the criteria. If a future qualifying holder is a third-country financial sector entity subject to supervision, a request for authorisation to acquire a qualifying holding shall also be accompanied by the consent or opinion of the competent authority or supervisory authority, or by notification that no such consent or opinion is required in accordance with regulations applicable for the future qualifying holder in its country of establishment.
The Bank of Slovenia shall reject a request to issue authorisation to acquire a qualifying holding if:
- a the future qualifying holder does not satisfy the criteria set out in Article 66 of the Banking Act;
- b it is likely that the bank’s ability to act in accordance with risk management rules and to meet the requirements set out in the Banking Act, CRR and other regulations that apply to the bank will be compromised due to the acquisition of the qualifying holding that is the subject of the request;
- c it is likely that effective supervision, the efficient exchange of information between the competent authorities and supervisory authorities, and the segregation of supervisory powers and responsibilities between the competent authorities and supervisory authorities, will be hindered or made difficult due to the acquisition of the qualifying holding that is the subject of the request;
- d it is suspected that an act of money laundering or terrorist financing, as set out in the Prevention of Money Laundering and Terrorist Financing Act, will be committed or an attempt to commit such an act will be carried out in connection with the intended acquisition of a qualifying holding, or that the risk of money laundering or terrorist financing will increase due to that acquisition;
- e it is likely that effective supervision, the efficient exchange of information between the competent authorities and supervisory authorities, and the segregation of supervisory powers and responsibilities between the competent supervisory authorities, will be hindered or made difficult in connection with a third-country future qualifying holder, taking into account the regulations in that person’s country or taking into account the practices in that person’s country in the application and implementation of such regulations; and
- f the future qualifying holder does not submit all documentation and information required for the assessment of its suitability by the deadline set by the Bank of Slovenia in accordance with the Banking Act.
ii Transfers of banking business
The Banking Act provides for an elegant option by which a bank may transfer all or part of its business (comprising deposits, and possibly also loan arrangements and other assets) to another entity without the consent of the customers concerned, namely the demerger (spin-off) of a banking entity, where the universal legal succession principle applies and the consent of the customers is not required. The following rules apply:
If a demerger results in a new undertaking that will provide banking services, that new undertaking shall obtain authorisation to provide banking services before the demerger in question is entered in the companies register. If a bank is party to the demerger of undertakings in which it continues to provide banking services, it shall obtain authorisation before the demerger from the Bank of Slovenia, or the ECB whenever the latter performs all of the tasks set out in Paragraph 1 of Article 4 of Regulation (EU) No. 1024/2013 during the supervision of a bank. The request for authorisation shall be submitted to the Bank of Slovenia, where the ECB performs the tasks set out in point P(b) and points (d) to (i) of Paragraph 1 of Article 4 of Regulation (EU) No. 1024/2013 during the supervision of a bank in accordance with the same regulation.
A request for authorisation for a demerger shall be accompanied by the following documents:
- a the demerger plan;
- b a report of the bank’s management board on the demerger;
- c a report regarding the audit of the demerger;
- d a proposal for the publication of the convening of the bank’s general meeting that will approve the demerger; and
- e a written report of the supervisory board.
A decision to issue an authorisation may include conditions or limitations on the provision of services for which authorisation is issued with the aim of preventing breaches of the Banking Act or CRR. In general, the process and the conditions are similar to the process of obtaining a general banking licence.
There are also other options for transferring all or part of a banking business to another entity whereby not all above-described goals are achieved (i.e., transfer of all or part of its business (comprising deposits and possibly also loan arrangements and other assets) to another entity without the consent of the customers concerned). Such options might be:
- a contractual transfers of particular contractual positions or transfers of entire contracts (the main negative side of such option would be that consent of each relevant customer of the transferor bank would be required);
- b assignments of receivables or rights based on the general provisions of Slovenian law on obligations (the main negative aspect of such option would be that the underlying contractual relationship would remain with the transferor bank, and only receivables would be transferred (assigned) to a transferee. While such transfer does not require the consent of relevant customers of the transferor bank, it is not applicable to deposits, living overdrafts and similar); and
- c synthetic transfers of assets or a kind of silent participation or sub-participation, which is actually not a real transfer of business.
VII THE YEAR IN REVIEW
In addition to the adoption of the new Resolution and Compulsory Dissolution of Credit Institutions Act (partially amending the Banking Act and implementing EU Directives 2001/24/EC and 2014/59/EU and regulating the execution of Directive 806/2014/EU), the ‘consolidation’ of the banking sector continued in 2016.
Within this scope, the controlled liquidation of two Slovenian banks, Factor Banka dd and Probanka dd, in early 2016 led to the decision of the governing board of the Bank of Slovenia on the termination of the special administration at Factor Banka dd and Probanka dd, and the consequential lapse of the two banks’ authorisations to provide banking services. Both entities were in 2016 merged with BAMC.
