Bankruptcies of Small Banks – Like Warning Earthquakes

Recently, there have been reports of minor earthquakes in the vicinity of Zagreb. Nothing serious. Below magnitude three on the Richter scale. But the feeling was not pleasant. Small earthquakes can be a sign that a devastating earthquake is coming. They do not have to be a precursor, but they can. Unfortunate…

The same goes for the news about the collapse of small banks in Croatia. Last year, the Credo bank from Split ‘collapsed’. This week, it shook again. The Centar bank from Zagreb has gone bankrupt. After an agreement was not reached between the Czech J&T bank and the Croatian government regarding the conditions under which the recapitalization of the struggling Centar bank would take place, an emergency session of the HNB Council decided to open bankruptcy proceedings against Centar bank.

A series of small earthquakes? In a market economy, from time to time, some bank must go bankrupt (if I am not mistaken, one explanation of that term is the Italian version of overturning the bench on which some ancient ‘banker’ conducted transactions outside the rules). The problem arises if such earthquakes occur in succession. Then the danger of capitalva increases – ‘seven on the Richter scale’.
Predicting a larger earthquake in the banking system is the most dangerous task of business journalism. Even the fiercest journalists pull the handbrake here. One must believe that the series of earthquakes in the banking scene will not continue and that messages stating that DAB has sufficient funds to pay out the guaranteed insured amount of savings of 100,000 euros per user will have a calming effect. 

The bankruptcy of Centar bank, however, must be taken very seriously. Croatia has lost its credit rating this year, GDP continues to fall, industrial production is simply collapsing, and in a few years we will be able to take tourists to see the miracle – the ten remaining factories in Croatia. Two years ago, only one in four companies was creditworthy. Today, it is far worse. 
If the national economy is in recession for the fifth year, banks cannot be healthy. When asked how the collapse of Centar bank will affect his, also small bank, the co-owner of one, according to all data a healthy small bank, gave an interesting answer. He says that, temporarily, as in the case of the collapse of Credo bank, there will be a minor outflow of savings from small to large banks. But after some time, the frightened will return. However, that banker has nothing against his savings being reduced. Because, and this is the most dramatic, there is nowhere to invest it without it being too risky.
There is no room for panic about the domino effect at this moment. But, among us, even when the state guaranteed deposits only up to 40,000 euros, the total payout would not be sufficient for the entire annual state budget. With the European increase of the guaranteed amount to 100,000 euros, it would therefore require at least two and a half complete annual budgets.

Mute State Intervention The second level at which to interpret events around Centar bank is the realization that the state apparatus does not know how to implement state interventionism. This week’s theme of the Lider magazine is dedicated to examples of governments around the world that know how to respond to the demand that the state and the private sector achieve good results in the global competition through joint synergistic effects. Centar bank is an example of how not to conduct state intervention. Economic cooperation funds (initiated during the HDZ government) in the case of Centar bank were a complete failure. Centar bank was shaken before by management and owners, and the management company FGS Alternative, through irresponsible actions (an elephant in a china shop), only sealed the bank’s fate. It will still need to be clarified why the portfolio of HBOR was so contentious for the would-be Czech buyers. When one adds the need to investigate how HNB controlled small banks a few years ago – it is certain that it will show that many economic policy makers in Croatia should repeat the grade. So if there is truth in the assessments that the government was not united in accepting the Czech conditions for recapitalization or not – here is another reason to use the collapse of Centar bank for a large and quick inventory. And reorganization on the go.

And one more thing. It may be coincidence, but somehow it strangely coincided with the withdrawal of the Czech bank from the recapitalization of Centar bank (the government must have known about this on Friday) and the placement of Cyrillic signs on state institutions in Vukovar (from Sunday to Monday). If some spin doctor were orchestrating events, he would probably assess that it is better for unrest to occur on Monday in front of the police station in Vukovar due to the letter than in the center of Zagreb in front of the failed bank where half a billion kuna in savings remains.