13th Financial Stability Council Session

The Financial Stability Council held its 13th session at the Croatian National Bank today, chaired by the CNB Governor Boris Vujčić, and attended by the Minister of Finance of the Republic of Croatia Zdravko Marić, the Croatian Financial Services Supervisory Agency Board President Ante Žigman, the Director of the State Agency for Deposit Insurance and Bank Resolution Marija Hrebac, and their associates.

The Council members were briefed on the main indicators of the state of the financial system and the risks to its stability, which still mostly stem from developments in the international environment. Interest rates are expected to remain at low levels over the medium term, which is estimated to be the most significant factor contributing to risk accumulation.

As regards the banking system, the indicators for 2019 suggest that loan portfolio quality improved, currency and interest‐rate induced credit risks decreased and banking system capitalisation and liquidity remained high. The discussion on the developments and risks related to bank activity was focused on indicators of lending to households and the effects of the CNB's Recommendation on actions in granting non‐housing consumer loans. Information was exchanged concerning the possibility of reintroducing the issuance of credit reports for citizensthrough a credit register and the risksthat possible court disputes may pose for banks considering the model procedure related to converted Swiss franc loans recently initiated by the Supreme Court of the Republic of Croatia. Furthermore, CNB representatives informed the Council members about the macroprudential activities undertaken in Croatia and other EU countries in the course of 2019.

The significance of the financial services sector has been growing continuously over the past ten years, with the trend continuing in 2019. At the end of September, the financial services sector managed assets worth 55% of GDP, accounting for one third of Croatia's financial system. The main generators of growth were pension funds, but other sector segments (investment funds, insurance companies and leasing companies) also recorded growth. The segments of the financialservicessector are notsignificantly directly interconnected, but they are strongly indirectly interconnected on the basis of concentration of investments in government securities. Against the backdrop of low interest rates, the predominance of bonds in the structure of investments exposes financial institutions in the financial services sector to reinvestment risk, but on the other hand, it increases the value of their bond portfolios. As a result, high yields were achieved in 2019. A slight rise in trading on the domestic capital market was recorded in 2019, with no signs of systemic market risk seen in the bond or the equity segment of the market.

As for the real estate market, preliminary commercial real estate market indicators were presented at the session, and the participants concluded that it was necessary to carefully monitor the developments in real estate prices and increase research related to its determinants.

Council members were also informed of the activities undertaken to comply with the Recommendation of the European Systemic Risk Board on closing real estate data gaps and the future activities directed at collecting the missing data. Council members were also informed of the activities of the State Agency for Deposit Insurance and Bank Resolution undertaken in 2019 and of the Agency's plans for 2020.