HNB to maintain stability of exchange rate, banking system if gov’t implements CHF loan conversion scheme


The Croatian National Bank (HNB) said on Saturday that the capital adequacy of the national banking system was very high and that it would remain high if the government implemented its proposal for the conversion of loans indexed in the Swiss franc, stressing that it was capable of maintaining the stability of the kuna exchange rate and the banking system in terms of possible risks of that proposal.

“At the request of the Finance Ministry the HNB has made an analysis of possible economic effects of amendments to the Consumer Credit Act and has forwarded the analysis to the Ministry. As regards possible effects on the HNB’s scope of work, which is maintaining the stability of the exchange rate and the banking system… the HNB has both the resolve and instruments keep the exchange rate and the banking system stable,” the HNB said.
The banking system’s capital adequacy ratio will remain very high if the government’s measures are implemented, which is guaranteed by the banking system’s stability, and there will be no need for recapitalisation due to a loss that could result from the planned loan conversion model and its extent, which could be estimated at some 8 billion kuna, the HNB said.
“If the loss is incurred, the estimated capital adequacy ratio at the end of 2015 would still be a high 19.8% (3.7 percentage points lower than without the loss caused by the loan conversion). As regards stability, the HNB has the resolve, instruments and credibility to maintain it, as it has been doing so far,” the HNB said.
The Jutarnji List daily on Saturday published an HNB document warning the government that the implementation of its scheme for the conversion of Swiss franc-pegged loans could cause serious financial and macroeconomic instability in Croatia and estimating that the most vulnerable debtors would continue to have problems with loan repayment.
The HNB recently forwarded a statement to Finance Minister Boris Lalovac, warning that the government’s conversion scheme could undermine the kuna exchange rate and affect the country’s credit rating. Nonetheless, on 10 September, the government forwarded to parliament the pertaining draft legislation in a bid to equate the status of holders of CHF loans with the status of euro loan holders.
“The loss of international reserves negatively affects their adequacy and increases risks for currency liquidity and indirectly for the stability of the kuna exchange rate and Croatia’s credit rating,” the HNB says among other things in the statement signed by Governor Boris Vujcic. This could result in Croatia having more difficulty borrowing money on the international market. Interest on loans could go up and there may be an outflow of deposits to other countries, the HNB says, warning about a danger of decreasing reserves undermining the trust in the monetary and financial system and about a need to compensate for adverse fiscal effects of the loan conversion with stronger fiscal adjustment.
Prime Minister Zoran Milanovic said earlier today that even if the HNB did not support the government’s proposal for CHF loan conversion, the government would nonetheless implement it.
“The bank is not the one passing laws, that is done by the government and the parliament, and even if the bank does not support the bill, the government will implement it,” Milanovic said.