Macroprudential Diagnostics No. 4

Published: 8/3/2018

Introductory remarks

The macroprudential diagnostic process consists of assessing the macroeconomic and financial relations and developments that might result in the disruption of financial stability. In the process, individual signals indicating an increased level of risk are detected based on calibrations using statistical methods, regulatory standards or expert estimates. They are then synthesised in a risk map indicating the level and dynamics of vulnerability, thus facilitating the identification of systemic risk, which includes the definition of its nature (structural or cyclical), location (segment of the system in which it is developing) and source (for instance, identifying whether the risk reflects disruptions on the demand or on the supply side). With regard to such diagnostics, instruments are optimised and the intensity of measures is calibrated in order to address the risks as efficiently as possible, reduce regulatory risk, including that of inaction bias, and minimise potential negative spillovers to other sectors as well as unexpected cross-border effects. What is more, market participants are thus informed of identified vulnerabilities and risks that might materialise and jeopardise financial stability.

1 Identification of systemic risks

The CNB's assessments suggest that in 2017, economic activity continued to grow at a pace similar to that recorded in 2016. The increase in real GDP in 2017 was to a great extent a result of a rise in the exports of goods and services, which continued their strong upward trend in the first nine months of 2017, reflecting the good performance in the exports of goods and, notably, a record performance in tourism services. Since growth was recorded in all components of domestic demand, it would seem that the 2017 Agrokor crisis had only a limited impact on economic activity, primarily via reduced investments. Strong fiscal adjustment continued throughout 2017, resulting in a further decrease in the general government debt-to-GDP ratio. Other domestic sectors deleveraged as well, causing the external debt to decline substantially.[1] Favourable developments in the domestic economy were positively assessed by the Fitch rating agency, which upgraded Croatia's credit rating in early 2018.

Favourable developments in economic activity are expected to continue in 2018, although at a slightly slower pace than in 2017 (see Macroeconomic Developments and Outlook No. 3). Medium-term projections point to a slight slowdown in real activity at relatively low rates of potential future growth. Since the positive contribution to the improvement of potential growth through the production factors of labour and capital is limited due to the ageing of the population, emigration by a part of the labour force that is mostly young and educated and investments projected to be significantly lower than those recorded in the pre-crisis period of infrastructural expansion, the domestic economy's growth is predominantly contingent upon higher productivity. However, a distinctly low rise in the productivity of the Croatian economy in the last fifteen years points to the existence of significant structural problems in the domestic economy, which hampers a more efficient use of existing resources (for more information, see Estimating Potential Growth and Output Gap in Croatia).

As for the systemic vulnerabilities to which the domestic economy was exposed, in most of the sectors identified vulnerabilities (both structural and cyclical) decreased from the previous issue of Macroprudential Diagnostics, thereby reducing the exposures of the entire system (including both the non-financial and the financial sector) to systemic risks. This was primarily a result of positive real developments recorded in the previous year and of the country's more favourable risk perception.[2] Structural vulnerabilities of the non-financial sector remained unchanged (Figure 1, upper left corner), since, despite the decrease, domestic and external vulnerabilities remained relatively high and the projected rates of potential growth low.

Observed in the short term, the continued decline in interest rates and the rise in disposable income resulting from tax changes could decrease the burden of debt repayment and, consequently, current risks in the household and corporate sector, improving sectors' vulnerability indicators. As a result, the degree of risk exposure of the non-financial sector dropped (from the previous issue of Macroprudential Diagnostics). Nevertheless, a possible rise in interest rates exposes some debtors repaying loans with variable interest rates to a substantial risk of annuity increase (for more information, see Macroprudential Diagnostics No. 1 and the results of the Survey on Interest Rate Variability and the Analytical annex to Recommendation to mitigate interest rate and interest rate-induced credit risk in long-term consumer loans). Moreover, even though no significant negative effects of the restructuring of Agrokor are expected under the baseline scenario, a disorderly and uncertain restructuring of the concern could have a far more unfavourable impact on the business of affiliated enterprises.

