INTRODUCTION
The banking sector is an important part of the national economy. Banks take deposits, support the payment system and provide the largest source of funds on the market. Therefore, stable and safe banking are of crucial importance for the development of a safe and stable economy. The concept of centralized bank supervision, widely accepted throughout the world, is also applied in Croatia, where bank supervision is conducted by the Croatian National Bank.

LEGAL FRAMEWORK
The Croatian National Bank has been responsible for bank supervision since 1992, the year in which the Republic of Croatia gained independence, and since the adoption of the Law on the Croatian National Bank (official gazette Narodne novine, No. 74/1992) and the Law on Banks and Savings Banks (official gazette Narodne novine, No. 94/1993). However, due to changes in the banking sector, and the need to further regulate the banking sector, these laws were soon replaced by new laws and regulations.

In April 2001, a new Law on the Croatian National Bank was adopted (official gazette Narodne novine, No. 36/2001), emphasizing the operational autonomy and independence of the Croatian National Bank and granting the central bank, among other things, authority in bank supervision area (Art. 4).
( the Law on the Croatian National Bank)

In response to the need for fuller authority of the Croatian National Bank in bank supervision, a new Banking Law (official gazette Narodne novine, No. 161/1998) was adopted in 1998, establishing the authority of the Croatian National Bank in the supervision of the legitimacy of bank operations, assessment of the abilities of banks to manage their business risks and in taking measures in cases of irregularities and noncompliances with the law found in the course of examinations. Development of the banking industry, entry of foreign banks into the domestic market and domestic banks into the foreign market, but above all, association with the European integration processes, necessitated the drafting of a new Banking Law which took effect in July 2002.  (the Banking Law )



ORGANIZATION
The Prudential Regulation and Bank Supervision Area of the Croatian National Bank is responsible for adopting new and aligning the existing prudential regulations with international standards in bank supervision, analysing financial reports and records of banks, on-site supervision of banks, bank branches and representative offices of foreign banks in the Republic of Croatia, analysing data and indicators and for preparing standard reports on the Croatian banking system.

The Prudential Regulation and Bank Supervision Area is also responsible for processing applications of banks for various authorisations provided for by the Banking Act and for the protection of market competition.
Bank supervision involves supervision of the legitimacy of bank operations, the assessment of the ability of banks to manage their business risks and taking measures in cases of established irregularities and noncompliances with the law.  (Decision on Conducting Supervision of Bank Operations)

Within the Prudential Regulation and Bank Supervision Area, there are five departments:

1. Prudential Regulation and Banking System Analysis Department.
2. Off-Site Supervision Department
3. On-Site Risk Management Supervision Department
4. Specialised On-Site Supervision Department
5. Licensing and Market Competition Department

The Prudential Regulation and Banking System Analysis Department is responsible for enactment of prudential regulations and alignment, on an on-going basis, with the standards and recommendations of the Basel Committee on Banking Supervision. Within this Department there are two divisions: Prudential Regulation Division which is responsible for the enactment of relevant regulations (Decisions in the area of Bank Supervision and Control) and Banking System Analysis Division which is responsible for analysing figures and other indicators and preparing standard reports on the conditions and trends in the Croatian banking system. Some of these reports are published regularly (Banks' Bulletin), (Indicators of Banking Institutions Operation), while others are prepared for internal needs of the Croatian National Bank.

The Off-Site Supervision Department is responsible for supervising banks' operations on the basis of data and reports submitted by banks to the Croatian National Bank pursuant to a Decision on Supervisory Reports of Banks, and on the basis of business indicators by banks. On the basis of prudential analysis of different financial indicators by banks, groups of peer banks and the banking system as a whole as well as analysis of different qualitative information, the banks are rated in terms of the level of risk involved in their business operations in accordance with the adopted methodology for analysis.

The responsibility for on-site supervision lies with the On-Site Risk Management Supervision Department and the Specialised On-Site Supervision Department. On-site examinations are carried out at the banks' premises and involve examination of their business books and assessment of their technical, professional and organisational resources. Risk management function is gaining in importance in the banking sector. In addition to credit risk, banks are exposed to other risks such as: market risk, liquidity risk, interest rate risk, currency risk and a line of other risks. Their monitoring and supervision, and successful management require advanced specialised knowledge. To this end, the employees of the On-Site Risk Management Supervision Department have received specialised training for the specific risks they monitor.

In addition to credit, interest rate and markets risks, which are traditionally considered typical of the banking business, on-site supervision also covers the so called operational risk which is defined as the "the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events". In terms of its importance, operational risk is right next to credit risk. The Specialised On-Site Supervision Department, within its assessment of the banks' management of operational risk performs on-site examination of IT systems in banks, internal control systems, compliance with regulations, in particular supervision of the implementation of the measures of monetary and foreign exchange policy and compliance with laws and other regulations, internal procedures and payment system procedures.

The Licensing and Market Competition Department is responsible for processing applications for authorisations and approvals prescribed by the Banking Act, Act on Housing Savings and State Incentives for Housing Savings (official gazette Narodne novine, Nos. 109/1997, 76/1999 and 10/2001) and the National Payment System Act (official gazette Narodne novine, No. 117/2001). On the basis of these acts, the Croatian National Bank issues (and revokes) the following authorisations and approvals: for establishing banks and building societies, for the provision of banking and other financial services, for appointing management board members of banks and building societies, for the acquisition of shares of banks and building societies, for mergers and acquisitions of banks and building societies, for establishing a legal person by a bank, for the acquisition by banks of shares in other companies, for entrusting internal audit of a bank or building society to an external auditor, for establishing bank branches abroad, for establishing representative offices and bank branches of foreign banks in Croatia, for general operating conditions of building societies, for models of assessment of credit, market and other risks in a business of a bank, and for carrying on payment system operations by credit unions. Since the 2002 Banking Act came into effect, the protection of the freedom of market competition within the banking sector has been the responsibility of the Croatian National Bank, more specifically, its Licensing and Market Competition Department. Central bank authority in this area involves the prevention of prohibited agreements, anti-cartel activity, prevention of abuse of dominant market position and control of concentrations.

BANKING LAW (July 2002)
In July 2002 a new Banking Law took effect, enabling a more efficient and more transparent supervision of banks in Croatia.
According to the Banking Law, bank supervision comprises the following areas of activity and responsibilities:

• entry of banks into and exit from the market and bank business operations (granting operating licenses, supervisory measures, reporting, special administration, liquidation and bankruptcy of banks);
• determining the accountability of the bank's owner for the bank's operations (internal organization of a bank, audit);
• determining the methods for the bank's risk management (determining the capital and capital adequacy of a bank, risk management);
• consolidated supervision of banks (determining the scope and frequency of consolidation, as well as the content of consolidated financial statements);
• consumer protection (determining a uniform method for calculating and disclosing loan and deposit prices and other elements of the loan contract and cash deposit contract);
• protection of the Croatian National Bank employees involved in bank supervision (liability for damage);
• cooperation with other supervisory bodies in the country and abroad (data processing and communication of information).