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19th Financial Stability Council session
The Financial Stability Council met today, on 21 November 2022, for its 19th session, chaired by the CNB Governor Boris Vujčić and attended by the Finance Minister Marko Primorac, the Croatian Financial Services Supervisory Agency Board Member Tomislav Ridzak, the Director of the Croatian Deposit Insurance Agency Marija Hrebac and their associates.
Discussing the increased risks to financial system stability amid increased uncertainty, worsened economic outlook, increased inflation and volatility and negative developments in the financial markets, they concluded that the risks were elevated. The increase in key interest rates in the world’s major economic areas has thus far only had a modest and limited impact on Croatia, however, this may change with the expected further monetary policy tightening. Still, Croatia’s entry into the euro area as of the beginning of next year, the reduction in the reserve requirement rate and the abolishing of the minimum required amount of foreign currency claims will alleviate and slow down the worsening of the financing conditions on the domestic market. Also, a relatively widespread use of fixed interest rate loans provides a hedge against interest rate risk for users of such loans, while legal restrictions in force reduce the intensity of interest rate growth for borrowers with variable interest rate loan agreements.
Amid worsened economic outlook and increased inflation, global investor sentiment is negative, with prices of financial assets in almost all segments of financial markets falling steadily. The domestic capital market also reported a fall in share and bond prices of –8.5% and –13.8%, respectively, until mid-November, although their fall was smaller than that in the international markets, partly due to a structurally low liquidity. The developments in the domestic and foreign financial markets continue to be the main source of risks that reduce the profitability of the financial services sector through heightened market risk, and over a medium term, with the worsening of macroeconomic developments also increase the level of credit risk.
The financial cycle remains in an upturn phase while the increase in cyclical systemic risks in the first nine months of 2022 was mostly driven by accelerated growth in the prices of residential property and bank lending. The activity in the residential property market was stable in the first half of the year, with price growth accelerating to 13.6%. In addition to a steady growth in housing loans to households, corporate lending also rose markedly this year, reflecting rising costs of energy and raw materials and increased risks of the sustainability of their operations. The worsening of economic developments has thus far not impacted credit institutions, which continued to improve profitability, however, the risks to their operations in the forthcoming period will be increasing.
To further strenghten credit institutions’ resilience, the Croatian National Bank has announced yet another increase in the countercyclical capital buffer. Thus, as of March 2023, credit institutions that currently do not need to maintain this buffer requirement, will have to maintain a countercyclical buffer rate of 0.5%, and as of the end of 2023, a countercyclical buffer rate of 1% of the total risk exposure. Given that credit institutions on an aggregate level have significant surplus capital above the regulatory requirements, higher capital requirements are not expected to have an unfavourable impact on the cost and availability of bank lending. At the session, the CNB also reported on its other macroprudential activities: identification of other systemically important institutions, suitability of risk weights for exposures secured by real estate property and reciprocation/non-reciprocation of macroprudential policy measures adopted by EEA member countries.