15th Financial Stability Council session

Published: 18 December 2020

On 18 December 2020, the Financial Stability Council held its 15th session, chaired by the CNB Governor Boris Vujčić, and attended by the Finance Minister Zdravko Marić, the Croatian Financial Services Supervisory Agency Board President Ante Žigman, the Director of the State Agency for Deposit Insurance and Bank Resolution Marija Hrebac, and their associates.

The Council members were briefed on the main indicators of the condition of the financial system and risks for its stability amid the deteriorating epidemiological situation and tightened containment measures, which will have negative consequences for economic activity. Despite the support to affected businesses and citizens and continued expansionary monetary policy, the financial system's exposure to systemic risks has remained elevated. High public debt level and the financial sector's exposure to the government as well as the corporate insolvency risk can be singled out as key structural vulnerabilities.

The banking sector is well capitalised and liquid, lending activity has decelerated following stronger lending to the government and corporate sectors at the beginning of the year and government guarantees have been used modestly. Although household lending has slowed down considerably due to a decrease in consumer loans, housing loans have picked up on the back of government subsidies. Hence, real estate prices have continued to rise despite a drop in the number of transactions. Under the unfavourable economic conditions, banking sector revenues and earnings have predictably decreased. Moratoriums have been granted for approximately one fifth of the total amount of loans. So far, no increase in the share of non-performing loans has been observed, but the cost of credit risk has started to increase.

As regards the non-banking financial sector, a sizeable fall in assets in the first quarter of 2020, especially pronounced in the investment fund category, was partly offset later in the year due to increasing net inflows and positive market developments. The domestic equity market turnover also grew in the last quarter. The insurance sector has not yet been strongly affected by the coronavirus crisis, although its profitability dropped due to a decrease in newly-contracted premiums and an increase in the number of indemnification claims in certain insurance categories. However, the liquidity and solvency of insurance companies have remained unaffected. The coronavirus crisis has stopped the five-year growth trend of the leasing industry, largely because it is closely related to tourism, which has been hard hit by the crisis. Reprogrammed leasing contracts currently account for 11.2% of the total value of all leasing contracts (or in terms of the number of contracts, 3.9% of all contracts). HANFA will continue to monitor the regularity of repayment and it will intervene with additional measures if necessary to protect users and leasing companies.

The Council members were informed of recent macroprudential activities implemented in Croatia and the EU and discussed the extension of the ESRB recommendation on restriction of distributions of financial institutions, in an amended form. The participants also agreed to continue activities for a prompt, comprehensive and precise reporting to all financial system participants on credit risk caused by the COVID-19 pandemic.

In 2020, the Ministry of Finance proposed a large number of amendments to acts pertaining to the financial sector. The alignment of the Croatian legislation with the acquis has continued, and the distribution of tasks and responsibilities of competent institutions has further simplified and speeded up the processes of resolution and winding up of distressed credit institutions, thus contributing to the overall stability of the financial system. The precondition was also created for the Republic of Croatia's entry to the European exchange rate mechanism (ERM II) and the establishment of close cooperation between the Croatian National Bank and the European Central Bank, so that the Republic of Croatia became part of the Single Supervisory Mechanism and the Single Resolution Mechanism even before joining the euro area.

The representative of the State Agency for Deposit Insurance and Bank Resolution gave a detailed account of amendments to the legislative framework covering the Agency's scope of work, including the Act on the Resolution of Credit Institutions and Investment Firms and the Insurance Deposit Act, which, in addition significant changes in terms of content, provide for the change of the name of the State Agency into the Croatian Deposit Insurance Agency.