Ljubljana - Banka Slovenije deems Slovenia's financial system stable, but "the expected deterioration in economic conditions and inflation persisting at high levels means systemic risks to financial stability are elevated", vice-governor Tina Žumber said as the central bank presented its latest Financial Stability Report on Tuesday.

"Macroeconomic, credit, interest rate and property market-related risks are among the biggest risks. However, the resilience of the banking system to the potential materialisation of all these risks remains robust," Primož Dolenc, an advisor at Banka Slovenije, told the press.

The main risk to economic growth is the continuation of the Russian military aggression against Ukraine and its consequences.

Banka Slovenije will publish its latest forecasts in December and, according to Žumer, the euro area would slip into recession in the worst-case scenario, which includes a complete cut-off of energy supplies to the EU.

Inflation in Slovenia remains high and is expected by the central bank to remain elevated in the final months of the year and at the start of next year.

"We expect it to fall significantly in the second quarter of 2023, but it will remain above the ECB target of around 2% both next year and in 2024," Žumer said, adding that the high energy prices and the gap between supply and demand would require a concerted effort involving all economic policies.

With continued strong house price growth and increased housing lending, the risks stemming from the property market remain elevated.

The acceleration of fixed-rate long-term housing loans means banks' interest rate sensitivity is also increasing. As a consequence, the interest rate risk remains elevated with a tendency to increase further over a period of up to one year.

The revenue risk to the financial system, which was elevated for a long time, is gradually declining. Favourable trends are reflected in the growth of net interest income due to increased lending and thus positive quantitative effects. Further positive effects can be expected as monetary policy normalises, Dolenc said.

Banks' profitability is fairly good this year, but it is significantly affected by impairment and provisioning. However, this can change quickly, Dolenc added, noting higher provisions entail lower profits.

According to Dolenc, the capital position of banks in Slovenia is good. Not all banks are in the same position, but they all have capital adequacy ratios above those required by the central bank. The solvency of the banking system is adequate and liquidity is quite good.

"The resilience of the banking system is now quite good," Dolenc said, adding that, should risks increase, Banka Slovenije could respond with macroprudential measures.

In the EU, some central banks have strengthened the resilience of the banking system in recent years by introducing a positive countercyclical capital buffer, which is currently at level zero in Slovenia.

According to Dolenc, Banka Slovenije will adopt a decision to change this change in the coming months in case risks increase.