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January 16, 2018

IMF published staff report and selected issues report in context of the 2017 Article IV consultation with Croatia. The staff report highlights that the conservative prudential policies of the Croatian National Bank (CNB) have thus far paid-off with regard to the banks’ ability to withstand the Agrokor crisis.

The staff report reveals that the results of CNB’s stress-testing of banks’ exposure showed that the banking system could absorb significant write-offs of Agrokor’s debt due to the system’s high capital buffers. With respect to nonperforming loans (NPLs), the authorities have over time taken various measures to incentivize their reduction, including through the facilitation of write-offs of fully provisioned NPLs during 2017, via the amended tax legislation. However, market-based solutions, such as NPL sales, seem to be the preferred option to banks thus far. There is no immediate need to tighten macro-prudential measures (MPMs) absent signs of overheating in the real estate market. CNB used various MPMs prior to the adoption of the Capital Requirement Directive IV of the EU. The main MPMs include the capital conservation buffer, structural systemic risk buffers, higher capital charge on other systemically important institutions (O-SII), strict definition of residential property, and higher risk-weights on exposures secured by mortgages on commercial real estate. Going forward, it is vital to continue to maintain conservative prudential policies and banking supervisory vigilance, including by considering revisiting MPMs, should the pace of real estate price increases accelerate.

The selected issues report focuses on issues related to bank credit and NPL resolution. The report reinforces that NPLs and how they are handled, in addition to the real growth, are important determinants for credit. These findings are supported by the cross-country analysis and corroborated by other studies. The Croatian authorities have taken several initiatives over the years to gradually resolve legacy NPLs. Croatian banks have high NPL ratios compared to peers, but provisions have improved, and the un-provisioned part is, on average, fully covered by excess capital. Banks have the option to renegotiate and restructure the NPL, sell the NPL, or collect and write-off the NPL.

 

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Keywords: Europe, Croatia, Banking, NPLs, Stress Testing, Article IV, IMF

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