In addition, the changes to the International Financial Reporting Standard 9 (IFRS 9), in effect since the beginning of the year, will expectedly have a one-off effect on the business of non-financial corporations via the possible decrease in total assets and comprehensive income (particularly in large and medium-sized enterprises). The effect of the changes to the accounting standards is impossible to quantify precisely as it depends on the degree of risk of claims and financial assets held by corporations, although the standard is expected to have a positive effect on corporate risk management in the long term (see Analytical annex: International Financial Reporting Standard 9 and its financial stability implications). Similarly, the cost of the application of the new standard will affect credit institutions as well (primarily during initial application) through the expected rise in provisioning costs; however, this effect would have been much stronger had Regulation 2017/2395 mitigating the impact of the introduction of IFRS 9 on own funds not taken effect.

Figure 1 Risk map for the fourth quarter of 2017

Source: CNB (for details on the methodology, see Financial Stability No. 15, Box 1 Redesigning the systemic risk map).

The banking sector remains stable and highly capitalised, while positive developments[3] in the sector reduce the exposure of the financial system to systemic risk. Risks related to the elevated level of non-performing loans of domestic banks are declining as well, primarily under the influence of sale, which favourably affects the banks' provisioning costs and the continued rise in lending (for more information on such risks, see Macroprudential Diagnostics No. 3, Box 1 Cyclical movement of loan quality in Croatia). Still, the positive trends in provisioning costs will probably be partially offset by the previously mentioned changes to IFRS 9. Furthermore, the recent rise in the share of loans having fixed interest rates (reducing the vulnerability of the household and the corporate sector by decreasing their exposure to currency and interest rate risk) increases the exposure of banks to interest rate risk, primarily as a result of the rise in kuna lending at fixed interest rates.

In that respect, the intention to adopt the euro in the medium term is also worth noting, as this will, among other things, reduce risks to financial stability and eliminate vulnerabilities stemming from the high level of euroisation, which is one of the major characteristics of the Croatian economy (for more information, see Strategy for the Adoption of the Euro in Croatia). Moreover, risks will probably be reduced even before the euro is finally introduced, since the effects on perception are materialised gradually.

Moreover, the improvement of the domestic component of the financial stress indicator is contributing to the decrease in the degree of risk in the financial sector (Figure 1, lower right corner) owing to reduced appreciation pressures on the domestic currency (as a result of CNB foreign exchange interventions) and capital market volatility.

2 Potential triggers for risk materialisation

The main potential triggers for risk materialisation in the domestic economy are primarily the external factors related to developments in the economies of the major trading partners. A significant rise in global risk aversion and instability on global financial markets would be expected to increase the country's borrowing costs, and, in consequence, push budgetary interest expenditures up; in addition, it would affect personal consumption and consumption in the tourist industry as well, thus producing a negative impact on the gross domestic product. The materialisation of risks related to the deterioration of established international relations and a potential escalation of terrorism in Europe would have similar effects. Furthermore, the aforementioned scenario would, through the investment channel, have negative effects on the access of the private sector to both the domestic and foreign capital and hamper it in its debt servicing, which, in turn, could have an unfavourable impact on the stability of the overall banking system. All of the above would increase risks to financial stability.

In addition, unexpected changes in implementation of the monetary policy of the leading central banks could also contribute to the tightening of financing conditions on international financial markets. For instance, a price shock brought about by a rise in the prices of goods and energy products, currently unlikely, could, should it occur, push reference interest rates up. Still, according to the current decisions and expectations of the Governing Council of the ECB, a rise in the ECB's benchmark interest rate is not expected in 2018.

However, in addition to the geopolitical risks and changes in monetary policy implementation mentioned above, the most recent ECB Financial Stability Review specifies additional triggers that may lead to increased euro area financial market volatility in the future. This includes, for instance, a deterioration in the expected macroeconomic conditions of countries, which could result in increased investor uncertainty, as well as the strengthening of the euro exchange rate, which could, through lower than expected economic growth and increased volatility of asset prices, tend to produce instability in other markets as well.

