Frequently asked questions concerning Croatia’s request to establish close cooperation with the ECB
1. What requirements does Croatia need to comply with to become a participant in the Single Supervisory Mechanism (SSM)?
Croatia has requested the establishment of close cooperation between the European Central Bank (ECB) and its national central bank, Hrvatska narodna banka, under the conditions set out in Article 7 of the SSM Regulation. This process involves, in particular:
- ensuring that Hrvatska narodna banka will abide by any guidelines or requests issued by the ECB;
- providing any information on credit institutions established in Croatia that the ECB may require for the purpose of carrying out a comprehensive assessment of those credit institutions;
- adopting relevant national legislation to ensure that Hrvatska narodna banka will be obliged to adopt any measures requested by the ECB in relation to credit institutions.
The ECB will conduct an assessment and adopt a decision on Croatia’s request to establish close cooperation, which will be dependent on the fulfilment of the conditions set out in the SSM Regulation. The starting date for that close cooperation may be conditional on progress made with the implementation of measures required in relation to the results of the comprehensive assessment.
2. What are the roles of Hrvatska narodna banka, the ECB and other Union institutions in the process of responding to Croatia’s request to enter into close cooperation?
Following Croatia’s request for close cooperation, the ECB is now conducting an assessment of that request and is preparing for the relevant comprehensive assessment. Hrvatska narodna banka is supporting this process. As provided for in the SSM Regulation, the European Commission, the European Banking Authority (EBA) and the other Member States have been notified of Croatia’s request to establish close cooperation.
3. What will close cooperation mean for the supervision of Croatian banks?
Member States whose currency is not the euro may participate in the SSM by establishing close cooperation with the ECB. Once established, close cooperation means that certain credit institutions established in Croatia – credit institutions that are classified as significant in accordance with Article 4 of the SSM Regulation –, will be supervised by the ECB via instructions given to Hrvatska narodna banka. Credit institutions classified as less significant will continue to be supervised by Hrvatska narodna banka, with the ECB performing an oversight role. The ECB will also be responsible for the implementation of common procedures for all credit institutions established in Croatia. Establishing close cooperation will also automatically entail the participation of Croatia in the Single Resolution Mechanism.
4. With close cooperation, will Croatian banks also have access to ECB liquidity?
Participation in the SSM through close cooperation involves a change to the supervisory and resolution framework, but does not have implications for the monetary policy operational framework, so Croatian banks will not have access to ECB liquidity.
5. When a Member State enters into close cooperation with the ECB, how is the supervision of credit institutions established in that Member State exercised?
As Article 107 of the SSM Framework Regulation makes clear, for significant supervised entities and groups and less significant supervised entities and groups established in the participating Member State in close cooperation, the ECB and the national competent authority in close cooperation will be in a position comparable to that of the ECB and national competent authorities in respect of significant supervised entities and groups and less significant supervised entities and groups established in euro area countries. Such an arrangement will nevertheless take account of the fact that the ECB does not have directly applicable powers over credit institutions established in the participating Member State in close cooperation. Hence the need to ensure that the national competent authority will be obliged to adopt any measures requested by the ECB in relation to credit institutions.
6. What is the objective of the comprehensive assessment?
The general objectives of every comprehensive assessment conducted by the ECB are: (i) to enhance the quality of information available on the condition of banks, (ii) to identify problems and implement the necessary corrective actions, and (iii) to assess whether banks are fundamentally sound. More specifically, the asset quality review aims to assess the adequacy of the valuation of balance sheet exposures, while the stress test aims to assess the resilience of banks to a stressed macroeconomic scenario (typically involving an economic downturn). Both components focus mainly on risks to capital. Other risk areas, such as liquidity risk, operational risk and money laundering, do not fall within the scope of this exercise. The comprehensive assessment will be carried out using the latest methodologies available, both for the asset quality review and for the stress test, in order to guarantee a level playing field.
7. What criteria were used to select the banks that will undergo the comprehensive assessment?
The five banks selected have been chosen in order to ensure a level of coverage that is consistent with Article 6(4) of the SSM Regulation and is broadly comparable with previous comprehensive assessments conducted by the ECB since 2014. Institutions are selected on the basis of their size, risk profile and overall significance for the national economy. This involves taking account of several elements, such as the business model of the institution, its internal governance and risk management, its capital risk, its liquidity and funding risk, and its interconnectedness with the rest of the financial system.
8. Who will conduct the comprehensive assessment – the ECB or Hrvatska narodna banka?
The ECB will lead the comprehensive assessment, with Hrvatska narodna banka providing support.
9. Will the methodology be similar to the one used by the ECB for the comprehensive assessment of European banks in 2014? Will it be a bottom-up or a top-down approach?
The methodology used for the asset quality review component of the comprehensive assessment is set out in the ECB manual governing asset quality reviews for banks. The methodology used for the stress test component will be identical to that applied in the 2018 EBA-led stress test (i.e. a bottom-up approach). Both methodologies are publicly available and up to date and take account of the changes introduced by IFRS 9. They can both be found on the ECB Banking Supervision website.
10. How does the stress test interact with the asset quality review?
The results of the asset quality review and the stress test are combined by means of a predefined process in order to produce a final consolidated outcome.