Anita Krizmanić Ivana Manovelo October 20 2020 Croatia reaches major milestone for admission into eurozone Maćešić & Partners | Banking & Financial Services - Croatia Anita Krizmanić, Ivana Manovelo Banking & Financial Services Admission to ERM IICooperation between ECB and CNBLetter of intentUpcoming changesSeven years after its accession to the European Union, Croatia has entered the last stage of preparation to adopt the euro. The European Central Bank (ECB) recently announced a list of eight Croatian banks which will be under its direct supervision following the country's admission to the exchange rate mechanism (ERM II) and the banking union.Admission to ERM IICroatia was admitted to ERM II on 10 July 2020 by mutual agreement of the finance ministers of the eurozone member states, the president of the ECB and the finance ministers and central bank governors of Denmark and Croatia. The central rate of the Croatian kuna is set at HRK7.53450 per €1 (the reference rate on the day of admittance), with the standard fluctuation band of plus or minus 15%.Cooperation between ECB and CNBOn 1 October 2020 the ECB took over the supervision of Croatian banks, either directly or via the Croatian National Bank (CNB). Following the ECB's assessment, eight banks operating on the Croatian market were deemed 'significant' and will thus be directly supervised by the ECB, with the Single Resolution Board (SRB) acting as their resolution authority. Seven selected banks are subsidiaries of existing significant banking groups with headquarters in Italy, Austria and Russia, while one is the subsidiary of Austrian group Addiko Bank AG, which recently came under the ECB's supervision. The selection fulfils the ECB's regulatory requirements, which is to directly supervise:all banks in significant groups at an individual level; andat least the three most significant banks in a country.The remaining credit institutions on the Croatian market continue to be supervised by the national banking authority in close cooperation with the ECB, while the SRB will oversee their resolution planning.Letter of intentCroatia's admittance to ERM II was preceded by its letter of intent of July 2019, which defined several supervisory and legislative prerequisites that Croatian authorities needed to meet in order to participate smoothly in ERM II. The measures pertained to the following policy areas:banking supervision;the macro-prudential framework;the anti-money laundering framework;the collection, production and dissemination of statistics;public sector governance; andthe reduction of the financial and administrative burden on the economy.Among other things, Croatia committed to broaden the macro-prudential framework by providing a legal basis for borrower-based measures. This condition was fulfilled in April 2020 when Parliament adopted amendments to the Credit Institutions Act (Official Gazette 159/2013, 19/2015, 102/2015, 15/2018, 70/2019 and 47/2020) and the Croatian National Bank Act (Official Gazette 75/2008, 54/2013 and 47/2020). The amendments explicitly empower the CNB to impose borrower-based measures – namely:limits to loan-to-value, loan-to-income and debt-service-to-income ratios;maturity limits;loan amortisation requirements; andother requirements aimed to prevent and mitigate systemic risks.Croatia's implementation of the above measures received a positive assessment by the ECB and the European Commission one year after the country's commitment, thus fulfilling the conditions for admittance to ERM II.Upcoming changesDuring this preparatory period, further institutional reforms can be expected. Croatia has undertaken additional voluntary policy commitments aimed at ensuring sustainable economic convergence by the time that it adopts the euro. Additional efforts are to be invested in:strengthening the anti-money laundering framework;reducing the financial and administrative burden on the economy by further simplifying administrative procedures;reducing parafiscal and other non-tax charges;improving corporate governance in state-owned enterprises; andstrengthening the national insolvency framework.Since Croatia entered both the banking union and ERM II simultaneously, adopting the euro may be possible in 2023 provided that it complies with all treaty-based convergence criteria.For further information on this topic please contact Anita Krizmanić or Ivana Manovelo at Maćešić & Partners by telephone (+385 51 215 010) or email ([email protected] or [email protected]). The Maćešić & Partners website can be accessed at www.macesic.hr.