Given increased public interest for regulations governing the foreign exchange position of credit institutions, legal consequences of open foreign exchange positions and some interpretations of these issues which may lead the general public to make incorrect conclusions about this aspect of business of credit institutions, we find it necessary to point out the following:

The foreign exchange position of credit institutions operating in the countries of the European Union and therefore also of those operating in the Republic of Croatia is governed by Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176/2013), Articles 351 to 354 and Commission Delegated Regulation (EU) No 528/2014 of 12 March 2014 supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to regulatory technical standards for non-delta risk of options in the standardised market risk approach, adopted on the proposal of the European Banking Authority (EBA).

These regulations prescribe the manner of calculation of open foreign exchange position and the manner of calculation of capital requirements but they do not impose a limit on the open foreign exchange position that a credit institution may take in its business operations. Each credit institution, regardless of the size of its open foreign exchange position, is considered to be operating in accordance with the law provided it calculates and records its foreign exchange position in accordance with Article 352 of Regulation (EU) No 575/2013. Under Article 351 of the same Regulation, each credit institution must calculate capital requirements for foreign exchange risk if the sum of its overall open net foreign exchange position exceeds 2% of its total own funds. It follows from the above-mentioned that the fact that a credit institution keeps on its books an open foreign exchange position does not produce legal consequences nor does it question in any way the validity of a credit institution's claims. However, depending on the degree to which its foreign exchange position is open, the bank must meet own funds requirements.

We would like to point out that until the entry into force of Regulation (EU) No 575/2013, i.e. until 1 January 2014, the foreign exchange position of credit institutions in the Republic of Croatia was regulated by the Decision on the capital adequacy of credit institutions (Official Gazette 1/09, 75/09, 2/10, 118/11 and 67/13). Until 30 June 2014, stricter limits for permitted open positions were also prescribed by the Decision on foreign exchange risk exposure limits of credit institutions (Official Gazette 38/10, 62/11 and 128/13) which capped the maximum permitted total open foreign exchange position of credit institutions at 30% of its own funds. Following the accession of the Republic of Croatia to the EU, this restriction was lifted with the entry into force of the May 2014 Decision on reporting on foreign-exchange risk exposure of credit institutions (Official Gazette 66/14).

Credit institutions report individual items included in the foreign exchange position based on the mentioned regulation and in accordance with the applicable International Accounting Standards and International Financial Reporting Standards which are binding for the banks pursuant to Article 13, paragraph (2) of the Accounting Act (Official Gazette 109/07, 54/13 and 121/14). The reports audited by external auditors contain information on the foreign exchange exposure of credit institutions and constitute an integral part of their financial reports. The manner of calculation and reporting of the foreign exchange position is subject to supervision by the Croatian National Bank and, where applicable, the regulator of the owner of Croatian credit institutions.

Any infringement of regulations governing the open foreign exchange position constitutes an infringement of prudential regulations and as such is governed by penalty provisions of the Credit Institutions Act (Official Gazette 159/13), in particular Article 360, paragraph (1), item (60) thereof.

In the period from 2004 to 2014, credit institutions in Croatia reported their open foreign exchange positions in accordance with the applicable regulations. On system level, the open foreign exchange position never exceeded the prescribed regulatory maximum and mainly stood below 5% of own funds of credit institutions. The reporting open position in Swiss francs fluctuated around zero during the same period, and since 2005, its maximum on overall system level never exceeded 0.5% of own funds of credit institutions.

For data on the foreign exchange position of credit institutions, please see CNB's statement of 21 January 2015: Some facts about loans in Swiss francs and some options for government intervention [1].

[1] For information on how the Austrian central bank monitors and analyses the exposure of banks supervised by it to the foreign exchange risk associated with the Swiss franc, see, for instance, Raphael Anton Auer, Sébastien Philippe Kraenzlin and David Liebeg, How Do Austrian Banks Fund Their Swiss Franc Exposure?, Financial Stability Report, 2012, issue 24, pages 54-61.