In the short term, there are risks present in the domestic economy as well, primarily in relation to the restructuring of several enterprises, which even though they do not have a systemic impact, are significant regional employers and partners and participate in Croatia's exports of goods. For example, one current issue is that of the Uljanik shipyard, which, in addition to employing 3.9% of the total number of persons employed in legal entities in the region at end-2016 and accounting for an average[4] of 4.5% of the operating revenues in the Istria and Primorje region, contributes to the country's exports with an average share of 1.03%.

Observed in the medium and long term, risks stemming from the domestic economy prevail. Continued negative demographic trends and a further outflow of the labour force could have significant and unfavourable effects on the availability of labour in the domestic economy, i.e. affect wage levels.

3 Recent macroprudential activities

3.1 Review of the identification of other systemically important credit institutions in the Republic of Croatia

In January 2018, the CNB as the competent authority in charge of identifying other systemically important credit institutions (O-SIIs) released the results of the annual review of the identification of O-SIIs in line with the regulatory framework. The procedure of identifying O-SIIs and determining adequate capital buffer levels was in line with the Credit Institutions ActEuropean Banking Authority guidelines and internal methodology.

The review identified a total of eight O-SIIs to which the respective capital buffer levels of 0.2% and 2% of the total risk exposure amount are applied, depending on the estimated systemic importance. However, O-SIIs are also required to maintain a structural systemic risk buffer applied to all exposures. As the structural systemic risk buffer is currently the higher of the two capital buffers, O-SIIs are still only subject to the application of the structural systemic risk buffer rate.

Box 1 An overview of the application of the capital buffer for other systemically important credit institutions (O-SIIs) in EU member states, Norway and Island

In line with an EU regulation governing the area of prudential requirements for credit institutions, all EU member states have, as well as taking other steps, introduced the capital buffer requirement for credit institutions identified as systemically important. Among the first to introduce this measure in 2014 were Denmark and the Netherlands. By the end of 2016, it had been introduced in all other member states, Norway and Iceland.

However, transposition into national legislation and identification of O-SIIs does not necessarily mean an active application of this capital buffer. When a country identifies systemically important credit institutions, this constitutes an instrument of macroprudential policy even if the capital buffer rate is not set (or is set at nominal rate of 0%) because this changes the legal status of the credit institutions in question. Credit institutions identified as O-SIIs are subject to stricter regulatory requirements, such as to a wider scope of reporting, more complex capital quality and liquidity tests, etc.

In addition, there are certain limitations in the activation of the capital buffer for O-SIIs. The Directive lays down that when applying the structural systemic risk buffer relating to all (domestic and external) exposures, credit institutions shall maintain either a structural systemic risk buffer or a buffer for other systemically important credit institutions, whichever is higher (see the Rules for the combined buffer requirement). If, however, the structural systemic risk buffer relates only to domestic (or only to external) exposures, it may be added to the O-SII buffer. The buffer rate for O-SIIs has a legislative cap of 2%. In addition, the rate for subsidiaries of G-SIIs/O-SIIs with head offices in the EU is also implicitly limited by the rate applied by the parent credit institution. In this case the buffer must not exceed the higher of the following values: 1% of the total exposure to risk or the buffer rate for the parent G-SII/O-SII applied to the group of which the credit institution is a member on a consolidated basis.

Experience has shown that in order to compensate for existing implicit and explicit limitations to the rate of capital buffer for O-SIIs, countries often prefer to use the structural systemic risk buffer for all exposures. For example, in the Czech Republic and Denmark, all credit institutions identified as systemically important are subject to the structural systemic risk buffer instead of the O-SII buffer because unlike the O-SII buffer it can go up to 3% (or up to 5% with prior authorisation from the European Commission). In the Netherlands, the two measures are combined so that the largest three O-SIIs are subject to the structural systemic risk buffer (for all exposures), and others are subject to the O-SII capital buffer.

