CNB Council: Increased total financial system exposure to systemic risks

Published: 11/5/2022

At today’s session, the Council of the Croatian National Bank discussed current economic and financial developments and financial stability and adopted several decisions on matters within its competence.

Statistical indicators suggest acceleration in current economic growth at the beginning of the year. At the same time, consumer confidence fell visibly, and its small recovery notwithstanding, held steady at a relatively low level in April. Employment growth came to a halt in March, while the growth in nominal wages keeps accelerating. Rising prices of oil and food products on the global markets, partly influenced by the war in Ukraine, are spilling over to domestic prices of refined petroleum products and food, propelling strong acceleration in inflation in March. The expected shift in monetary policy direction of the central banks of major economic areas continued to fuel the costs of short-term and long-term government financing and lead to a small increase in interest rates on corporate loans. Amid such conditions, the growth in placements to non-financial corporations accelerated strongly while placements to households continue to rise steadily, mainly mirroring strong housing lending.

The total exposure of the financial system to systemic risks has risen as a result of the war in Ukraine and sanctions imposed on Russia, the effects of which spill over to the Croatian economy mainly through developments in the prices of raw materials and other goods on global and regional markets. The uncertainties associated with the pandemic and recent geopolitical tensions have thus far not undermined the stability of the financial sector in Croatia. Good liquidity and capitalisation of the banking sector played an important role in this, supported by the accumulated capital buffers.

The challenges and risks to the domestic financial system in the forthcoming period in Croatia stem from developments in geopolitical instabilities and inflationary pressures, the effects of the expected monetary policy normalisation and further growth in the prices of residential real estate. The duration of the war in Ukraine and the intensity of its consequences will determine the depth of the impact on macroeconomic, fiscal and financial developments. Disruptions in supply chains that fuel further price growth may place a large burden on the companies and households.  Amid rising inflation, monetary policy is expected to tighten and key interest rates of the central banks of the major economies to rise. This will gradually increase the price of new borrowing and debt repayment burden for the existing debtors with loans with variable interest rates. The negative effects of interest rate growth on the financial system may be mitigated by a long-term trend of a fall in total indebtedness of the households and companies and a relatively low level of household debt as well as a small number of loans that might see a considerable increase in repayments. Also, the expected introduction of the euro could further alleviate the growth in the price of new borrowing for the government and the other sectors.

The tightening of the financing conditions on the international financial markets, coupled with an increase in domestic interest rates could dissolve some of the risks to financial stability that had been growing during the extended period of low interest rates, such as strong private sector borrowing, low profitability of banks and a search for risky alternative forms of investments with higher yields.  The risk associated with a sharp rise in the prices of residential real estate is one of such risks, which is supported, among others, by a large volume of housing lending.

The CNB closely monitors and analyses the developments in systemic vulnerabilities so that it can respond to them with measures falling within its competence. To this end, in early 2022 it announced a rise in the countercyclical buffer rate, which will additionally strengthen the resilience of credit institutions to possible losses associated with exposures to cyclical systemic risks in the downward phase of the financial cycle or in the case of a sudden crisis emerging. The CNB continues to closely monitor the terms of lending on individual debtor level to enable a timely identification of potential sources of systemic risks and an introduction of the measures to alleviate them, such as the tightening of the terms for consumer lending. However, in the conditions where many transactions in the real estate market are not financed by loans, there are limits to what macroprudential policy measures can do in terms of lessening the imbalances, as the development of an effective and balanced real estate market requires a joint effort on the part of various economic and other policies.

The CNB Council gave approval to the Supervisory Board of Privredna banka Zagreb d.d. to appoint Andrea Pavlović as member of the Management Board of that bank.   

The CNB Council adopted a Decision on the issue and sale of the commemorative 5 kuna gold coin from the “Gold Kuna” series.