17th Financial Stability Council session

Published: 20 December 2021

The Financial Stability Council held its 17th session today, chaired by the CNB Governor Boris Vujčić and attended by the Croatian Financial Services Supervisory Agency Board President Ante Žigman, Assistant Minister of Finance Hrvoje Radovanić, the Director of the Croatian Deposit Insurance Agency Marija Hrebas and their associates.

The Council members discussed the main risks to financial system stability, the uncertainty surrounding the development of epidemiological situation and its impact on economic developments and the financial sector. Financial system exposure to systemic risks is estimated to have diminished slightly owing to a faster than expected economic recovery, although it still remains moderately high. There are pronounced risks associated with the existing structural vulnerabilities in the economy while the prices of real and financial assets and inflationary pressures continue to rise. The conditions in the global financial markets remain favourable, however, sudden changes might have a negative impact on financial system stability. This relates in particular to a potential rise in interest rates that would, if faster than anticipated, increase the burden of debt repayment for debtors with loans with variable interest rates and reduce the value of investment in assets sensitive to interest rate changes, such as debt securities.

The banking sector remains highly capitalised and liquid, and the comprehensive measures of support provided during the pandemic prevented a more pronounced negative impact on business operations in this sector. In the second half of 2021, credit activity in the household sector continued to accelerate, with housing loans growing over 10% annually, while lending to the corporate sector remained subdued. The total business of non-financial corporations stabilised and enabled smaller reliance on support measures to the economy, with the share of total non-performing loans continuing to decline. However, not all segments of the economy were equally hit by the pandemic; companies operating in the hotels and restaurants as well as transport segments were hit the hardest, as seen in a slight rise in their non-performing loans. The profit of credit institutions is returning to the pre-pandemic levels, however, future profitability will be limited by low interest rates, changes in the balance sheet structure towards less risky but also lower-yielding placements as well as higher costs associated with adjustments to climate risks and business digitalisation.

The prices on the domestic capital market reached their pre-crisis levels, although trading remains relatively low and characterised by the trend of trading concentration. Positive developments in the financial markets and faster than expected economic recovery were mirrored in rising profitability of leasing and insurance companies. Excellent tourist season amid the pandemic aided the growth of new leasing contracts, which, with the gradual expiry of the re-programme, contributed to a partial recovery and stabilisation of leasing companies' operations. Despite inflationary pressures, the fund industry generally continues to record on average mainly positive real yields. The crisis situation did not affect the indicators of capitalisation of the institutions in the financial services sector, and the results of the financial services sector stress testing to macroeconomic and financial shocks showed the system’s ability to withstand simulated stress events even after the crisis 2020.

The Council members were briefed about recent macroprudential activities and discussed mid-term risks in the real estate market in Croatia. The prices of real estate continued to grow fast in 2021, although at a somewhat slower pace, with the total growth in real estate prices reaching 40% in five years, largely outpacing income growth and worsening the already low housing affordability. Price growth is fuelled by ample liquidity in the financial markets, historic low interest rates and strong demand driven by non-residents. Housing loans and price growth are also spurred by government programme of subsidised housing loans. Factors on the supply side, such as rising costs of construction, also drive prices upwards. Council members discussed different sets of economic policies that could help mitigate vulnerabilities and risks associated with the real estate market.