The banking system plays a key role in financial intermediation, in particular in the processes of mobilising and redistributing savings, and in payment systems. The impact of the banking system on the economy is great. In particular, the negative impact that weaknesses in this system can have on the health and effectiveness of the real sector is particularly pronounced. That is why the stability of the banking system is of particular public interest.
In addition, only credit institutions are authorised to receive deposits and other repayable funds from the public. In order to protect depositors, a certain amount of these deposits is legally insured and in the event of forced liquidation of a credit institution, it is paid from the funds of the Croatian Deposit Insurance Agency. Therefore, the main objectives of supervision are to maintain trust in the Croatian banking system and to promote and preserve its security and stability.
They are achieved through credit institutions' adherence to the special rules that cover all key parts of the business, from authorisation and provision of certain financial services, ownership structure, organisation, institutional governance system reporting to supervisors, to risk management and adequate capital and liquidity to cover those risks.
The supervision checks whether the credit institution operates in accordance with these rules and whether the organization, strategies, policies, procedures and arrangements established by the credit institution together with the regulatory capital and liquidity of the credit institution ensure appropriate governance system and risk coverage. This reduces the risk of losses for depositors and other creditors of the bank and the society as a whole.
Organization of supervision in Croatia
The function of supervision and oversight of credit institutions and credit unions in the Croatian National Bank is organized within the Prudential Regulation and Methodology Area, the Prudential Supervision Area, the Expert Supervision and Oversight Area and the Office for Coordination of Prudential Supervision, Oversight and Risk Management Activities.
Supervision in the CNB is organized in accordance with the requirements arising from accession to the banking union under the Single Supervisory Mechanism (SSM), the challenges in the macroeconomic environment, changes in bank business models and the need to optimise decision-making processes by establishing organisational units with higher-level responsibility.
Since January 2023, the supervision has been carried out under the Single Supervisory Mechanism, which has been responsible for the supervision of banks in the euro area since 2014.
This supervisory system consists of the European Central Bank (ECB) and the national competent authorities of the Member States (NCA). The Croatian National Bank is designated as the competent authority of the Republic of Croatia within the SSM.
The ECB directly supervises significant institutions (SIs). The procedure for determining the significance of credit institutions is carried out annually by the ECB on the basis of defined criteria. The supervision of credit institutions that meet the significance criteria is carried out operationally by Joint Supervisory Teams (JSTs). For each supervised significant institution/group, the JST consists of an ECB coordinator and members from the ECB and national competent authorities.
Credit institutions that do not meet the significance requirement are defined as less significant institutions (LSIs). They are directly supervised by the CNB in accordance with the rules of the ECB and the SSM, and the ECB oversees them indirectly on the basis of information it receives from the CNB, although the ECB may also exercise direct supervision of these institutions if it deems it necessary.
The main activities of CNB's supervision are:
- granting and withdrawing authorisations and approvals in accordance with the laws governing the operations of credit institutions and credit unions;
- monitoring and drafting of regulations related to the operations of credit institutions and credit unions; and
- performance of activities of supervision and oversight of credit institutions and credit unions.
In Croatia, credit institutions may be established as banks, savings banks and housing savings banks. Credit institution is a common name for companies whose activity is the taking of deposits or other repayable funds from the public and the granting of credits for own account.
The CNB exercises supervision of the following entities:
- credit institutions (banks, savings banks and housing savings banks), which have obtained the authorisation in accordance with the Credit Institutions Act, and their branches outside the Republic of Croatia;
- branches of credit institutions from another Member State (a 'Member State' means a Member State of the European Union and the state signatory to the Agreement on the European Economic Area) and credit institutions from Member States in respect of their direct provision of services within the territory of the Republic of Croatia, within the competencies prescribed by the Credit Institutions Act;
- branches of credit institutions from third countries ('third country' means a foreign country that is not a Member State) which have obtained the authorisation from the CNB; and
- credit unions which have obtained the authorisation from the CNB.
Regulatory framework and exercising supervision
With regard to the specificity of their operation and the interest of the government that they operate in a stable manner and not take too much risk because they operate with a large amount of the funds of others, credit institutions are subject to a special and complex regulatory framework, stricter than that for the other segments of the economy.
The majority of the quantitative requirements that are set before credit institutions are determined in the Regulation (EU) No 575/2013 (Capital Requirements Regulation), including the basic supervisory rule, the rule on capital adequacy, which prescribes the minimum of own funds that must be readily available to credit institutions in relation to the risks they take in their operation. Other quantitative and qualitative requirements are governed by the Credit Institutions Act (transposing Directive 2013/36/EU, the Capital Requirements Directive). Therefore, the CNB verifies whether credit institutions operate in accordance with the set rules and standards by:
- exercising supervision by collecting and analysing reports and information, ongoing monitoring of operation of credit institutions, and other persons who are required by legislation to report to the supervisor;
- carrying out on-site examinations of credit institutions' operation;
- imposing supervisory measures; and
- issuing opinions, authorisations and approvals and assessing credit institutions.
In the course of supervision, the CNB verifies the security, stability and legality of operations of credit institutions and assesses the risks in their operations. On the basis of the completed supervision, the CNB determines whether the organisational structure, strategies, policies, processes and procedures implemented by the credit institution and the own funds and liquidity held by it ensure an adequate management and coverage of its risks. If illegalities, weaknesses or deficiencies in operation are identified, the CNB will impose supervisory measures upon credit institutions to eliminate those illegalities or deficiencies.
In accordance with its competence under law, the CNB cooperates and exchanges information with other supervisors and competent authorities, both home and foreign, and enters into cooperation agreements.
The regulatory framework for credit unions is determined by the Credit Unions Act, which lays down conditions for the establishment and operation of credit unions, (which are much less extensive that those for credit institutions), and oversight over credit unions is exercised in a similar manner as it is exercised over credit institutions.
Supervisory priorities in 2024
Supervisory priorities for the supervision of SIs are defined by the ECB, while the CNB is responsible for defining priorities for the supervision of LSIs. When defining supervisory priorities for LSIs, in addition to assessment of vulnerabilities and threats for credit institutions, the CNB takes into account the priorities of the ECB and the European Banking Authority (EBA). In 2024, the CNB defined the following supervisory priorities for LSIs:
CNB supervisory priorities for LSIs in 2024
|Strengthening resilience to macro-financial and geopolitical shocks
|Adapting business to the macroeconomic environment
|Addressing management deficiencies and stepping up efforts in addressing climate change management
|Addressing digitalisation challenges and improvement of operational resilience framework
|Addressing ML/FT risks
Again in 2024, the main focus of supervisory activities will be directed at risk management – especially of credit and interest rate risks, as well as the management of climate change related risk, followed by internal management and securing of business continuity, as well as activities associated with digital transformation and activities related to the ML/FT risk management framework.
According to the ECB criteria, a significant institution is one that meets the following criteria: (1) has total assets of more than EUR 30bn or more than 20% GDP (excluding banks with total assets less than EUR 5bn); (2) is one of the three largest banks in the country; (3) requested or received funding from the European Stability Mechanism or the European Financial Stability Facility; (4) has total assets exceeding EUR 5bn and the ratio of its cross-border assets/liabilities in more than one other participating Member State to its total assets/liabilities is above 20%. ↑