The capital buffer for O-SIIs is actively applied in 19 EU member states and Iceland. Of this number, six also apply the structural systemic risk buffer only to domestic exposures, so in these countries these two buffers are added up. The remaining 13 do not use the structural systemic risk buffer rate so there is no possibility of them overlapping. Cyprus, Slovenia and Iceland do not apply the structural systemic risk buffer and have announced they would start applying the O-SII capital buffer as of 1 January 2019 (Table 1).

Among the countries actively applying the O-SII capital buffer, most use differentiated capital buffer rates depending on the size of the institution, and half of them use (or will be using after the end of the phase-in period) the highest legally permitted rate of 2%. Numerous countries among those that activated the O-SII capital buffer used the statutory possibility of the phase-in period during which the initial rate is increased gradually every year until the planned level is attained.

Table 1 An overview of the use of the capital buffer for other systemically important credit institutions (O-SIIs) in EU member states, Norway and Iceland*

3.1.1 In November 2017, a report on the compliance of the activity of EU member states with the Guidelines on the criteria to determine the conditions of application of Article 131(3) of Directive 2013/36/EU (CRD) in relation to the assessment of other systemically important institutions (EBA/GL/2014/10) was released

In December 2014, the European Banking Authority (EBA) released Guidelines on the criteria to determine the conditions of application of Article 131(3) of Directive 2013/36/EU (CRD) in relation to the assessment of other systemically important institutions (EBA/GL/2014/10, hereinafter: the Guidelines). The Guidelines were implemented in the CNB's internal bylaws and, in line with Item 15 of the Guidelines, the CNB published the methodology for identifying O-SIIs on its website.

In November 2017, the EBA published the results of a peer review of the compliance of the activity of EU member states with the Guidelines during O-SII identification. In early 2017, relevant authorities of member states received a questionnaire and were required to submit responses to the EBA. The analysis in question encompassed the period of O-SII identification in 2016 based on the data for 2015. The report first provides results referring to the self-assessment of relevant authorities with regard to the manner of their implementation of the Guidelines. After that, results of the independent peer review are presented. In addition, good practices of relevant authorities in O-SII identification are provided to serve as examples for further improvement. The report stresses that the CNB, as the relevant authority for identifying O-SIIs in Croatia, fully or largely applied the EBA Guidelines during the identification process, both according to self-assessment and peer review results.

3.2 Continued application of the countercyclical capital buffer rate for the Republic of Croatia for the first quarter of 2019

Although there has been a slight recovery of lending activity for some time now, the results of the analytical assessment of the evolution of cyclical systemic risks suggest that there are still no cyclical pressures requiring correction by the CNB. According to the data for the third quarter of 2017, gross domestic product continued to grow, the nominal debt of non-financial corporations and households continued to decline, the standardised credit-to-GDP ratio decreased further, and the credit gap calculated on the basis of the standardised credit-to-GDP ratio remained negative. Such trends were confirmed by the specific indicators of relative indebtedness based on a narrower definition of loans[5]. Therefore, the countercyclical capital buffer rate of 0% will continue to be applied in the first quarter of 2019.

Box 2 Countercyclical capital buffer (CCB) – current application in the EU and the EEA countries

CCB is a part of macroprudential instruments devised to aid in preventing countercyclicalities from arising in the financial system. The specific role of this capital buffer is reflected in its potential to absorb bank losses during the period of economic slowdown, that is, to limit excessive loan growth during periods of rising optimism and strong recovery of the economic cycle. In the territory of the European Union and the European Economic Area[6] the countercyclical capital buffer is currently used as a macroprudential tool at a rate different from zero by three EU member states (the Czech Republic, Slovakia and Sweden) and two EEA member states (Norway and Iceland ) (Figure 1).

