20th Financial Stability Council session - VFS
20th Financial Stability Council session
The Financial Stability Council met today for its 20th session, chaired by CNB Governor Boris Vujčić and attended by Finance Minister Marko Primorac, the Croatian Financial Services Supervisory Agency Board President Ante Žigman, Director of the Croatian Deposit Insurance Agency Marija Hrebac and their associates.
The beginning of 2023 saw reduced macroeconomic uncertainties related to inflationary and economic developments; however, due to disruptions in certain international financial institutions, the level of systemic stress remained elevated. Main risks to the stability of the financial system stem from the relatively weak economic outlook and increased inflation, tightened financing conditions and the potential spillover of developments in global financial markets. Apart from temporary volatility, stress episodes in the banking systems of USA and Switzerland did not have a long-lasting unfavourable effect on European banking and financial markets owing to the low level of direct exposures, differences in business models and more stringent regulatory environment for European banks.
Croatia introduced the euro at the beginning of the year, thus almost completely eliminating currency risk as one of the main systemic risks. The adjustment of monetary policy instruments significantly increased banking system liquidity. This delayed the transmission of European Central Bank monetary policy tightening to interest rates in Croatia, with the transmission being faster and more pronounced in corporate loans and deposits than in the household sector. The environment characterised by higher interest rates has a favourable impact on the banks, increasing interest margins and profit, while an increase in credit risk caused by the growing debt repayment burden in loans with variable interest rates and pricier new borrowing may be expected with a certain delay. Negative effects of the rise in interest rates on the valuation of financial instruments reduced the capital of credit institutions to a relatively small extent. Liquidity and the capitalisation of the system remained high with solid profitability outlook. Cyclical systemic risks continued to grow driven by a strong growth in lending and acceleration of real estate price growth in late 2022. However, in the last quarter of 2022, activity in the residential real estate market contracted strongly, and the number of transactions fell, which could be the first sign of a reversal in the financial cycle, warranting continuous monitoring of future developments.
Despite the slight decline from the end of 2022, at the end of March, systemic risks in the financial services sector remained elevated. Developments in the domestic and foreign financial markets remain the main source of risk threatening the profitability of the financial services sector through increased market and interest rate risk. Growing investor expectations regarding the end of the monetary tightening cycle and the reduced risk premium for equity investments were the main drivers of the recovery in market sentiment. Valuation recovered in the domestic equity market as well, with CROBEX having grown by 12.7% in the first four months of 2023. Pension fund sector yields also recovered in 2023, with growth seen in the MIREX indices of all three categories of mandatory pension funds in the first four months of 2023.