governor boris vujcic's speech at the fbf executive seminar published : 4 / 7 / 2023 governer vujcic held a keynote speech at the fbf executive seminar " european finance in 2020s : new risks in a volatile world " organized by florence school of banking and finance - the european university institute on the 29 june 2023 keynote speech at the florence school of banking and finance executive seminar june 29, 2023 introduction over the last ten days that i have been on the road i spoke about cbdc to bankers, about the war in croatia and economic lessons for the ukraine, important, but heavy topic, and, of course, about monetary policy, interest rates and the balance sheet. so, i am happy to have been given a different topic for the last speech – financial stability. thorsten told me to speak either about what the entry into the euro area means for the financial stability of croatia, or about the risks to financial stability. i shall try to combine both and tell you what i have learned about financial stability from croatian experience over the last 30 years, and how i see things now that we got into the euro area and the banking union. over the last three decades, the croatian banking system went through a transformation from a group of mostly bankrupt socialist financial institutions into a set of strictly supervised, overwhelmingly private, internationalised companies with strong corporate governance. today, croatian banks are amongst the best capitalized in europe, have fairly efficient operations and comfortable profitability, which adds to their ability to withstand even major economic and financial disturbances. however, this transformation was not quick or simple. neither was the progress linear, as there were no textbook solutions to many problems that arose along the way. nevertheless, every step forward and each single setback provided us with important lessons that are helping us navigate in the complex economic and financial environment. so, today, i thought of sharing with you some of the insights we got along this journey, and what we bring into the euro area and banking union in particular, what we have learnt along the way. a tale of two crisis first, i want to draw on the croatian experience of two banking crises from the 1990s, the first at the beginning of the decade, and the second at its very end. both crises had a strong macro dimension. however, the roots of the problem were always in the banking sector, although set in different corners of the system. in the first case, the background was economic collapse amid transition from socialism into

declines from about 60 % to about 55 %, may prove to be only temporary, if " windfall gains " of rising rates impact negatively focus on cost control. and all of this is taking place in an environment where banks sit on a substantial holding of low - yielding assets ( such as government bonds, while " flash - runs " on banks may take place without much prior warning and at a blazing speed. we do not need to go to the us to observe such a phenomenon. the croatian subsidiary of sberbank lost almost 20 % of deposits in a matter of two days, with the announcement for a third day, which never happened, because of the moratorium, of close to a third of deposits, pushing the bank into liquidation. that has happened in a typical european bank, without significant concentration of deposits or coordination of depositors through social networks, as was the case in the svb. there are also many risks luring outside of the euro area – geopolitical tensions can have a detrimental effect on growth and inflation, prompting further monetary policy tightening and disorderly adjustment in the financial markets. recent failures of banks outside of the euro area have exposed vulnerabilities in markets and institutions, and how quickly shocks can transmit through the system. complacency and overconfidence are chief enemies of every bank and every regulator. temporary boost to profits may be like a sugar rush – weakening bank discipline on costs and hiding deeply rooted weaknesses. banks should use the opportunity to improve their capital position, prepare for the potential losses if outlook deteriorates and intensify preparations to resist the rising competition from the non - banking sector. failure to do so may become expensive in the medium term. conclusion – a few lessons that we learned 1. structural issues in the european banking system have likely not gone anywhere – they may just be hiding behind the huge excess liquidity created over the last years, and windfall profits that have started to accrue and will stay with us for some time. however, as they dry out, problems are likely to reappear. in some corners sooner than in others. banks need to put an effort into efficiency improvements and regulators should not be complacent and need to be cognisant of over - banking. downsizing of the overbanked market is possible. it took us 20 – 25 years to do so, bring down the number of banks by two thirds. with good planning and a good resolution system that can be done