As a rule, the introduction and application of the CCB in the mentioned countries has been initiated by strong credit expansion, consequentially linked to the growth in the prices of property, especially commercial and residential real estate property, which accumulates risks that, if materialised, would additionally worsen the effects of recession. Countries using the CCB buffer have indicated the growth in real estate prices and risks associated with it as the main channel for possible materialisation of risks in the banking sector, i.e. as the main reason for the introduction of a countercyclical buffer rate different from zero. The only exception is Great Britain, which, temporarily and occasionally used the CCB as a capital buffer to shield itself directly from a risk not directly or exclusively linked to the level and trend of economic cycle. Its central bank used this macroprudential tool also as protection against risks associated with Great Britain's exit from the EU. Great Britain used the countercyclical capital buffer also because of the assessed possible materialisation of other types of risks that may arise in the banking system.

Figure 1 An overview of the EU and the EEA member states that use (or have used) the countercyclical capital buffer (CCB) at a rate different from zero

Notes: The unshaded area indicates the expected level of the CCB in the upcoming period. The rate indicates the end-of-the-month balance.

Sources: ESRB, Announced CCyB rates and data processed by the CNB.

Table 1 An overview of the applied CCB rates and reasons for application by country

3.3 Recommendations of the European Systemic Risk Board (ESRB)

3.3.1 In October 2017, an amendment was made to Recommendation ESRB/2015/2 on the assessment of the cross-border effects of and voluntary reciprocity for macroprudential policy measures (ESRB/2016/3 ESRB/2017/4).

Recommendation on the assessment of cross-border effects of and voluntary reciprocity for macroprudential policy measures (ESRB/2015/2) was adopted by the ESRB in December 2015 to ensure that all exposure-based macroprudential policy measures applied in one of the member states are reciprocated in other member states and to encourage member states to assess the cross-border effects of the macroprudential policy measures they apply.

However, the existing framework on voluntary reciprocity did not provide guidelines on the threshold to be used by the relevant authorities to determine the materiality of exposure. When a relevant authority wishes to exempt an individual financial service provider with non-material exposure, it may adopt the threshold it deems appropriate, creating potential divergences in the application of the de minimis principle. To avoid such potential divergences, the ESRB published in October 2017 amendments to the Recommendation ESRB/2015/2 (ESRB/2017/4). This amendment defines the materiality threshold[7], and the relevant activating authority should propose a maximum materiality threshold at the financial service provider level when requesting reciprocation.

If reciprocation by other member states is deemed necessary to ensure the effective functioning of the relevant measures, the relevant activating authorities are recommended to submit a request for reciprocation to the ESRB, together with the notification of the measure. The request should include a proposed materiality threshold.

3.4 Overview of macroprudential measures in EU countries

Table 1 below shows macroprudential measures currently applied by EU member states in order to ensure the financial stability of the system (Table 1) and an overview of macroprudential measures applied in Croatia (Table 2), including those outside the CNB’s mandate as the macroprudential authority and their amendments from the last issue of Macroprudential Diagnostics No. 3.

Table 1 Overview of macroprudential measures in EU countries

Disclaimer: of which the CNB is aware.

Notes: Listed measures are in line with EU regulations, namely with Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms (CRR) and Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (CRD IV). Definitions of abbreviations are provided in the list of abbreviations at the end of the publication. Green indicates measures that have been activated since the last version of the table, while red indicates measures that have been deactivated.

Sources: CNB, ESRB and notifications from central banks and websites of central banks as at 15 January 2018.

For more details see: https://www.esrb.europa.eu/national_policy/other/html/index.en.html.

Table 2 Implementation of macroprudential policy and overview of macroprudential measures in Croatia

Notes: Definitions of abbreviations are provided in the List of abbreviations at the end of the publication. Green indicates measures that have been activated since the last version of the table.

Source: CNB.

Analytical annex: International Financial Reporting Standard 9 and its financial stability implications

The mandatory application of the International Financial Reporting Standard 9: Financial Instruments (IFRS 9) starts from 1 January 2018 onwards, for credit institutions and for the majority of non-financial and financial corporations in Croatia. The main characteristic of IFRS 9 is the recognition of the value of financial instruments pursuant to the assessment of their future fair value and expected credit losses and not pursuant to realised loss as under IAS 39. The new way of assessing credit risk may result in the improvement of the portfolios of credit institutions and affect the pricing of credit risk.

