At its meeting held on Wednesday, March 24, 1999 the Council of the Croatian National Bank, chaired by Governor dr. Marko Skreb, continued the discussion on the situation in the banks under temporary administration since the end of January this year - Komercijalna banka d.d. Zagreb, Gradska banka d.d. Osijek, Zupanjska banka d.d. Zupanja and Glumina banka d.d. Zagreb. Mr. Borislav Skegro, Finance Minister of the Republic of Croatia, and Mr. Djuro Njavro, President of the Parliamentary Committee for Budget and Finances, also attended the meeting. As results of the previously conducted bank examinations indicated, the findings of temporary administrators and their expert teams confirm that these banks had run into deep insolvency due to their business operation. The Council believes that they have no chance of recovery which could guarantee that their future operation will be stable and consistent with regulation.

The four ailing banks represent approximately 6.5 percent of total banking system's assets, and had at their disposal about 3.5 billion kuna of total savings, and about 2.8 billion kuna of savings covered by the deposit insurance scheme. Unfortunately, they managed the savings as well as other resources entrusted to them in such a way that for some time they have not been able to pay out the principal, let alone the high interest. High interest rates were offered to attract other peoples' money which was then used for financing companies owned by these banks, members of their management boards, supervisory boards and other connected persons. This kind of business policy, as well as other irregularities and noncompliance with regulation, resulted in the amount of potential losses which heavily exceeds the amount of the guarantee capital.

When deciding on the resolution of the situation in the aforementioned banks, the CNB Council examined all legally available possibilities for solving the problem, having in mind primarily the protection of depositors' interests, the confidence in the Croatian banking system, as well as the estimated cost of each of these solutions for the budget and tax payers.

The Council of the CNB concluded that those interests will be protected most effectively by urgently initiating bankruptcy proceedings against all four banks. The proposal for the initiation of bankruptcy proceedings will be sent to the competent commercial courts. The CNB Council wishes to remind the public that savers of the banks which are to go bankrupt have received guarantees from the highest state level that the pay-out of savings guaranteed under the deposit insurance scheme - up to 100 thousand kuna for an individual saver - will begin as of July 1, 1999.

The CNB Council considers it extremely important that the Croatian government, in the shortest possible period of time, examines the possibility of protecting savings up to the amount of the principal with the adequate interest, that is, such interest as is earned in normal circumstances, and is not contracted on the basis of high interest rates and without any criteria. The additional protection of savings, as well as of all creditors' claims has to be provided by conducting bankruptcy proceedings effectively and pursuant to regulation. In addition, the CNB Council finds it justifiable that competent institutions consider again the possibility and financial viability of the transfer of insured savings from blocked and insolvent banks for which the CNB proposed the initiation of bankruptcy proceedings to sound and stable Croatian banks. All recent attempts to realize the aforementioned transfer have not met the necessary interest of other Croatian banks and the expected coverage has not been found.

The Members of the CNB Council wish to emphasize the fact that the initiation of the bankruptcy proceedings does not implicitly include the final liquidation of the bank. It is, namely, possible that a bank is taken over during bankruptcy proceedings, if an investor willing to invest the necessary funds in the bank is found. So far, none of the ailing banks managed to find such an investor. It is also possible that the debtor is restructured on the basis of an agreement by the creditors, if they believe that the restructuring would enhance better protection of their interests than other solutions.