This paper presents key findings of the Financial System Stability Assessment for the Republic of Croatia, including Reports on the Observance of Standards and Codes on Banking Supervision, Payments Systems, Securities Regulation, Insurance Regulation, and Monetary and Financial Policy Transparency. The financial system of Croatia is now more resilient and seems better prepared to cope with moderate shocks. The larger banks are generally better capitalized, and their risk management capacity has improved. The economy, however, remains highly euroized and susceptible to shifts in residents’ sentiments toward the local currency.
Using a combination of propensity score matching and difference-in-difference techniques we investigate the impact of foreign bank ownership on the performance and market power of acquired banks operating in Central and Eastern Europe. This approach allows us to control for selection bias as larger but less profitable banks were more likely to be acquired by foreign investors. We show that during three years after the takeover, banks have become more profitable due to cost minimization and better risk management. They have additionally gained market share, because they passed their lower cost of funds to borrowers in terms of lower lending rates. Previous studies failed to pick up the improvements in performance of takeover banks, because they did not account for the performance of financial institutions before acquisitions.
Mr. Mark Swinburne, Stéphanie Marie Stolz, and Ms. Marina Moretti
For almost a decade, the IMF has been using stress tests to identify vulnerabilities across institutions that could undermine the stability of a country's financial system. This working paper focuses on the IMF's experience with stress testing in the Financial Sector Assessment Program (FSAP). It provides background on the nature of an FSAP and the role of macro stress testing within it. It also describes how the methodology of stress testing in FSAPs has been evolving and what are fairly common approaches now being used. Finally, it discusses the main strengths and challenges for future development of macro stress testing in FSAPs and provides an overview of stress testing practice in European FSAPs.
A mechanism is proposed that aims to reduce the risk of a banking sector liquidity crisis—which is a quintessentially systemic event and thus the object of macroprudential policy—and moderate the effects of a crisis should one occur. The instrument would give banks more incentive to build up buffers of systemically liquid assets as a proportion of their total liabilities, yet these buffers would be usable in times of stress. The modalities of the instrument are considered with a view to making it effective, efficient, and robust.
Mr. Jerome Vandenbussche, Ms. Ursula Vogel, and Ms. Enrica Detragiache
Several countries in Central, Eastern and Southeastern Europe used a rich set of prudential instruments in response to last decade’s credit and housing boom and bust cycles. We collect detailed information on these policy measures in a comprehensive database covering 16 countries at a quarterly frequency. We use this database to investigate whether the policy measures had an impact on housing price inflation. Our evidence suggests that some—but not all—measures did have an impact. These measures were changes in the minimum CAR and non-standard liquidity measures (marginal reserve requirements on foreign funding, marginal reserve requirements linked to credit growth).
Dilyana Dimova, Ms. Piyabha Kongsamut, and Jérôme Vandenbussche
This paper presents a detailed account of the rich set of macroprudential measures taken in
four Southeastern European countries—Bulgaria, Croatia, Romania, and Serbia—during
their synchronized boom and bust cycles in 2003–12, and assesses their effectiveness. We
find that only strong measures helped contain domestic credit growth, the share of foreigncurrency-
denominated loans provided by the domestic banking sector, or the domestic
banking sector’s reliance on foreign borrowing during the boom years. We also find that
circumvention via direct external borrowing often fully offset the effectiveness of these
strict measures, and thatmeasures taken during the bust had no discernible impact. We
conclude that (i) proper calibration of macroprudential measures is of the essence; (ii) only
strong, broad-based macroprudential measures can contain credit booms; (iii) econometric
studies of macroprudential policy effectiveness should focus on measures rather than on
instruments (i.e. classes of measures) and in so doing allow for possible non-linear and
The development of the Croatian financial sector has faced many of the difficulties experienced by other transition countries. Recent troubles have exacted a significant macroeconomic price but the strategy implemented by the Croatian National Bank (CNB) since the approval of the new banking law promises the early resolution of the more immediate problems. GDP at constant prices, trends in total labor costs, price developments, retail inflation rates, agricultural production, consolidated central government fiscal accounts, government employment, health insurance, disability and retirement insurance, and so on are presented in detail.
This Selected Issues and Statistical Appendix paper analyzes monetary transmission in Croatia. The evidence analyzed in this paper supports the view that monetary policy in Croatia is not an effective tool for aggregate demand management. One of the main conclusions is that financial conditions in the economy are only weakly correlated with the monetary policy stance. Monetary policy can exercise some control over money-market interest rates, but its influence on lending rates is uncertain and comes with long lags. The paper also examines determinants of lending rates and domestic spreads in Croatia.