The Croatian National Bank has so far not received any request for the acquisition of a qualifying holding in HVB Splitska banka d.d. Split by either KBC or any other bank. When such request is made, the Croatian National Bank will, as in all other cases, act in accordance with the provisions of the Banking Act (Official Gazette 84/2002) and the Croatian National Bank Act (Official Gazette 36/2001).

As provided by Article 25 of the Croatian National Bank Act: "The Croatian National Bank shall, on the basis of a special law, issue and revoke bank licenses, supervise bank operations, perform other operations within its fields of competence and enact subordinate legislation and decisions which shall regulate banking transactions and set the standards for the stability and safety of bank operations."

The Banking Act is a special law which governs the conditions for the establishment, operations, discontinuation and supervision of bank operations and its provisions are based on the International Accounting Standards and Core Principles for Effective Banking Supervision of the Basel Committee as key references for effective supervision.

The competence of the Croatian National Bank for decision-making in connection with granting approvals for the acquisition of a qualifying holding in banks clearly follows from the stated legislative provisions.

Article 20 of the Banking Act provides that, in order to acquire shares of a bank on the basis of which a person directly or indirectly acquires a qualifying holding in a bank, it is necessary to obtain a prior approval from the Croatian National Bank.

As provided by Article 21 of the Banking Act:

1. It shall be necessary to enclose the documents referred to in items 4 and 5, paragraph 1, Article 35 and other documentation as stipulated by the Croatian National Bank with the request for issuing the approval for the acquisition of a qualifying holding.
2. The Croatian National Bank shall refuse the request for issuing the approval for the acquisition of a qualifying holding, if the information available to it indicates that:
   1. because of the activities or operations performed by the qualified owner or persons connected thereto, or because of actions taken by the qualified owner or persons connected thereto, the operations of the bank could be endangered due to noncompliance with the rules on risk management;
   2. because of the activities or operations performed by the qualified owner or persons connected thereto, or because of the manner of connection between such persons, the supervision of the bank could be hindered or substantially more difficult; or
   3. it would result in a large concentration in the banking system that might limit the freedom of market competition;
   4. it could adversely influence the implementation of monetary and foreign exchange policy in the Republic of Croatia.
3. The Croatian National Bank shall also refuse the request for the acquisition of a qualifying holding by a foreign person if, in consideration of the regulations or practice in that person's country, it is likely that the exercise of supervision in accordance with the provisions of this Act will be hindered or substantially more difficult.

As shown by the preceding quotation, it is evident that the reasons for refusal to grant approval for the acquisition of a qualifying holding are explicitly stated. We therefore find that the given legislative framework enables the interested party to have a clear insight, even before submitting its application for the acquisition of a qualifying holding, into the specific and objective circumstances which are relevant for decision-making in connection with an application for the acquisition of a qualifying holding, and in that same context, the granting of such an application or refusal to grant such an application.

The criteria determined in Article 21, paragraph 2 are well-defined and precise and are in conformity with the principles of legal safety as they enable persons to make full use of all the rights derived from the principles of free movement of capital and right of establishment.

In addition, an explanation is provided to each applicant of every decision taken in connection with approvals for the acquisition of a qualifying holding. This enables each applicant to be well informed about all the facts and elements on which a certain decision is based. By doing so, the Croatian National Bank ensures transparency of its decision-making in connection with acquisitions of qualifying holdings.

Legal action can be initiated against every decision taken by the Croatian National Bank, and by the same token, against any decision in connection with acquisition of a qualifying holding, with the Administrative Court of the Republic of Croatia. This ensures a mechanism of court control of the legitimacy of operations of the Croatian National Bank and its orderly application of regulations.

Should KBC submit a request for acquisition of a qualifying holding in HVB Splitska banka d.d. Split, the Croatian National Bank would be obligated to apply the aforementioned legal provisions and ensure the same treatment as in any other case.

It is beyond question that in the course of its actions the Croatian National Bank has to adhere to clear and unequivocal provisions of the Banking Act as regards decision-making in connection with its approvals for acquisition of qualified holdings, and it is equally undisputable that the Croatian National Bank has the legal right to determine whether any of the reasons referred to in Article 21, paragraph 2 of the same Act exist.

