Pursuant to the provisions of Articles 273 and 274 of the Credit Institutions Act and Article 42 of the Act on the Croatian National Bank, the Council of the Croatian National Bank decided at 1:25pm today to submit a request to the Commercial Court in Zagreb to open bankruptcy proceedings against Centar banka d.d. Zagreb.

The CNB Council adopted the decision after establishing that Centar banka received no capital injection, in contrast with the decision of its general meeting held on 16 August 2013, and thus failed to implement a decision of the CNB. Along with essential changes in the management of the bank, its credit and other operational risks, the capital injection was a necessary precondition to restore the legality of the bank's activities and ensure its continued regular operation.

On 30 August 2013, J&T banka submitted to the Croatian National Bank a request for prior approval for the acquisition of a qualifying holding accounting for over 50 percent of the initial capital of Centar banka and complemented the request in the morning of 2 September 2013. Based on the request, the CNB Council adopted a decision at 2:15pm on 2 September as to issue the requested approval to J&T banka, provided that the capital injection be effected in line with the decision adopted at the general meeting of Centar banka. Believing that the request was made by a credible credit institution authorised by the competent authorities of an EU Member State, the CNB Council carried out the procedure for issuing the prior approval in an exceptionally short period of time in an effort to ensure the necessary preconditions for the continued operation of Centar banka. However, after obtaining the prior approval, J&T banka on that very same day withdrew its request for the acquisition of a qualifying holding in Centar banka. It then became evident that the necessary capital injection to Centar banka was not to be made and that it could not be expected that the bank's operation would become stable and its legality restored.

In such circumstances, the CNB Council acted in line with its obligations under law; it established the existence of the grounds for bankruptcy under Article 274, items (3) and (5) of the Credit Institutions Act and requested the initiation of bankruptcy proceedings against that credit institution. To that effect, under the provisions of Articles 242 and 244 of the Credit Institutions Act and Article 43 of the Act on the Croatian National Bank, the CNB Governor adopted a decision to appoint a special administration that was to assume the responsibilities of the credit institution's supervisory and management boards up to the adoption of the court decision on the opening of bankruptcy proceedings.

Liquidity and solvency problems in Centar banka have been the result of profound disruptions and irregularities in its operation. The data provided to the CNB by the bank's management show that its assets do not cover its existing liabilities. As a result, the bank does not meet the legal requirements regarding own funds. It has also been established that the bank has not been implementing and is not able to implement the supervisory measures imposed.

Centar banka is a credit institution holding only 0.35 percent (slightly over HRK 1.4 billion) of total banking system assets as at end-June 2013. Difficulties in its operation were observed last year. In response to the illegalities and weaknesses in risk management established in the course of an off-site examination, the CNB adopted a decision on 24 September 2012 ordering the bank to implement some ten measures to improve its liquidity and solvency, foremost by reducing liquidity outflows and operating expenses, preventing new borrowings at high interest rates and improving the collection of past due receivables.

Furthermore, in its report of April 2013, the external auditor of Centar banka's accounts for 2012 established that the bank failed to assess the risk in its loan portfolio in line with the International Accounting Standards and the Decision on the classification of placements and off-balance sheet liabilities of credit institutions, i.e. it failed to report the required value adjustment for its portfolio. Had it done so, the auditor concludes, it would have reported a loss of HRK 76 million and the capital adequacy ratio below the legally prescribed minimum of 12 percent. In such circumstances, the certified auditor stated that, without urgent capital injection, the bank's continued operation was at risk.

Following the imposition of supervisory measures and the audit opinion, an on-site examination was carried out in Centar banka in April and May 2013. The examination covered an assessment of the capital adequacy, asset quality and credit risk management, as well as an analysis of the deposit structure and liquidity risk as at 31 December 2012. The examination showed material deficiencies and illegalities and that the bank's indicators were much worse than presented in reports to the central bank. It was established that, as at the on-site examination date, more than 65 percent of all placements were associated with receivables overdue for more than 90 days. After value adjustments were set aside, the share of partly recoverable and irrecoverable placements in total bank placements increased to as much as 44.8 percent; additional value adjustments had to be set aside for 39 out of 42 clients in the sample. After including all the necessary value adjustments established in the course of the on-site examination, the capital adequacy ratio fell far below the legally prescribed minimum. It should also be said that additional losses may be incurred not only in the portfolio not covered by the examination, but also in the examined portfolio, which is due to uncertainties regarding the realisation of collateral.

Assessing that the established difficulties warranted continued oversight and monitoring of Centar banka's operation, the CNB appointed a trustee to the bank on 23 May 2013. Trustee's reports show that the situation in Centar banka steadily deteriorated in the first half of the year. The share of non-performing loans and the amount of past due receivables went up. The bank was still unable to meet its due liabilities and to maintain the required level of kuna and foreign currency reserves, the minimum required amount of foreign currency claims relative to foreign currency liabilities, as well as the minimum liquidity coefficient and the ratio of readily marketable assets to total liabilities.

The most recent management report delivered to the CNB on 14 August shows a negative capital adequacy ratio as at 31 July 2013. This implies that the management concluded that bank assets were not sufficient for the repayment of all liabilities and that the bank was insolvent. In such circumstances, it is not possible to obtain liquidity from the central bank.

In that context, aware of interests of potential investors lead by J&T banka, the CNB issued a decision ordering bank recapitalisation by the end of August. Once it became evident that recapitalisation had not been effected on time, the CNB Council acted in line with its legal obligations.

The temporary restriction on all payments from the bank's accounts, as provided under Article 274a, paragraph (2) of the Credit Institutions Act, is to be in effect in the period between the adoption of the CNB Council's decision and the commercial court's decision on the request to open bankruptcy proceedings. In practice, this means that forced collection of payments debited to the bank's accounts in accordance with the law governing the execution of cash assets will not be effected, regardless of the payment basis (promissory notes, execution orders, etc). As a result, up to the date when the commercial court adopts a decision on the request to open bankruptcy proceedings, bank's clients cannot withdraw funds from their accounts at the bank, transfers debiting their accounts cannot be made and the bank may not provide payment services via payment cards. Debtors of the bank continue to be obliged to fulfil all their liabilities to the bank.

Insured deposits will be available to their holders within the legally prescribed period and according to the prescribed procedure.