We need a better regulatory framework

We will strive to ensure that the laws, which concern the banking sector as well as the economy as a whole, will be drafted in the future by the consensus of the political, business and regulatory sectors. We hope to find enough partners in the society to do this.

Long periods of low interest rates have facilitated the bolstering of competition and more favourable loans, which benefitted the borrowers. Unfortunately, the banks cannot say that the operating conditions for them were favourable too. This is primarily due to the relatively weak demand for loans, as well as the adverse regulatory environment – says Zdenko Adrović, Director of the Croatian Banking Association.

Although our interlocutor’s goals are to fight for legal security of business, clear regulation and adhering to the expert criteria, he says that he cannot be satisfied because there are no indications that a stable and predictable regulatory framework for bank operations could be created in the long run.

1. Do banks have internal reserves to increase their efficiency?

Reserves in banks are limited. The most commonly used bank efficiency indicator, the cost-income ratio, stands at close to 45% which is relatively low due to the degree of development of our economy and the banking system. Banks are also constantly faced with the pressure of technological changes to which they have to respond, so there are no significant internal reserves. Banks are doing this on a continuous basis, but cost efficiency is not so important to interest rates as other factors such as risk and regulatory expense.

2. What are the key features of the banking market today compared to the time before the crisis?

Demand for loans is somewhat weaker, and the growth is slower. There is a much greater demand for kuna loans than for foreign currency-denominated ones, while not much has changed regarding savings and funding sources – foreign currencies, mostly the euro, still dominate, creating a problem of currency imbalance. We do not have kuna sources to finance long-term loans.

3. What is your assessment of today’s regulatory framework in which banks operate?

The regulatory framework is unfavourable. Firstly, there are high regulatory costs associated with standard costs such as the opportunity costs of the reserve requirement and deposit insurance premium. Secondly, we have the high cost of risk associated with poor regulation. Retroactively changing contractual relations through regulation, such as Swiss franc conversion and risk cutoff, make risks latent and therefore everyone pays the price.

4. After you have been appointed director of the CBA, you have said that the CBA would focus on fighting legal security for business, clear regulation and compliance with the expert criteria. Are you satisfied with the results so far?

Unfortunately, for the time being, we are failing to achieve more concrete results that would ensure a stable and predictable regulatory framework, i.e. legal security of business, clear regulation and adhering to the expert criteria in the long run.

However, banks in Croatia will continue to advocate that each regulation, law or by-law should be given an optimal time to be publicly debated, and an evaluation of the impact of the solutions proposed in accordance with the EU methodology, which is also transposed into our laws. We hope that we will have a significant number of potential partners on this path who are also going to insist on this kind of practice, since it would be in the society’s best interest for the state to be more responsible and efficient in this segment. We will strive to ensure that the laws, which concern the banking sector as well as the economy as a whole, will be drafted in the future by the consensus of the political, business and regulatory sectors.

5. How is the dialogue between the banking sector and the state developoing?

Dialogue exists but we can not be satisfied with the results. We fully understand the situations involving court instances and it is clear that the government cannot do anything in that aspect. We are all in the situation to have to wait for court rulings. However, more effort can be invested and we can accomplish results in terms of the predictability of tax treatment of debt write-offs, the reduction of deposit insurance premium costs and other outstanding issues. I must point out that the benefits of regulatory progress in this segment will not be felt by banks, but primarily by their clients through more favourable lending terms.

6. How much work do banks still need to do on introducing the euro?

This job mostly rests on regulators’ shoulders. Banks are ready to implement their decisions at any time. Our IT and financial experts have great experience, and most banks are internationally linked to the banks from the eurozone so there is no problem there. In the summer of last year, the CBA conducted a series of analyses and covered the topic of introducing the euro at a round table discussion, which we, by the way, strongly support. Although banks will lose significant revenue from currency conversions, we believe that reducing regulatory cost and risk will benefit everyone – banks and clients. Finally, introducing the euro is the best way to overcome the problems of currency clause.

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