Commentary on the passage of the amendment to the Act on the CNB by the Chamber of Deputies

The Chamber of Deputies of the Czech Parliament today passed a "small" amendment to the Act on the Czech National Bank concerning CNB open market operations. The amendment was debated in the Chamber of Deputies in legislative emergency as one of the major measures to combat the impacts of the coronavirus crisis and is yet to be approved by the Senate and signed by the President.

The amendment enables the CNB to trade on the financial market without limitations in terms of possible instruments, their maturities and counterparties. It is aimed at enabling the CNB to enter the financial markets where necessary and thus maintain the stability of the domestic financial sector even if some financial institutions were to experience liquidity shortages due to the economic impacts of the coronavirus crisis and were forced to start selling their assets on a large scale. Such sales could lead to financial markets becoming destabilised and frozen, which in turn could cause some institutions to collapse if the CNB did not intervene. 

"It may turn out to be necessary for the CNB to provide liquidity not only to banks, but also to non-bank financial institutions such as insurance companies and pension funds, which was not previously possible. In a crisis, which we are unfortunately facing in the economic area, the collapse of even a relatively small non-bank institution could cause dangerous domino effects," said CNB Governor Jiří Rusnok. "The broadening of the CNB's trading powers does not mean we will be allowed to operate on the financial markets at will. We can only do so to fulfil our statutory duties, that is, in the interests of price and financial stability," he added. 

The amendment does not lift the prohibition of monetary financing. On the contrary, it brings the CNB's instruments into line with legislation in advanced countries, including the EU. 

The current amendment is based partly on the original comprehensive amendment to the Act on the CNB which the CNB has been seeking approval of since 2016 and which also contains the introduction of the statutory power of the CNB to set limits on mortgage loan ratios. Contrary to the original government proposal, deputies approved the broadening of the CNB's instruments and counterparties only until the end of 2021.

"We accept the time limit as a compromise, in the belief that, after the current emergency situation subsides, Parliament will resume the debate on the broader amendment to the Act on the CNB, which should be discussed in the standard legislative process," said Governor Rusnok.