New c-bank measure provides Croatian banks with EUR 50mn extra liquidity in first month of application

By bne IntelliNews January 24, 2014

The Croatian central bank introduced a new measure in December, aiming to encourage banks to transfer more actively their abundant liquidity to the real sector, and already in the first month of its application provided further EUR 50mn of extra liquidity to the domestic lenders, governor Boris Vujcic told IntelliNews.

In December, the central bank reduced the reserve requirement to 12% from 13.5%, freeing funds equal to HRK 4.7bn (EUR 615mn) intended to help banks finance the economic recovery. However, the decision required banks to purchase three-year compulsory central bank bills (CBBs) for the total amount of the released reserve requirements.

The CBBs carry no interest and prior to the maturity banks can only redeem them at the central bank at the end of every month with the central bank buying out CBBs in the amount of 50% of any loans that banks extend to the corporate sector.

"Basically this is an incentive for banks to extend loans and therefore turn the zero yielding assets into credit that yields an interest of 6% or similar," Vujcic told IntelliNews on the sidelines of Euromoney's Central and Eastern European Forum held in Vienna on Jan 14-15. "It also introduces some competition between the banks because those that extend loans will get this de-facto reduction into the regulatory cost of business and those that do not, will not."

Vujcic said that the central bank is ready to buy out the whole amount of CBBs it has issued, which is HRK 3.935 (EUR 515mn). The central bank has said previously that if the total released amount of the kuna reserve requirement is used, the extra lending that the real sector shall receive is HRK 7.8bn.

The monetary authority has put no limits regarding the interest rate and the currency of the credits it will partly reimburse, but said the required maturity shall not be lower than three months.

ACTIVE MONETARY POLICY INSTRUMENTS

Vujcic told one of the panels of the Forum the Croatian central bank has not been running the reverse repo operations for a few years now as the market already enjoys a huge amount of excess liquidity. Therefore, the central bank does not have an operational interest rate at the moment but it expects that the money market interest rates, which are close to zero, will remain close to zero.

In these circumstances, characterised also by the yields on domestic treasuries and the credit interest rates of banks sinking to historic lows, the central bank targets supporting this environment in 2014 and probably longer, Vujcic said. One of the measures to do this is the introduction of the zero-interest central bank bills that create additional liquidity on a monthly basis.

CORPORATE LENDING PICKING UP, HOUSEHOLD DELEVERAGING CONTINUING

Vujcic told IntelliNews that the stock of loans to the corporate sector increased last year, while the credits to the household sector declined. "This year we expect a further increase in the credit to the corporate sector, while the household sector deleveraging will continue."

Croatia ended a five-year recession in 2013 and although domestic authorities and international institutions hope for a mild recovery in 2014, this year's prospects are already becoming gloomier with the S&P saying on Jan 24 it now expects the recession to continue for a sixth consecutive year.  

The agency cut Croatia's rating to BB from BB+ on weak economic growth and budgetary prospects, noting consumption will continue to decline on rising unemployment, falling real disposable incomes and expected fiscal tightening ahead of the country's entry into the EC's excessive deficit procedure.

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