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The Financial Stability Council is the inter-institutional body that designs the macroprudential policy of the Republic of Croatia. It consists of representatives of the Croatian National Bank (HNB), the Croatian Financial Services Supervisory Agency (Hanfa), the Ministry of Finance (MF) of the Republic of Croatia and the Croatian Deposit Insurance Agency (CDIA).

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18th Financial Stability Council session

Published: 17 May 2022

The Financial Stability Council convened on 17 May 2022 in the Croatian National Bank for its 18th session, chaired by the CNB Governor Boris Vujčić and attended by the Croatian Financial Services Supervisory Agency Board Member Tomislav Ridzak, Director of the Public Debt Management at the Ministry of Finance Hrvoje Radovanić, the Director of the Croatian Deposit Insurance Agency Marija Hrebac and their associates.

Council members discussed the main risks to financial system stability, arising primarily from the uncertainty regarding the duration and impacts of the war in Ukraine, growing inflation and the expected normalisation of the monetary policy of the central banks of major economic areas. Such circumstances led to increased volatility on the global financial markets and reduced the value of financial instruments sensitive to interest rate changes and investor sentiment. The expected increase in the interest rates on the global markets leads to domestic financing conditions tightening, which increases the burden of debt repayment in the case of agreements with variable interest rates and the price of new borrowing, although the approaching introduction of the euro is expected to take some of the pressure off of these developments.

After credit portfolio quality and bank profitability continued to improve throughout 2021, at the start of this year, the banking system remained highly capitalised and liquid, despite systemic risks growing. A fast resolution of a domestic bank in an indirect Russian ownership executed through its sale to another domestic bank mitigated the risks to financial stability arising from the immediate reputation contagion in the aftermath of the Russian invasion of Ukraine and the introduction of sanctions against Russia. Banking system resilience to highly unlikely but plausible shocks has been confirmed by resilience stress testing, which assumes long-term inflationary pressures and a gradual increase in interest rates and relatively unfavourable economic developments over a three-year period. The high level of accumulated capital maintained by credit institutions above the legally prescribed minimum requirements is key to preserving system stability. However, there are indications of cyclical risks growing, as evidenced mostly in the rise in real estate prices and housing lending, spurred by strong foreign and domestic demand amid low interest rates and subsidies for first home buyers. The Croatian National Bank has thus decided to increase the rate of the countercyclical capital buffer from 0% to 0.5%, effective as of March 2023 to further support credit institutions’ resilience.

The exposure of the domestic financial services sector to share market corrections increased, and the interest rate risk also rose slightly, as seen in the increase in interest rates and yields in the first five months of 2022. Despite the negative impact of such developments on investment portfolio yields of institutional investors and the small liquidity pressures they brought about in some segments, the increase in systemic risks in the first half of the 2022 was not significant and did not threaten the stability of the financial services sector.  However, the relatively high valuation of financial assets that continues to be present globally, particularly of shares, increases the probability and strength of potential future price corrections on the financial markets, which can easily spill over to the domestic market. The turnover on the domestic capital market, following acceleration at the time of the outbreak of the conflict in Ukraine, shrank in April and May and the prices of shares fully recovered from the correction caused by the geopolitical crisis. The decline notwithstanding, the concentration of trading on the Zagreb Stock Exchange continues to be relatively high amid, compared to other peer markets, relatively low liquidity.

The Director of the Croatian Deposit Insurance Agency reported that the first quarter of 2022 saw a marked increase in total and covered deposits, which activated the legal obligation of deposit insurance premium payment to enable the legally prescribed level of protection of depositors.

The Council approved the Annual Report on the Work of the Council in 2021.