The ESRB conducted an analysis of the impact of IFRS 9 on financial stability at EU level as part of their report Financial stability implications of IFRS 9 (July 2017). The report elaborates on the application of the standard to credit institutions, its long-term implications on their profitability and own funds and the so-called day-one effects at the very beginning of its application from 1 January 2018. The report establishes that consequent implementation of IFRS 9 and of the approach based on expected credit loss may contribute to transparency and improvement of long-term financial stability. However, the possible unwanted consequences of the implementation of this framework should also be kept in mind, in particular:

  1. Modelling risk – the calculation of expected credit loss entails a large degree of complexity that poses a challenge to credit institutions related to the lack of additional knowledge and skills and available data, which may be reflected in increased costs of implementation and/or diminished reliability of resulting reports for the end users, auditors and investors. This might be a special issue for smaller credit institutions.
  2. Lending – there is a risk for some credit institutions, depending on their market competitiveness, related to adjusting the price of their placements in accordance with new value adjustments and capital cost, potentially shifting credit risk to entities not subject to IFRS 9.
  3. Procyclicality – although consequent implementation of IFRS 9 may contribute to financial stability because of timely recognition of expected credit losses during recession when expected credit losses are greatly increased, there may be a reduction in bank lending and significant deleveraging of the non-financial sector. The effect of procyclicality in these situations may be softened through prudential measures and existing regulatory buffers.

Aiming to reduce the day-one effect, the European Parliament and the Council adopted Regulation (EU) 2017/2395, published in the Official Journal of the European Union of 27 December 2017 as regards transitional arrangements for mitigating the impact of the introduction of IFRS 9. Credit institutions (and investment firms) have been given an option to apply a transitional period of up to five years during which the institution may neutralise the cost of increased provisions for expected credit loss on capitalisation indicators by increasing Tier 1 capital by the portion of increased provisions.[8] During the period until 1 January 2023 this portion shall decrease gradually down to zero. Credit institutions intending to apply transitional arrangements are required to announce this to the regulator and publicly disclose their own funds, capital ratios and leverage ratios both with and without the application of these arrangements. However, irrespective of the decision to apply these transitional arrangements, the application of IFRS 9, in force since the beginning of the year, will undoubtedly affect the operating results of credit institutions through a certain amount of additional costs of provisions for expected credit loss.

In addition to the expected positive impact on financial stability in the long-term, Croatia, like other EU countries, faces the risks associated with the transition from IAS 39 to IFRS 9. The introduction of this financial reporting standard will cause changes in the classification of exposures of credit institutions in Croatia, pursuant to the new Decision on the classification of exposures into risk categories and the method of determining credit losses (OG 114/2017), which may result in additional provisioning costs as compared to the period up to 31 December 2017 and the applicable IAS 39. In addition to the mentioned impact on credit institutions, we may expect a one-off effect of the application of IFRS 9 on the operation and possible increase in the riskiness of the sector of financial and non-financial corporations. Namely, depending on the structure of corporate assets (the share of financial instruments) and its riskiness, the application of IFRS 9 may result in a reduction of the value of total assets, an increase in financial expenses and a reduction of the overall corporate profit. This outcome can be expected in the segment of medium-sized and large enterprises. In addition to the mentioned effect, the application of IFRS 9 might result in the spillover of the total or a part of the increased cost of value impairment of financial instruments on end prices. Although these effects are impossible to estimate at the moment due to the lack of relevant data, the nature of financial assets of non-financial corporates, dominated by short-term financial instruments (such as trade credits), the direct impact of the application of expected credit losses and IFRS 9 is not expected to be as prominent as in the context financial institutions.

