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The Croatian Banking Crisis

articles & speeches

Importance of the banking sector in transition economies

Commercial banks have played and will play a very important role in transition economies. But, to fulfil the demanding task of efficient financial intermediary, the banking sector must to undergo significant changes. It must be de-politicized, restructured, privatized, in short, it has to become completely different from what it was before transition started.

Since its independence in 1991, Croatia has undergone two banking crises. The first was a structural crisis of the old banks, due to their inheritance of bad assets from the previous economic system, the legacy of war, and the disintegration of the former Yugoslavia. All told, the costs of this first crisis are estimated to be approximately US $4.67 billion. Included in these costs was US $473 million, for the individual rehabilitation of four major banks, during the period 1995 to 1996, which represented 40% of total banking assets in the system.

The second crisis emerged at the beginning of 1998 in new banks founded during the liberalized banking market of the economic transition. This crisis was attributed to weak management (including fraud); connected and insider lending; increased market competition as the transition period progressed; and inadequate regulation and supervision of the banking industry.

By late 1998, following a slow stream of bank failures, the Croatian National Bank, responsible for banking supervision, was faced with a difficult decision – to either rescue more banks through costly rehabilitation schemes that would add to the public debt, or to initiate bankruptcy proceedings.

This case study is presented by Marko Skreb, who was Governor of the Croatian National Bank at the time of the Croatian banking crisis.

The Basel Core Principles on Effective Banking Supervision, issued by the Basel Committee in September 1997, sets out important issues for banking supervisors. This case draws on the following Core Principles and the associated Essential Criteria…

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