Currency risk management using the currency clause, as the dominant method, in the Croatian banking system in recent years has been strongly influenced by instability in the foreign exchange market, primarily after the strong growth of the Swiss franc against the domestic currency. Currency risk is one of the most significant risks of banks' operations in Croatia since the day the financial market was established. The research in the doctoral thesis is focused on the area of application of the currency clause as the dominant method in currency risk management in Croatian banks. The main goal of the research is to review the justification of the application of the currency clause. In addition, based on the analysis of the currency structure, both sources and placements of banks, the possibility of applying some other methods in hedging against currency risk is examined, as well as the possibility of exclusive kuna lending. Based on econometric tools, the main drivers of growth of non-performing loans to households in the period from 2005 to 2015 were analyzed. The aim of the econometric analysis is to determine which of the main macroeconomic factors, including exchange rates, has significantly influenced the movement of non-performing loans in a given decade. The paper also conducts a scenario of analyzes on the abandonment of the currency clause as the dominant method in hedging against currency risk. Also, the measures taken by the state to reduce currency-induced risk in the Croatian banking system are analyzed. The achieved research results, as well as the recommendations, aim to improve the currency risk management system.