bostjan jazbec : financial crises and the current situation in slovenia address by mr bostjan jazbec, governor of bank of slovenia, at the annual conference of the bank association of slovenia, ljubljana, 18 november 2014. * * * my congratulations to the bank association of slovenia for choosing a most appropriate theme for this year ’ s annual conference, and for putting together in the november edition of bancni vestnik some high - quality papers on critical issues that occupy the minds of policymakers in slovenia. this year is the tenth anniversary of slovenia ’ s accession to the european union. who would have dared to predict ten years ago that slovenia would find itself in the midst of a most severe and protracted economic and financial crisis? can we take comfort by claiming, like in the famous hit song by billy joel, “ we didn ’ t start the fire ”? in my opinion, much of the problem that we face today is of our own making. we have to figure out ourselves the best strategies to put the economy back on track and make sure that we get there. * * * let me start with what we all know about financial crises and the current situation in slovenia. a common cause of the vast number of financial crises experienced in various countries at different times is excessive debt accumulation without enough awareness of the consequent risks. most debt - fuelled booms end badly. financial crises generally tend to be protracted affairs. sometimes, inertia and denial on the part of the policy makers add to the duration of the crisis period. the situation in slovenia conforms to this pattern. the rapid economic growth that followed european union accession in 2004 was fed by excessive borrowing and risk taking by banks and enterprises. banks relied heavily on external wholesale funding and the rapid credit expansion took place against very limited equity capital in the corporate sector. these balance sheet vulnerabilities got exposed when the external financing began to drain away with the onset of the global financial crisis in 2008. slovenia was caught in a vicious cycle of reduced credit availability, deleveraging, a cutback in corporate investment and output, and rising non - performing loans. the deterioration in the balance sheet of banks became a problem for the state, given that the state owns the majority of the banking sector. the recession put the public finances under severe strain and, as early as in 2009, slovenia was placed under the excessive deficit procedure of the european commission requiring substantial fiscal consolidation efforts in the near and medium

of another financial crisis. matters are likely to become worse if additional credit availability enables enterprises to postpone balance sheet adjustment. so, the focus should be on the proper allocation of credit instead of its aggregate amount. it is important that good borrowers rather than the bad ones are the main beneficiaries of credit growth. i am not downplaying the importance of credit in fostering economic activity. far from it. bank credit and other debt instruments are crucial to all economies, but balancing the risk and opportunities is always a challenge, a challenge that we must never forget. the crisis has demonstrated very clearly the importance of limiting the reliance on debt - financing and having adequate safeguards in place to prevent credit bubbles. a shift toward more equity financing is urgently necessary, for which, an appropriate environment has to be in place for attracting new non - debt capital flows. * * * so, what should be the way ahead? putting the economy back on track requires a coherent, integrated national policy strategy to restore the health of the financial sector, restructure the corporate sector, and reinforce the sustainability of the public finances. the economic recovery must be based on equityfinanced investment and not on debt - financed investment. given the need to ensure fiscal sustainability, recourse to more state funding for restructuring the economy and increasing investment is not a feasible option. some of the required policy measures, notably in the financial sector, have been and are being implemented. without a determined follow through with supporting measures on other fronts, the fragile economic recovery will stall and problems will intensify. * * * priority has been given to repairing the balance sheet of banks. based on the findings of a comprehensive asset quality review and stress tests in late 2013, balance sheets of four banks have been repaired through recapitalization and transferring non - performing loans to bis central bankers ’ speeches the bank asset management company. the findings of the recently concluded comprehensive assessment indicate that, notwithstanding these efforts, the health of the banking sector remains fragile. this is not surprising. the banking system is the nerve center of the entire economy. nonperforming loans remain high even after the transfers to the bank asset management company and their volume has increased in the course of 2014. this is a result of the still weak economic growth, slow deleveraging in the corporate sector and too slow enterprise restructuring. the rehabilitation strategy also involves bank resolution through liquidation, consolidation and privatization. two small domestic banks are currently in the process of being