A crisis situation can be defined as the occurrence of a disruption in one or more segments of the financial system that may threaten overall financial stability, e.g. illiquidity or insolvency of financial entities, a significant disruption in the payment system and the system of the settlement of payment transactions, disruptions spilled over from external financial markets or other disruptions that may lead to difficulties in the functioning of the financial system.

Effective management of crisis situations in credit institutions include preventive measures, early intervention measures and resolution measures. As part of preventive measures, credit institutions in Croatia are required to draw and, at least annually (or after a change in the legal or organisational structure, or after a change in the business or financial situation which could have a material effect on or necessitate a change to the recovery plan), submit the recovery plan to the competent supervisory authority. In the recovery plan, a credit institution sets out actions to be taken to restore its financial position in situations of severe financial distress. These actions may include measures to conserve or restore the own funds, arrangements to maintain access to financial market infrastructures and contingency funding sources, to restructure liabilities, reduce risks and leverage, etc. In case of disruptions in a credit institution’s regular operation to the extent that might jeopardise its liquidity, solvency or business continuity, supervisory early intervention measures are activated, which may include: the application of measures from the recovery plan, such as the identification and addressing of problems in operations and preparation of a plan for negotiation on restructuring of debt with individual or all creditors. Additional measures may also be implemented, provided for in the Credit Institutions Act, such as the removal from office of senior management and the management body, the revocation of approval for management or supervisory board members or some other measures.

If the competent supervisory or resolution authorities determine that a credit institution is failing or likely to fail and if there is no reasonable prospect that any alternative supervisory measures would prevent its failure within a reasonable timeframe, the resolution body adopts the decision about whether the resolution of that credit institution should be initiated. For most credit institutions, resolution of a crisis situation means exiting the market through normal insolvency proceedings. However, in the case of banks whose failure would jeopardise public interest, that is, preserving financial system stability and mitigating unfavourable effects of financial instability on economic activity, resolution mechanisms are applied. These mechanisms enable the resolution costs to be distributed to banks’ shareholders and creditors, with the aim of ensuring the continuity of banks' critical functions and avoiding significant adverse effects on financial stability in the light of spreading the crisis to the entire financial system. In the procedure of resolution of credit institutions for which the competent supervisory authority has determined that it is failing or is likely to fail, the most important role is played by resolution authorities that are empowered to apply the resolution instruments and exercise the resolution powers. In the Republic of Croatia they are as follows: the Single Resolution Board (since accession to the banking union), the central resolution authority within the banking union competent for credit institutions under the direct supervision of the European Central Bank within the Single Supervisory Mechanism, and at the national level, the Croatian National Bank, responsible for other credit institutions. Pursuant to the provisions of the Act on the Resolution of Credit Institutions and Investment Firms, the Croatian Deposit Insurance Agency (CDIA) manages the national resolution fund and is authorised to collect previous and subsequent contributions for the purpose of payments to the Single Resolution Fund. Pursuant to the provisions of the Act on Compulsory Liquidation of Credit Institutions, the CDIA is also the supervisory liquidation authority, or the authority for the compulsory liquidation procedure supervising the work of liquidators.

In maintaining confidence in the financial system, in particular in the case of a crisis situation, the deposit insurance system plays an important role, that is, the system which protects depositors from loss of deposits in the case of failure of a credit institution. The system is managed by the CDIA, and members of the System are all credit institutions authorised by the Croatian National Bank and their branches in other Member States. The system is exclusively financed by contributions from member credit institutions. Depositors are compensated for the insured event of a credit institution, which occurs when the CNB issues a decision on the unavailability of deposits, or when a competent court adopts a decision to open a compulsory liquidation proceeding. The funds from the deposit insurance fund may (under specific circumstances and up to a certain amount) also be used to finance resolution or apply instruments in a credit institution’s compulsory liquidation proceeding. In crisis situations, an important role is also played by the Financial Stability Council, which ensures cooperation and the exchange of information between the competent authorities for the purpose of effectively resolving a crisis and maintaining financial stability.