Basic principles of IFRS 9

Recognition models, i.e. models of value impairment of financial instruments, in the IFRS 9 are based on the classification of financial instruments. Financial instruments are classified into one of the following three categories: financial instruments at amortised cost (AC), financial instruments at fair value through other comprehensive income (FVOCI) and financial instruments at fair value through profit or loss (FVTPL). The basis for classification of instruments into any of these categories depends on the business model and contractual cash flow characteristics. There are two main business models: the held-to-collect (HTC) business model and the hold-to-collect and sell (HTCS) business model[9].

Figure 1 Classification of financial instruments under IFRS 9

Source: CNB.

Expected credit loss (ECL) is calculated in accordance with Basel III guidelines, i.e. Regulation (EU) 575/2013 of the European Parliament and the Council:

where probability of default (PD) may be estimated for a one-year period (PD1-y) or for the entire life of the financial instrument (the so-called lifetime probability of default (PDlt)). The same concepts apply to the loss given default (LGD1-y and LGDlt). Under IFRS 9, off-balance sheet claims are a part of total exposures, i.e. exposure at default (EAD).

Glossary

Financial stability is characterised by the smooth and efficient functioning of the entire financial system with regard to the financial resource allocation process, risk assessment and management, payments execution, resilience of the financial system to sudden shocks and its contribution to sustainable long-term economic growth.

Systemic risk is defined as the risk of an event that might, through various channels, disrupt the provision of financial services or result in a surge in their prices, as well as jeopardise the smooth functioning of a larger part of the financial system, thus negatively affecting real economic activity.

Vulnerability, within the context of financial stability, refers to structural characteristics or weaknesses of the domestic economy, which may make it less resilient to possible shocks or intensify the negative consequences of such shocks. This publication analyses risks related to events or developments that, if materialised, may result in the disruption of financial stability. For instance, due to the high ratios of public and external debt to GDP and the consequentially high demand for debt (re) financing, Croatia is very vulnerable to possible changes in financial conditions and is exposed to interest rate and exchange rate change risks.

Macroprudential policy measures imply the use of economic policy instruments that, depending on the specific features of risk and the characteristics of its materialisation, may be standard macroprudential policy measures. In addition, monetary, microprudential, fiscal and other policy measures may also be used for macroprudential purposes, if necessary. Although the evolution of systemic risk and its consequences may be difficult to predict in all of their manifestations, despite certain regularities, the successful safeguarding of financial stability requires not only cross-institutional cooperation within the field of their coordination, but also the development of additional measures and approaches, when needed.

  1. The projection of gross external debt (as a percentage of GDP) for end-2017 is 79.9%, a decrease of 9.9 percentage points from 2016. 

  2. Although developments in the domestic economy do have an impact on the country's reduced risk perception, the increasingly more favourable economic developments in euro area economies play a more significant role in the trend. 

  3. The support of the EIB to four Croatian banks for the funding of projects with long-term effects (up to a total of EUR 220m) should contribute to positive developments regarding the lending to small and medium-sized enterprises. 

  4. Due to marked volatility in operating and export revenues, averages were calculated for the 2012-2016 period. 

  5. This includes only the claims of domestic credit institutions in relation to the quarterly, seasonally adjusted GDP. For detailed methodological explanations, see Box 4 Financial cycles and countercyclical capital buffer calibration, Financial Stability No. 13, July 2014. 

  6. The European Economic Area (EEA) was established on 1 January 1994 by the Agreement signed by the 12 member states of then the EEC (today the EU) and EFTA for the purpose of creating a single market and providing for the free movement of persons, goods, services and capital. 

  7. Materiality threshold means a quantitative threshold below which an individual financial service provider’s exposure to the identified macroprudential risk in the jurisdiction where the macroprudential policy measure is applied by the activating authority can be considered non-material. 

  8. 95% of increased provisions due to the application of IFRS for 2018. 

  9. Financial instruments not classified into one of the two business models above or contractual cash flow characteristics do not meet the criterion of the "contractual cash flows solely for payments of principal and interest on the outstanding amount of principal in accordance with the initial agreement" (the so-called SPPI test (Solely Payments of Principal and Interest test)) are classified into other business models and their fair value is valued through profit or loss (FVTPL).