Compliance Risks in Banking Pose Threats to Financial Stability in Croatia

The Croatian National Bank (CNB) Council has expressed concerns over the rising compliance risks in the country’s banking sector, citing elevated geopolitical risks and financial market turbulence. The risks are further exacerbated by structural weaknesses in the domestic economy and high uncertainty.

Stability and Liquidity of Banking System

Despite the uncertain environment, the CNB has praised the stability and liquidity of Croatia’s banking system, with a high amount of liquid assets providing banks with resilience to sudden shocks. However, the regulator has warned that the growth of credit risk could hamper profitability if economic activity slows down alongside rising interest rates.

Capital Buffers

The CNB has been adjusting capital buffers in response to changes in systemic risks and market conditions. The countercyclical buffer rate was increased twice last year to a total of 1%, aiming to strengthen the resilience of credit institutions to potential losses. If favorable macro-financial circumstances continue, the rate may be further increased.

Banking Sector Growth

The banking sector has seen strong growth in real estate prices and lending, but this has been accompanied by rising interest rates and increasing costs for debtors. The use of the National Reference Rate (NRR) as a dominant variable parameter and statutory restrictions on maximum interest rates have mitigated some of these effects, particularly in the household sector.

Governance and Risk Management

The CNB Council has also approved the appointment of Dijana Kalinić and Igor Unković to the Management Board of Imex banka d.d. The move is seen as a step towards strengthening the bank’s governance and risk management practices.

Conclusion

Overall, the CNB remains vigilant over compliance risks in Croatia’s banking sector, recognizing that the current environment poses significant challenges for financial stability.