1. Lamfalussy Lectures Conference On the effectiveness of non-standard monetary policy measures in Slovenia Boštjan Jazbec Banka Slovenije Budapest, 2 February 2015

2. 2 Summary The decoupling of real and financial cycles is symptomatic of a balance-sheet recession, which impairs the effectiveness of monetary policy. Credit continues to decline, while the economy is back on a growth path. The economic recovery is "domestic credit-less", but not "funding-less". Main impediments to more effective non-standard monetary policy measures rest with risk-averse domestic banking system as well as with the undeveloped market for alternative instruments that would support these measures. In small open economies, and especially in a country with boom-bust legacy, spill-overs of non-standard monetary policy measures complement and could even dominate their direct effects. Monetary policy could be effective in providing liquidity, but is not able to repair the impaired transmission channels without assistance of other policies.

3. 3 The decoupling of real and financial cycles in Slovenia is related to balance-sheet recession and to unsustainable model of debt-financed economic growth during the pre-crisis period.

4. 4 The contraction of loans to private sector in Slovenia persists. Hence, the economic recovery is a "domestic credit-less", but not a "funding-less" one. Source: Bank of Slovenia.

5. 5 Monetary policy was effective in filling the liquidity / funding gap of banking sector after shut down of wholesale markets via FRFA, and later on VLTROs and TLTROs. Source: ECB, Bank of Slovenia. Bank of Slovenia calculations.

6. 6 Excess liquidity had no effect on bank lending rates in Slovenia – not even for prime borrowers. Source: ECB, Bank of Slovenia. Bank of Slovenia calculations

7. 7 Why has there been no impact on lending interest rates in Slovenia? High level of NPLs High leverage of a part of the corporate sector

8. 8 In Slovenia, banks have been deleveraging since the beginning of the crisis, notwithstanding the non-standard monetary policy measures.

9. 9 Banks in Slovenia have been left with a high level of NPLs. They have not transferred the excess liquidity to the real sector of the economy and at the same time they deleveraged. Such a situation required decisive policy action which included a balance sheet-repair. This was done in the second half of 2013 by a comprehensive review of the banking sector, recapitalisation of major banks and the transfer of NPLs to BAMC. So why are banks not lending even then? – Strengthened risk management practices in banks – Stronger supervisory oversight – The realities of the private sector Some parts of the corporate sector are still suffering from debt overhang Corporate sector is still deleveraging Better clients are able to tap alternative sources of financing, mainly abroad - both by borrowing loans and by issuing bonds

10. 10 Slovenian banks keep their credit standards tightened.

11. 11 In Slovenia, there is an increased recourse of private (viable, mostly export oriented corporate) sector to funding from abroad. The share of foreign held securities in total liabilites of corporate sector reached 1.6% in 2014, compared to 0.6% in 2008.

12. 12 Why additional non-standard monetary policy measures may not be effective in Slovenia? ABS and covered bond programmes face obstacles in Slovenia ABS/covered bonds do not exist owing to small amounts of underlying assets, first mover disadvantage, to smaller extent also due to remaining legal uncertainty and tax issues. Diversification of risks by means of securitisation is weaker, because the pool of underlying assets that can be securitised is small. Banks which are losing their best clients magnify these problems as they may not have sufficient volume of eligible loans. QE – the effect of bond purchases may be limited in Slovenia It does not ensure that banks will pass the - yet additional provision of - liquidity into the private sector. Although yield curves are flatter, these effects are not expected to be transmitted to loan pricing conditions. It does not guarantee that banks will be willing to sell bonds at all – given that they are risk- averse and faced with very low-yield (or negative-yield) alternative assets. It is expected that the main effect will be an indirect one via spill-overs from other countries, where the above issues are less relevant

13. 13 Summary The decoupling of real and financial cycles is symptomatic of a balance-sheet recession, which impairs the effectiveness of monetary policy. Credit continues to decline, while the economy is back on a growth path. The economic recovery is "domestic credit-less", but not "funding-less". Main impediments to more effective non-standard monetary policy measures rest with risk-averse domestic banking system as well as with the undeveloped market for alternative instruments that would support these measures. In small open economies, and especially in a country with boom-bust legacy, spill-overs of non-standard monetary policy measures complement and could even dominate their direct effects. Monetary policy could be effective in providing liquidity, but is not able to repair the impaired transmission channels without assistance of other policies.

14. Lamfalussy Lectures Conference On the effectiveness of non-standard monetary policy measures in Slovenia Boštjan Jazbec Banka Slovenije Budapest, 2 February 2015