Slovenia looks at how to rebuild its banking system

A Bloomberg article discusses how Slovenia needs to rebuild its banking system and the question of whether it needs outside resources to do so.

Regular readers know that the starting point for rebuilding a banking system is transparency.

It is only by having Slovenia's banks disclose their exposure details that the process of rebuilding can credibly begin.  Your humble blogger says this because without exposure detail disclosure, there is no way for market participants to know if each bank has recognized all of its losses or if it is still hiding losses.

Once each bank has recognized its losses, the question that must be asked is:  does the interest income on the bank's assets exceed the sum of the interest expense on its liabilities and its operating expenses pre-banker bonuses.

• If yes, the bank is capable of rebuilding its book capital levels and nothing more needs to be done.

• If no, the bank is not capable of rebuilding its book capital levels and should be shut down.

With this simple plan, Slovenia should be able to rebuild its banking system and, because of ongoing transparency into each bank's exposure details, prevent a similar problem from recurring.

Jazbec needs to restore public confidence at home and investors’ faith abroad in Slovenia’s banks as the economy struggles with its second recession since 2009, sparking a rash of corporate bankruptcies that have saddled lenders with a pile of bad debts. 

“The problems aren’t insurmountable,” Jazbec, who helped set up Kosovo’s central bank, said in an interview late yesterday. 

“We know we have to rebuild the banking system. With a common effort from all policy makers we can carry this through to ensure that assistance from outside the country won’t be needed.”

By making use of future bank earnings and transparency, Mr. Jazbec is likely to be proved right.