As part of the possible procedure of deciding on the application for acquisition of a qualifying holding by KBC, the Croatian National Bank would start from the following facts:

• KBC Bank is a part of the KBC Group;
• KBC Bank acquired 34% of shares of Nova Ljubljanska banka d.d. Ljubljana in 2002;
• KBC appointed 4 members to the Supervisory Board of Nova Ljubljanska banka d.d. Ljubljana of the total number of 11 Supervisory Board Members;
• 35.41% of shares of Nova Ljubljanska banka d.d. Ljubljana is owned by the Republic of Slovenia;
• the existence of the debt of Ljubljanska banka d.d. Ljubljana towards depositors from the Republic of Croatia.

The fact that there is a debt of Ljubljanska banka d.d. Ljubljana towards depositors from Republic of Croatia, which is deemed extremely important by the Croatian National Bank, can be summarised as follows:

Ljubljanska banka Basic Bank Zagreb, which was an independent legal person in the system of Ljubljanska banka - United Bank Ljubljana, operated in the Republic of Croatia until 1 January 1990. As from 1 January 1990 Ljubljanska banka Basic Bank Zagreb ceased to exist as an independent legal person and following its reorganisation, based on a decision of the Constituent Assembly of Ljubljanska banka d.d. Ljubljana, continued to operate as an organisational unit of Ljubljanska banka d.d. Ljubljana without legal personality.

As a result of the said reorganisation, Ljubljanska banka Basic Bank Zagreb was merged with Ljubljanska banka d.d. Ljubljana. Ljubljanska banka d.d. Ljubljana guaranteed for all liabilities of the Main Branch Office with its entire assets, without limitation.

The Republic of Slovenia adopted a Constitutional Act Implementing the Basic Constitutional Charter on the Independence and Sovereignty of the Republic of Slovenia (hereinafter: the Constitutional Act) in July 1994. With this Act the Republic of Slovenia, among other things, established Nova Ljubljanska banka d.d. Ljubljana and stipulated that Ljubljanska banka d.d. Ljubljana transfers its operations and assets to Nova Ljubljanska banka d.d. Ljubljana. In conclusion, Nova Ljubljanska banka d.d. Ljubljana was established with the assets of Ljubljanska banka d.d. Ljubljana. However, pursuant to this Act all liabilities of Ljubljanska banka d.d. Ljubljana arising from foreign currency held in foreign currency accounts and savings books of depositors from other republics, and hence the depositors from the Republic of Croatia, continued to be the liabilities of Ljubljanska banka d.d. Ljubljana. Although this Act was aimed at preventing Nova Ljubljanska banka d.d. Ljubljana from being treated as successor of Ljubljanska banka d.d. Ljubljana, Nova Ljubljanska banka d.d. Ljubljana took over the assets but not the liabilities of Ljubljanska banka d.d. Ljubljana. At the same time, by adopting the said Act the Republic of Slovenia made it impossible for all depositors outside Slovenia to initiate any legal proceedings for the purpose of settling their claims against Ljubljanska banka d.d. Ljubljana and Nova Ljubljanska banka d.d. Ljubljana in the Republic of Slovenia. It is clear that Ljubljanska banka d.d. Ljubljana together with Nova Ljubljanska banka d.d. Ljubljana, as well as the Republic of Slovenia, which, by passing this discriminating Act, interfered with the relationship between Croatian depositors and Ljubljanska banka d.d. that is governed by private law, are responsible for not repaid savings of Croatian depositors.

Were the Croatian National Bank to decide on request for approval to acquire a qualifying holding by KBC, the central bank would deem the said circumstances very important due to the fact that KBC is a qualifying holder in Nova Ljubljanska banka d.d. Ljubljana.

KBC Bank holds 34% of shares of Nova Ljubljanska bank d.d. Ljubljana. Directive 2000/12/EC relating to the taking up and pursuit of the business of credit institutions defines a "qualifying holding" as direct or indirect holding in an undertaking which represents 10% or more of the capital or of the voting rights or which makes it possible to exercise a significant influence over the management of the undertaking in which a holding subsists. This provision exists also in Article 9 of the Banking Act of the Republic of Slovenia (Official Gazette of the Republic of Slovenia 7/1999, 59/2001, 55/2003, 42/2004) as well as in the Banking Act of the Republic of Croatia.

