New issue of the “Financial Stability”

The Croatian Financial Services Supervisory Agency (Hanfa) has published a new issue of its annual publication "Financial Stability", which analyses key trends and systemic risks pertaining to the financial services sector, namely the insurance, leasing, factoring, investment and pension fund industry. The publication provides an assessment of the exposure to systemic risks and the level of resilience of each industry, as well as the overall exposure assessment of the entire financial services sector, in the context of international and domestic macroeconomic, monetary and financial developments.

Total exposure of the financial services sector to systemic risks fell slightly during 2023, remaining, however, in the area of increased risks. The slowdown in inflation, economic growth and maintenance of positive trends in the labourmarket contributed to a decline in systemic risks in the macroeconomic environment. Clear intentions of central banks to contain inflation and the normalisation of inflationary pressures lowered the volatility in global financial markets, that was still marked by occasional leaps caused by various financial and geopolitical shocks. A sharp rise in the prices of almost all financial asset classes had an impact on the operations of the financial services sector, primarily pension funds, which recorded an increase in the value of units in all pension fund categories, compensating for the widespread fall in 2022. Market conditions exerted a positive effect on the fund industry yields and the profitability of insurance companies, which was brought back to normal levels. The upward trend in total premium income of insurance companies continued into 2023,with increasingly divergent trends in life insurance segment (which recorded a fall in premiums collected) and non-life insurance segment (where premiums collected recorded a rise).

Climate change-related systemic risksare a growing long-term source of risks for the financial system. They imply a variety of forms of risk, such as physical risks, triggered by extreme weather events, and transition risks, arising from the transition to a low-carbon economy. While climate change poses a systemic risk to the financial system, the system itself can play a key role in the green transition of the economyand contribute significantly to mitigating the effects of the climate transition. The importance of green and sustainable finance in the overall market remains relatively modest, but the accelerated evolution of sustainable regulation (Taxonomy Regulation, CSRD, SFDR) and awareness of the importance of addressing climate risks in a timely manner contribute positively to the development of sustainable forms of investment. The green transition, with many new investment opportunities, also poses new challenges that should be monitored on an ongoing basis and addressed in a timely manner to ensure the stability of the financial system in this necessary transition.

Source: NGFS

At the end of September 2023, total exposure of domestic institutional investors and leasing companies to climate risks[1]was moderate, with very low variability across individual segments of the financial services sector (Figure 9). Leasing companies and AIFs have somewhat better ESC scores than funds and insurance companies because of their relatively lower exposure to the government sector, i.e. a more diversified portfolio by individual activities. The results of the analysis of exposures to climate risks are highly dependent on the source of ESG scores used and should be interpreted with great caution, especially with regard to levels. Bearing this in mind, the several-year slow pace of reduction in exposure to climate risks in all the observed segments of the financial services sector is certainly encouraging, which suggests that domestic institutional investors have been gradually directing their investments towards sustainable projects.

The publication "Financial Stability" also assesses the exposure to various types of risk of each financial industry falling within the scope of Hanfa's competence. More information on individual exposures is available here.