At its meeting held on Thursday, January 28, 1999 the Council of the Croatian National Bank, chaired by Governor Dr. Marko Skreb, reviewed recent developments on the domestic money market and in the banking system, and decided on the introduction of several measures, acting in accordance with its authority.

According to indicators, the exit of several banks from the financial market had positive impact on interest rate movements. These banks had, on the average, higher interest rates than sound banks and prompted continuously with their business operation a rise in interest rates. Although it is quite true that call money rate on the Zagreb Money Market grew from 15.8 percent in December to average 16.10 percent in the first three quarters of January, in December 1998 all categories of interest rates in commercial banks decreased. Compared to November, the average interest rate on kuna loans without a currency clause fell in December by 0.4 percentage points to 16.1 percent (for short-term loans on 16.2 percent, for long-term loans on 13.3 percent). The average interest rate on kuna loans with a currency clause registered an even more significant fall: from 13.6 percent in November to 13.0 percent in December (for short-term loans on 14.3 percent, for long-term loans on 11.2 percent). This development occured along with a December rise in the amount of loans of as high as 27.4 percent in comparison with November. Simultaneously, deposit rates of commercial banks decreased as well: the average interest rates on kuna deposits fell in December to 4.1 percent, and the average interest rate on foreign currency deposits to 4.0 percent. Another favorable development is the December rise of total foreign currency deposits by 383 million kuna (slightly more than 100 million German marks), which shows that the confidence in the Croatian banking system has not been disturbed by a crisis in a few banks. Decrease of net international debt in November testifies that the growing demand for foreign currency observed at the end of last year was caused primarily by the fact that significant obligations towards foreign creditors came due in that period.

Taking into consideration the liquidity gap in the Croatian economy, caused primarily by structural reasons, the Council of the Croatian National Bank decided to offer to banks and savings banks another liquidity facility which can be used only by solvent banks and savings banks once they start suffering serios liqudity problems that cannot be solved by the use of regular secondary liquidity facilities. This facility, however, will not be as available as Lombard loans which are practically automatically granted to banks that have at their disposal necessary amounts of CNB bills or Treasury bills, and are taken even by the best banks, if it proves to be necessary. The new liquidity facility is designed as a help to those banks that have serios difficulties with liquidity, but also a sufficient amount of valuable assets which they can turn into liquid assets and stabilize their operation, while making use of the credit. The maturity of the facility is up to one year at the most.

A bank or a savings bank to use the new liquidity facility has to submit to the CNB a report on causes of its liquidity problems, a detailed plan to solve these problems and the cash flow forecast for the coming three months. The facility can be utilized only as a part of measures aiming at improving the situation in a bank or a savings bank, which are to include active involvement of the CNB. For the purpose of obtaining this credit, banks have to pledge adequate securities: CNB bills, Treasury bills, bonds serviced or guaranteed by the Republic of Croatia, securities issued by legal persons listed in the first quotation of the Zagreb Stock Exchange or marketable securities issued by legal persons headquartered in OECD-countries. The interest rate charged on the credit will be 14 pecent.