Year 1996
Methodological work
The provision on banking secrecy in Article 38 of Act No. 21/1992 Coll. on Banks was supplemented with a reporting duty in this year in connection with the issuing of Act No. 61/1996 Coll. on Some Measures Against Money Laundering and on the Amendment of Related Acts 1 .
The CNB Banking Supervision Group continued implementing fundamental modifications and changes to the prudential rules for banks, which had commenced in 1995. Entirely new provisions were issued on the principles for creating portfolios of securities and holdings by banks and covering the risk of the depreciation of securities and holdings through provisioning Revisions were made to the provision on banks' credit exposures, where the concepts of debtor and credit exposure were newly defined, and to the provision on capital adequacy. New risk weightings were introduced for Konsolidační banka, the NPF and EGAP, i.e. entities with state guarantees. A revision was also made to the liquidity provision from April 1993. After an aggregate evaluation of reports and the quality of work by bank auditors in 1995 (as in the preceding year), a new provision was issued setting out the requirements for banks' performance reports.
Control and analytical work
Aggregate analyses of developments in the banking sector were submitted to the CNB Bank Board at the end of each quarter. The methodology for rating individual banks was refined, signal information was processed for a warning system based on monthly changes to a group of selected financial indicators for banks, procedures for on-site inspections were refined and information outputs for evaluating individual banks within off-site surveillance were standardised. The Banking Supervision Group also produced and published its first report on banking supervision and the banking sector in the Czech Republic for 1995. Inspection work was to some extent influenced by the priority usage of banking supervision capacity to implement Consolidation Programme II, which meant appraising the results of all small banks for 1995 in accordance with the stipulated criteria, holding repeated talks with banks' managers, shareholders and auditors, preparing consolidation programmes for individual banks, and adopting a range of remedial measures, including administrative proceedings where recovery for banks was not possible. Nevertheless, there were eight comprehensive and partial inspections and seventeen information visits to banks.
The implementation of Consolidation Programme II led to a clarification of the negative financial situation facing a number of small domestic banks. The Banking Supervision Group reacted (after a period in which various solutions were tested) with uncompromising interventions in accordance with its legal powers in those cases where banks' shareholders rejected or were not able to accept an appropriate solution and where prolonging those banks' negative financial situation was unjustifiable. Of the total of 18 small banks, 15 were treated under the consolidation programme, with 9 of them receiving a radical solution consisting in the revocation of their licences or the introduction of conservatorship following a reduction in capital. In other cases there was co-operation with the existing shareholders or new investors in increasing capital to cover the banks' potential losses.
The consolidation programme did not go ahead without the public's confidence in the banking sector falling and an increased threat to small banks in the form of deposits being withdrawn, which those banks would not have been able to withstand. To reduce the risk of a liquidity crisis for small banks and to promote the overall stabilisation of the banking sector, a Czech Government Decree of 16 October 1996 adopted as a systemic solution a "Programme to improve the stability of the Czech banking sector" (the "Stabilisation Programme"), which was intended for the thirteen small banks in existence at the time. The Stabilisation Programme entailed Česká finanční s.r.o. 2 purchasing insolvent receivables from banks at their nominal value, up to a maximum of 110% of the banks' capital. This was done on the basis of returnability, with the banks obliged to gradually create a reserve to repay their dues to Česká finanční after seven years had elapsed.
The Stabilisation Programme was based on the level of knowledge of the small banks' situation at that time and was intended to create conditions for them to become financially stable again. Its success depended, however, on a number of other conditions, especially on the banks' true initial situation, developments in the country's economic and legislative environment, and the ability of shareholders and management to make use of this option.
The Stabilisation Programme was therefore by no means a guarantee that the risks to the banks would subsequently be eliminated. On the contrary, in the event of failure to comply with the prescribed terms, it envisaged terminating banks' operations.
To implement the Stabilisation Programme, the Banking Supervision Group elaborated conditions for banks to be included in the programme, working with other specialised CNB units on the procedures for Česká finanční to purchase assets from the banks and establishing uniform economic parameters for evaluation purposes.
Organisational arrangements for banking supervision
During 1996, the CNB Bank Board approved the formation of a team within the Banking Supervision Group focusing on financial crime in banking, the role of which was to make contacts with the law enforcement authorities to secure their methodological and professional assistance. The Banking Supervision Group ensured participation at a number of seminars for representatives from the law enforcement authorities and commercial courts. At these seminars, on the basis of its practical experience, it presented and clarified the economic basis and context of fraudulent practices within banks. The team's activities were also aimed at lodging complaints against banks in which suspicious transactions had been detected. A total of sixteen complaints were lodged (e.g. against Kreditní a průmyslová banka, Banka Bohemia, První slezská banka, Ekoagrobanka, Banka Skala, Podnikatelská banka, Realitbanka, Evrobanka, Agrobanka and Foresbank). There were consultations on the fraudulent practices uncovered in banks with FBI specialists, who proposed setting up a specialised team to focus on crime in the financial sector. In line with this recommendation, the CNB wrote to the Ministers of Finance, the Interior and Justice with a proposal to set up a specialised interdepartmental group and a recommendation for specialisation within the law enforcement authorities. These activities received no immediate response.
The total number of supervisory staff was now just over eighty.
The banking sector
The outcome of the greater pressure on the Banking Supervision Group to remedy shortcomings in banks was a painful but ultimately purgative process, the postponing of which would only have harmed the economy further. In the first half of 1996, První slezská banka's licence was revoked and conservatorship was introduced in Ekoagrobanka, COOP banka and Podnikatelská banka. Conservatorship in Ekoagrobanka was terminated in the second half of the year in connection with a capital investment by Union banka, which subsequently purchased part of the bank. In the second half of the year, conservatorship was introduced in Realitbanka, Velkomoravská banka and Agrobanka, while Kreditní banka Plzeň's licence was revoked. There were further changes in the banking sector. Two new licences were issued, one for the subsidiary West Deutsche Landesbank (CZ) a.s. and one for a branch of Midland Bank plc. At the beginning of the year, the Bayerische Vereinsbank branch was transformed into the subsidiary Vereinsbank (CZ) a.s. Three banks which no longer had licences went into liquidation (AB Banka, První slezská banka and Kreditní banka Plzeň) and one into bankruptcy (Česká banka).
A Financial Analysis Unit (FAU) was set up at the Czech Ministry of Finance in connection with the issuing of Act No. 61/1996 Coll.
2 A wholly-owned subsidiary of the CNB.