According to the existing situation, KBC appointed 4 members to the Supervisory Board of Nova Ljubljanska banka, while 2 members of the Management Board of Nova Ljubljanska banka d.d. are former employees of KBC Bank, i.e. KBC Group. Therefore, it may be assumed that they were appointed by the Supervisory Board at the proposal of KBC.

It is undisputable that KBC Bank is a legal person which exercises significant influence over Nova Ljubljanska banka d.d. Ljubljana and that it is hence the connected person thereto.

Since in the process concerning the issuing of the approval for acquisition of a qualifying holding, in accordance with the existing regulations, not only a future acquirer of a qualifying holding is assessed, but also the acquirer's connected persons, the Croatian National Bank, in deciding on a prospective KBC's application, would also have to take into account the fact that KBC and Nova Ljubljanska banka d.d. Ljubljana are connected persons.

According to Article 67, paragraph 3 of the Banking Act, risks to which a bank is exposed in its operations and which require a minimum in terms of methods of measuring, assessing and managing also include other risks. Such other risks are legal, reputation and other risks. Reputation risk is the current and prospective impact on earnings and capital arising from negative public opinion. Such a risk may affect the financial institution's ability to establish new relationships or continue servicing existing relationships.
The previously quoted Article 21, paragraph 2, item 1 of the Banking Act prescribes that the Croatian National Bank shall refuse the request for issuing the approval for the acquisition of a qualifying holding, if the information available to it indicate that because of the activities or operations performed by the qualified owner or persons connected thereto, or because of actions taken by the qualified owner or persons connected thereto, the operations of the bank could be endangered due to noncompliance with the rules on risk management.
A prospective acquirer of a qualifying holding, KBC, was aware or should have been aware, at the time of acquiring shares of Nova Ljubljanska banka d.d., of the manner in which Nova Ljubljanska banka d.d. had been established, as well as of the existence of unsettled liabilities towards the Croatian depositors. KBC was also aware or should have been aware that by acquiring the shares of Nova Ljubljanska banka d.d. Ljubljana it had become exposed to the reputation risk on the territory of the Republic of Croatia.

Nova Ljubljanska banka d.d. Ljubljana has not so far taken any actions aimed at settling the obligations to the depositors from the Republic of Croatia. Furthermore, KBC, in the period of more than 3 years of participation in the management structure of Nova Ljubljanska banka d.d. Ljubljana, has not taken any measures with a view to settling the debt to the depositors from the Republic of Croatia. On the contrary, KBC as a qualified holder of shares in Nova Ljubljanska banka d.d. Ljubljana, has been using, through the operation of that Bank, the funds of Ljubljanska banka d.d. Ljubljana, and in this manner the funds of the Croatian depositors, earning operating profit. Therefore, it is undisputable that the reputation risk is shared by Nova Ljubljanska banka d.d. Ljubljana and KBC, as the owner of 34% of shares.

HVB Splitska banka d.d. Split is the fifth bank on the banking market of the Republic of Croatia, in terms of the size of assets and earned profit (before tax). This fact should not be disregarded, in terms of impact of the reputation risk on its operations. More specifically, reputation risk could significantly affect the Bank's performance indicators.

In addition, it is a generally known fact that as a result of the not repaid foreign currency savings there is a negative public opinion in the Republic of Croatia concerning Ljubljanska banka d.d. Ljubljana and Nova Ljubljanska banka d.d. Ljubljana.

The Croatian National Bank has not by any of its actions prevented the entry of foreign banks, including Slovenian banks, to the Croatian banking market, so that the position of the Croatian National Bank concerning a possible entry of KBC or Nova Ljubljanska banka d.d. Ljubljana may not be identified with the fulfilment of obligations under the SAA as regards free movement of capital and rights of establishment. This is also confirmed by the fact that 92% of the banking system of the Republic of Croatia is in foreign ownership.

Every individual request for the acquisition of a qualifying holding in a bank or a request for establishment of a bank on the territory of the Republic of Croatia is subject to a separate procedure and decision-making, taking into account all the relevant facts and circumstances, in accordance with the provisions of the regulations that are in effect in the Republic of Croatia.