Bank Account Holders in Croatia: Protect Your Account Balance and Qualify for Deposit Insurance Repayment When Banks Fail or Stop
The Republic of Croatia is a member state of the European Union. The country currently relies on its local currency, the Croatian Kuna, but wishes to become a full participant in the Euro system. Several steps have gradually been taken to align domestic regulation with the European framework. Examples include the ERM participation that mitigates exchange rate risk between the Kuna and Euro and prepares Croatia to join the monetary union, and close cooperation on bank supervision between the Croatian National Bank (CNB) and the European Central Bank (ECB). As a result, systemically important financial institutions are subject to European oversight, where less significant credit institutions are governed by local laws.
In recent years, the service based Croatian economy has been severely impacted by the pandemic and two devastating earthquakes. The substantial tourism industry and its peripheral sectors experienced a heavy decline that was mitigated by the provision of EU funds and other state support measures. Non-performing exposures in the books of credit institutions raise concerns over the credit registration and risk weighting system, asset quality, and bank profitability.
The Croatian Financial System
Credit institutions take deposits from savers, facilitate payments for their customers and grant loans to borrowers. The credit institution acts as an intermediary for its own risk and reward. Its main concern is the maturity and liquidity mismatch between long term loans and short term deposits. This is furthered by complicated funding mechanisms such as fractional reserve lending, securitization and public stimulus in the form of quantitative easing.
Bank risk models and stress test scenarios imposed on credit institutions by supervisors are based on unpredictable events and forecasts. Croatian regulators require licensed credit institutions to maintain sufficient liquidity and capital adequacy ratios to protect themselves against internal value fluctuations and external matters like economic decline or financial crises. All 31 licensed and supervised credit institutions that operate in Croatia are subject to this regime and preserve comfortable and above market buffers.
Loans, even though they are illiquid, are considered assets in the books of a bank. Not all borrowers comply with the terms and repay their loan. Non-performing loans (NPL) often remain on the balance sheet of the bank until they are sold or written off. Institutional instability is warranted by improvements in asset quality and additional loan provisions. However, risk is not completely excluded.
Regulation and Supervision of Financial Institutions in Croatia
The foundations of bank regulation and supervision in Europe is laid down in the single rulebook. Its main pillars contain the Capital Requirements Directive and Regulation (CRD), the Bank Recovery and Resolution Directive (BRRD) and the system of Deposit Guarantee Schemes (DGS). Further rules exist on the establishment of credit institutions, the authorization for shareholders, internal governance and risk management, as well as capital requirements. These include liquidity requirements, limits to large exposures, and supervision of credit institutions.
Businesses and private persons hold their income and savings at financial institutions. They save, borrow and use the banking facilities to fund their lifestyle and save for the future. Thus, some level of protectionism via licensing, regulation and supervision of credit institutions serves the public interest. Authorization to operate as a deposit taking credit institution is granted by the central bank, the CNB. The Croatian financial system identifies three types of authorized credit institutions that are allowed to provide banking and financial services, universal and multifunctional banks, savings banks and housing savings banks. Although the banking sector is stable, sound and well-capitalized, the CNB has ample tools to intervene in times of stress. These include the reduction of excess liquidity in the system, and macroprudential action in case of excessive lending or housing price imbalances.
Deposit Protection in Croatia
In light of their importance to the economy, financial institutions must be well managed and protected. Micro-prudential regulation of individual credit institutions is strengthened by macro-prudential efforts to protect and maintain financial stability. Measures such as licensing and supervision, capital requirements, market discipline, liquidity support and deposit insurance seek to safeguard these prudential tasks.
Bank deposit protection in Croatia is managed by the Croatian State Agency for Deposit Insurance and Bank Resolution, the HAOD. This independent legal entity under state control protects account balances of eligible creditors held with licensed and supervised credit institutions in Croatia and its branches in other EU member states. The coverage is maximized at 100.000 euro, paid in Croatian Kuna, and is made available to creditors when deposits are inaccessible.
As soon as the CNB declares deposits to be inaccessible, the HAOD starts preparations for the activation of the deposit guarantee scheme. Account holders can file their substantiated claim for reimbursement of their insured account balance within 36 months after the public announcement of the activation of the scheme. Payment is made to the bank account of the account holder in another Croatian bank. Most deposits are covered under the scheme but several are excluded. Excluded categories are the deposits of financial institutions, debt securities and other liabilities, deposits whose owner was not identified, deposits made after the closure of the credit institutions and dormant accounts or other accounts without any transaction during the final 24 months prior to the closure of the bank.
Economic Crises and Bank Challenges: Guidelines for Creditors
A distinction is made between the resolution of systemically important financial institutions and its less significant and local counterparts. It is alleged that contagion and spill-over effects may disrupt the payment system. Such effects are evident for large banks with international cross-sector collaboration and risk exposure. Their potential failure is therefore a matter of public interest. For creditors of the institution this difference can have determine whether they risk their holdings above deposit insurance limits or be compensated because of a forced sale of the business.
The key objective of the Croatian regulator is to orderly resolve a credit institution in distress. The domestic Act on the Resolution of Credit Institutions and Investment Firms provides for the legal framework in these situations. It provides the State Agency for Deposit Insurance and Bank Resolution with the bail-in, asset separation and sale of business tools to achieve its objectives. This means that shareholder equity and subordinated debt can be written down or converted into capital for distribution to secured creditors.
Lawmakers and regulators aim for fairness and burden sharing to the creditors of the failed bank. Individual creditors however wish to protect their savings and get as much of their assets returned. Claims can be contractually secured and thus prioritized in winding up procedures. Most creditors however have little extra protection over their assets. They can take their dispute to the civil court for consideration. However, a feeling of being wronged does not always deliver the desired legal outcome. Creditors must therefore have a strong case against the bank to obtain additional compensation.
Contact us for More Information and to Discuss Your Case…
This website is an initiative of Legal Floris LLC. We assist international creditors recover money when their bank fails or their investments disappears. Due to our vast experience in bank failures in different countries, we are able to maximize repayments and minimize risks for our clients. Contact us right now to find out how we can help you too to reclaim your account balance if your bank in Croatia stops operating:
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