The Council of the Croatian National Bank, chaired by Governor Dr. Marko Škreb, met on Thursday, May 21, 1998 to continue its discussion on the situation in the Croatian banking system. The Council examined measures to prevent the spreading of difficulties from certain banks to sound financial institutions and to reduce the impression of the severity of the banking crises, which has exerted a negative influence on the confidence of savers and public in the banking system.

The Council emphasized that the stability of every market economy is based on the confidence of savers. Confidence in the Croatian banking system is very sensitive due to past experiences with frozen foreign exchange deposits and devaluation of savings deposits in domestic currency during periods of high inflation. Therefore, the Council believes that the Croatian central bank must react without delay by introducing appropriate measures to correct imbalances of liquidity in the banking system, which would under less sensitive circumstances probably be overcome by banks themselves. The measures may only be temporary and do not signalize that the central monetary authority is loosening up its rigidness towards those that do not respect financial discipline. The measures aim at stabilizing the current situation, so that consequently weak points in the Croatian banking system could be easily identified and corrected.

In response, the Croatian National Bank decided on the following: banks and savings banks will be allowed to use mandatory reserves they have deposited with the central bank to repay their overnight borrowings on the Zagreb Money Market. They will also be allowed to keep up to 40 percent of their mandatory reserves in giro-accounts and in the vault, instead of the previous 25 percent. Furthermore, the Council decided to retract the decision requiring banks to make deposits (in kuna) for foreign hard currency loans earmarked for conversion into kuna and for all guaranties for such loans with a maturity period of longer than 3 years, as well as for loans granted by the EBRD. The decision, requiring banks to deposit 15 percent of their foreign currency deposits in kuna, will take effect on August 25 and not on June 8, 1998, as previously determined.

The Council of the CNB expects that these measures will enable banks to overcome the current liquidity strain with their own resources, and increase the safety of banks with surplus liquidity which lend in the Money Market. The Council believes that under such circumstances the interbank rates should not exceed 10 percent.