The publication Financial Stability is the regular annual publication of the Croatian National Bank which analyses the main risks and challenges in safeguarding financial stability. Given their predominant role in financing the economy, the analysis focuses on the credit institutions and their risks stemming from the macroeconomic environment and developments in the main borrowing sectors. The analysis also includes the assessment of credit institutions' ability to absorb potential losses should these risks materialise and discusses the CNB measures to preserve financial system stability.
Financial Stability No. 22
Systemic risks to the financial system remain at a high level
Notwithstanding increasingly rapid economic recovery, the total systemic risk exposure of the domestic financial system remains elevated. Several groups of risks to financial stability stand out in a setting characterised by continued heightened uncertainty.
Fiscal policy, coupled with measures of other economic and regulatory policies, helped to alleviate the consequences of the pandemic, but public debt grew strongly
Lower revenues and ample fiscal support triggered a sharp increase in public debt. Nevertheless, favourable financing terms and substantial funds from the EU budget have facilitated government financing. The ongoing strong reliance on the domestic market in conditions of growing financing needs has further raised the already large bank exposure to the government.
The high and rapidly rising prices of residential real estate moving further away from their economic fundamentals
The number of sold real properties dropped somewhat during the pandemic, while the rise in residential real estate prices slowed down only slightly. The increase in housing loans continued to gain momentum, spurred by favourable financing terms, the ongoing government subsidy programme and stable employment and income influenced by fiscal support. Even though most such loans are granted under prudent lending conditions, some of them have seen an increase in the service-to-income ratio, which may exacerbate the impact of turmoil in the real estate market in adverse conditions.
The prolongation of the pandemic and fiscal incentives also raises the risk of zombification of the corporate sector
A too lengthy use of support measures may allow firms with unsustainable business models to stay in the market, which would reduce available resources for the growth of healthy firms. On the other hand, a premature withdrawal of support measures may put at risk the operation of sound firms.
The system of credit institutions is well capitalised and liquid, but burdened by the risks of low profitability
Pressures on credit institutions’ earnings will continue to grow, which may have an adverse impact on loan availability and system resilience to disruptions in the medium run. With considerable heterogeneity among credit institutions, the system is well capitalised and liquid, and is capable of absorbing considerable credit risk costs. These costs have already grown sharply as a result of the economic slump, while regulatory relief measures have partly postponed their full materialisation.
The steady decline in interest rates and the rise in the share of placements with lower yields will further limit opportunities to improve earnings. Credit institutions will therefore not only have to increasingly rely on digital sales channels, but will also have to adjust to the transition to a green economy.
- Real estate Analytical annex: Commercial real estate marke
- Box 1 A new source of data on consumer lending standards
- Box 2 Regional differences in real estate demand
- Box 3 Croatian firms with characteristics of the fourth industrial revolution (I4.0)
- Box 4 The survival of zombie firms and risks to financial stability
- Box 5 Climate changes and their importance for credit institutions
- Box 6 Macro models for forecasting non-performing loans