The second-largest Slovenian bank, Nova Kreditna Banka Maribor dd, integrated (merged) its affiliate bank PBS dd and KBS danka dd as part of the group’s overall consolidation.
A hot topic throughout 2016 remained the ‘bail-in’ measures introduced by the Bank of Slovenia in December 2013 concerning extraordinary measures ordering five banks (NLB dd, Nova Kreditna Banka Maribor dd, Abanka Vipa dd, Probanka dd and Factor Banka dd) to write off certain types of liabilities (share capital, hybrid capital and subordinated debt instruments), which was followed by state aid being granted to the concerned banks.
Certain entities filed for a review of the constitutionality of certain provisions of the Banking Act, and at the end of 2014 the Constitutional Court of the Republic of Slovenia stayed proceedings and referred certain questions to the Court of Justice of the European Union, where the main question was whether a Communication from the European Commission regarding state aid rules to support measures in favour of banks in the context of the financial crisis is binding on Member States. In early 2016, Advocate General Wahl delivered an opinion, and proposed that the Court of Justice find that the Communication is not binding on Member States, and as a leading message stressed that the burden-sharing principle is relative, and that it is up to the national courts to verify that when aid measures are adopted, the principle of proportionality has to be observed.
Following the preliminary ruling of the Court of Justice of the European Union in Case No. C-526/14, dated 19 July 2016, the Constitutional Court issued Decision No. U-I-295/13, dated 19 October 2016, where it adopted (what many call a Solomon) decision that the bail-in measures as such were constitutional, while at the same time decided that shareholders and holders of hybrid capital and subordinated debt instruments should have an option to challenge the bail-in measures (i.e., the consequences the measures had on them) in front of courts on grounds of damages liability (based on the principle that such entities should not be in a worse position than they would be in cases where banks would undergo an insolvency procedure or under a mandatory liquidation procedure). A special new law (with the working title of the Procedure of Legal Protection of Holders of Qualified Liabilities of Banks Act) is in the process of adoption, which will regulate such procedures.
During 2016, a lot of activity continued in the commercial banking sector in terms of non-performing loans and loan portfolio sale transactions. In an effort to encourage banks to ‘clean their balance sheets’ and to further improve their capital adequacy ratios, haircuts were rather appealing, and foreign investors were very active in this field. It is expected that this activity will continue in 2017.
VIII OUTLOOK AND CONCLUSIONS
The direction taken by the Constitutional Court in the above decision led to the maintained stability of the Slovenian financial and banking sector. Considering the current draft proposal of the new Procedure of Legal Protection of Holders of Qualified Liabilities of Banks Act, the potential claims brought forward by shareholders and holders of hybrid capital and subordinated debt instruments should have no further impact on the Slovenian banks. Namely, in the event that those subjects are successful in their claims, damages should be paid either by the Bank of Slovenia or by the state.
Post bail-in measures and the consequent ‘nationalisation’ of several banks, Slovenia is, in line with the commitments given to the European Commission, obliged to sell the affected banks. A hot topic during 2017 is expected to be the sale procedures of certain (currently) state-owned banks; for instance, the sale procedure of the biggest Slovenian bank, NLB dd, is already being prepared.
Economic growth in Slovenia remains among the highest in the eurozone, thanks mainly to the competitiveness of the export sector. Households are making a significant contribution to growth in domestic demand: their consumption is becoming increasingly balanced in the wake of growth in employment and wages and an increase in consumer loans, and consumption of non-durables having begun to grow. The recovery of the real estate market is strengthening the portion of demand that banks are ready to support to a greater extent with loans, and could contribute to economic growth in various sectors. In such an environment, the greatest risks to the banking sector come from low interest rates, which set banks the challenges of income generation and exposure to interest rate risk. The corporate sector is stronger than it was a few years ago, and is also less dependent on bank financing. The banks’ performance improved in 2016, primarily as a result of a reduction in credit risk and lower impairment costs, and the one-off impact of increased non-interest income. The main constraints on income generation remain the contraction in turnover and the fall in interest rates.8
It is expected that the positive trends in the banking sector that were present during 2016 will continue in 2017, and that Slovenia will remain a relatively stable financial environment with improving investment opportunities.
1 Simon Žgavec is a senior associate at Rojs, Peljhan, Prelesnik & partners o.p., d.o.o.
2 Case No. C-526/14.
3 Decision No. U-I-295/13.
4 Author’s estimation – due to recent mergers, there are no official data available. SID Banka dd was excluded as a bank with special status (a specialised bank for the promotion of exports and development that is fully state-owned).
5 Lending activity as such is not specifically regulated in Slovenia, with the exception of consumer lending, which is regulated under the Consumer Credit Act, and such activity requires a special consumer lending licence (whereas a bank in possession of a banking licence does not require a special consumer lending licence for consumer credit services).
6 Regulation (EU) No. 575/2013.
7 Directive 2013/36/EU,.
8 Bank of Slovenia press release of 10 January 2017.