At its session today, chaired by the Governor, Dr Željko Rohatinski, the Croatian National Bank Council reviewed the latest monetary and economic developments and adopted a report on international reserve management in the first half of 2007 and a report on the banking system condition in the second quarter of 2007. The Council also reviewed and accepted a new application from Bayerische Landesbank, Munich (BLB) requesting approval from the central bank to indirectly acquire an equity holding greater than 50 percent in Hypo Alpe-Adria-Bank d.d., Zagreb (HAAB) and Slavonska banka d.d., Osijek. The approval was granted since in the new application, submitted to the CNB on 28 August 2007, BLB accepted all the conditions that the CNB imposed after having refused the first application in July.

With the purchase of Hypo Alpe-Adria-Bank International AG, Klagenfurt, BLB had indirectly acquired equity holdings in all its subsidiaries, including the two banks in Croatia. To effect a change in ownership in these two banks, BLB had to receive approval from the Croatian central bank. Due to the negative experience with BLB as the former owner of Riječka banka d.d., Rijeka, and due to the fact that BLB's first application for approval, filed in May 2007, contained no firm assurances that this would not be repeated in a similar situation, the CNB refused this application on 11 July 2007.

As BLB still remained interested in entering the Croatian market, the CNB imposed minimum requirements to be met by BLB prior to submitting a new application. These included providing an explanation of the reasons for abandoning the troubled Riječka banka and issuing a public apology to the bank's depositors; conducting due diligence in both newly acquired banks in Croatia; estimating their contingent losses and infusing additional capital to provide full coverage for such losses, as well as achieving and maintaining an appropriate capital adequacy ratio, improving the risk management and control system and promptly implementing CNB guidelines on money laundering and terrorism financing prevention.

BLB accepted all the requirements, which, in light of due diligence findings, proved to be warranted. Accordingly, this year HAAB will be recapitalised with a total of EUR 250m (of which EUR 150m has already been provided) and Slavonska banka with EUR 100m (with EUR 30m already provided). The capital adequacy ratio will thus be raised to its mid-2005 level and will have to be maintained at this level for at least one year; i.e. at 18.6 percent for HAAB and at 22.6 percent for Slavonska banka. In this way BLB will be much more involved in improving the conditions and resolving the problems in the two banks than it was anticipated in its first application for approval.

Having performed due diligence, BLB found it necessary to revise the risk management and control systems in both banks and bring them immediately into compliance with the standards of the BLB banking group. BLB's recent streamlining of its operations and risk management procedures, and the fact that the regulations applied by the bank are fully harmonised with EU requirements, have provided additional grounds for expecting an improvement of the conditions at the two banks in Croatia and greater stability of their business operations.

Having considered all these facts and having taken account of the German bankers' professional cooperation during the preparation of the new application for approval, the central bank decided to accept this application and grant approval to BLB to re-enter the Croatian market despite its unacceptable conduct in the Riječka banka crisis in early 2002. Such a decision was made in the belief that the lessons learned from the past experiences and events would prove useful not only for BLB and its subsidiaries but for the Croatian banking system as a whole.

Also accepted at this session was the application of an affiliated company Berlin & Co Capital S.á.r.l., Luxembourg to indirectly acquire a majority holding exceeding 20 percent in the said two banks in Croatia.

The Council also endorsed the proposals of the supervisory boards of three banks regarding the appointment of management board members, i.e. the appointment of Gian Luigi Bonfe as member of the management board of Banka Kovanica d.d. Varaždin; Tomasz Jerzy Taraba as chairman and Dieter Hornbacher as member of the management board of Volksbank d.d. Zagreb, and Ivan Ostojić as member of the management board of Wüstenrot stambena štedionica d.d. Zagreb.