Court of Audit critical of C-bank measures during bailout

Ljubljana – The Court of Audit has found that Banka Slovenije was only partly successful in its oversight of banks’ capital adequacy and the management of loan risks in 2008-2013. It also found it to be unsuccessful in introducing emergency measures during the bank bailout.

The head of the Court of Audit, Tomaž Vesel, told the STA on Thursday that Banka Slovenije had failed to provide evidence to support its claim that the financial situation of banks had indeed been such that it called for the 2013-2014 bailout.

He believes Banka Slovenije did not have all the requisite documents when deciding on the bailout. “For these reasons, which are elaborated on in the 400-page audit report, we cannot confirm that the measures regarding the cessation of eligible liabilities were urgently required in such a scope.”

Banka Slovenije sees the court’s audit as a breach of its independence. In October, the central bank filed for a constitutional review of legal provisions that allow the Court of Audit to conduct audit at the central bank.

The bank has been warning that the audit, which was being conducted at Banka Slovenije in the last two years was breaching Banka Slovenia’s independence. “The report published today confirms that our warnings have been justified,” it said, without elaborating on the report any further.

The central bank reiterated that so far all attempts at solving the open issues related to the bank bailout had been unsuccessful, which was why all stakeholders still did not enjoy adequate judicial protection. “Banka Slovenije believes that only judicial protection can guarantee appropriate solutions to these open issues.”

The Court of Audit says in its report, whose content is mostly blacked out, that Banka Slovenije’s assessment of the banks’ capital, especially in 2013, was conducted based on an Audit Quality Review (AQR), which however leaves doubt about the calculations for additionally required impairments, as it could not be confirmed whether banks met the requirements.

Banka Slovenije made its assessment about individual banks being able to secure the minimum capital adequacy based on their reported losses.

However, auditors were unable to determine whether the central bank took into account the demands about impairments set in a decree on loss assessment which includes compliance with international accounting standards.

“This is why we cannot say for certain whether the determined amount of negative capital of banks indeed represented an objectively determined fact … that took fully into consideration the demands of the decree … regarding impairments,” the court said.

Similarly, the auditors were unable to determine whether the assessment of the value of a bank’s assets was carried out in line with requirements.

The Court of Audit also found that Banka Slovenije had picked the providers of the service of AQR and stress tests without prior notice. The methodology of the AQR was not set at the signing of the contract, nor was the definition of non-performing loans.

Thus, it is not clear which criteria were actually used to classify claims, which leaves a lot of room for personal judgement, the court said.

Moreover, the results of the AQR and stress tests were partly based on the appraisal of real estate set as collateral for bank loans. But the appraisal was not conducted in a way that it could be used to reliably assess the bank’s financial situation, the report says.

Banka Slovenije then decided for a capital injection of EUR 3.6 billion, which Vesel thinks was “calculated on very conservative assumptions”. He said the stress tests had been based on very bleak macroeconomic scenarios.

“All this, and the assessed value of the claims transferred to the Bank Asset Management Company, has led to high recapitalisation, which constituted state aid, which in practice means that the state committed to selling the banks or bank shares on a very short notice. The problem is that before the sale the state was unable to recoup possible excess investments because the black scenarios did not come true,” Vesel said.

As for the central bank’s oversight over banks, the Court of Audit found the bank’s strategic documents and plans very meagre and vague. Until 2013, Banka Slovenije has never resorted to any stricter measure than ordering additional measures. It was also not consistent in introducing measures or in acting against banks’ senior officials.

The Association of Small Shareholders welcomed the report, urging the court to upload it to a safe room, where it could be accessed by the holders of subordinated bonds who were wiped out during the 2013 bank bailout, so that they could use it in on-going court procedures related to the bailout.