By David Barwick – FRANKFURT (Econostream) – Croatian National Bank Governor Boris Vujčić said Friday that his new role as European Central Bank vice president would involve substantial work on financial stability across the Eurozone.

Vujčić, who takes over from Luis de Guindos on June 1, wrote in a guest column for Croatian weekly Nacional that he would deal “to a large extent precisely with activities aimed at preserving financial stability” in his new job at the ECB.

That work would cover all Eurozone members, “where financial systems are mostly more developed and risks more complex than in Croatia,” he wrote.

Responsibilities were also “scattered across dozens of national regulators whose activities will need to be coordinated,” he said.

Vujčić said his experience in Croatia over the past three decades would be useful, calling the perspective of preserving financial stability in a small, open economy exposed to global shocks “highly relevant in today’s world, which carries a number of new risks.”

The financial system was inherently procyclical, he wrote, with banks more willing to lend in good times than in bad ones and with firms and consumers tending to underestimate risks when optimism prevails.

“The longer the period of favorable developments lasts, the more memories of crisis times fade,” he said.

Pressure also rises on supervisors in such periods to ease requirements considered unreasonable or harmful to growth, he said.

In Croatia, Vujčić said the current situation differed significantly from that of the banking crisis of the late 1990s, but he warned that recent developments still required attention.

High credit growth over the past two years had increased household and corporate indebtedness, he said, and banks had loosened borrowing criteria for households, including by extending housing-loan maturities and allowing higher repayment burdens.

Banks were at the same time weakening their capital base through high profit payouts combined with strong asset growth, while also using asset-optimization techniques available under regulatory rules, including synthetic securitization, he said.

Such methods “seemingly improve the picture of capitalization, but carry additional risks,” he wrote.

“These factors have put the domestic banking system at the bottom among European countries in terms of capital surpluses above regulatory requirements,” he said.

The banking system remained safe and stable, he said. Vujčić cited better supervision, Croatia’s participation in the Single Supervisory Mechanism and EU macroprudential tools that had allowed the Croatian National Bank to raise capital requirements for banks.

Still, a stronger global disturbance could not be excluded, he said.

Such a shock could push banks into a “defensive” business model in which they thought less about supporting the economy and employment and more about collecting existing loans, he said.

Although he would change jobs in a few days, Vujčić said he would continue trying to read historical patterns in new situations and indicators that could point to problems in the financial system.

If regulators, supervisors and the financial system were successful in identifying and avoiding new risks, new generations would be able to study financial crises only from history books, he said.

“But if forgetfulness and greed prevail, we will remain condemned to the repetition of the same fate,” he said.