At its session today, the CNB Council was briefed on current economic, monetary and financial developments in the euro area and Croatia and discussed systemic financial risks. The Council members adopted the Semi-annual Information on the Financial Condition, the Degree of Price Stability Achieved and the Implementation of Monetary Policy in the Second Half of 2023, the Annual Report of the Croatian National Bank for 2023 and several decisions on matters falling within their competence.

The strong economic expansion supported household income and corporate performance, making a favourable impact on the stability of the financial system. The main structural weaknesses of the domestic economy, such as the high exposure of the banking sector to the government and low labour force participation rates, which, combined with adverse demographic and migration trends, limit the potential for economic growth, remained unchanged. As a result, the overall exposure of the financial system to systemic risks decreased only slightly from a moderately high level. The most important sources of risks to financial stability arise from a possible escalation of geopolitical tensions, which could adversely affect global economic flows and indirectly the domestic economy, which, as a small and open economy, is highly susceptible to spillover effects from the environment. Furthermore, the maintenance of interest rates at elevated levels in the event of persistent inflationary pressures could weigh on the sustainability of domestic private sector debt.

The robust labour market and income growth boosted lending to households, particularly in the segment of general-purpose cash loans. At the same time, housing loan growth stabilised at moderate levels. However, the increasing maturity of housing loans and the growing ratio of debt service to income, amid rising residential real estate prices and interest rates, increase consumers’ vulnerability to possible unfavourable financial conditions. In addition, the migration of deposits from transaction accounts to time deposits started to be reflected in the increase in the national reference rate (NRR). This will gradually albeit slightly raise the cost of repayment of some existing loans, which has so far not increased significantly. The growth in risks was also driven by a further increase in residential real estate prices, which was much stronger in 2023 than in other euro area members, despite the steady decrease in the number of sales. Good business performance of non-financial corporations has thus far reduced their vulnerability to tighter financing conditions, although a slight increase in the already relatively high debt raises the risks to debt servicing capacity in the event of a decline in business activity. This risk would be particularly pronounced if accompanied by a further increase in financing costs due to the replacement of maturing loans by new ones issued at higher interest rates.

The banking sector generated high profits in 2023 and its robust resilience was confirmed by the results of solvency and liquidity stress tests to highly unlikely, very intensive shocks. However, profitability prospects in the medium term are undermined by the continued growth of financing costs, a possible deterioration in asset quality and increased interest rate risk. In this context, the CNB’s macroprudential policy focuses on maintaining the accumulated high level of capital buffers, which help preserve banks’ resilience should macroeconomic or financial conditions deteriorate, without unfavourable effects on loan availability. Through the gradual build-up of the countercyclical capital buffer in the course of 2022 and 2023, the CNB created room for potential counter-cyclical action in the event of sudden shocks. In addition, system-wide capital requirements for other systemically important banks were also raised from the beginning of 2024, reflecting the higher concentration of the banking system and the strengthening of the link between capital requirements and the systemic importance of each credit institution.