The Supervisory Strategy of the Czech National Bank
Background
The Czech National Bank endeavours to supervise the financial market and its institutions in accordance with international standards. It actively monitors developments in this area and prudently implements new requirements or initiates steps for their implementation.
The basic strategic framework for the CNB’s supervisory responsibilities is formed by the “Core principles for effective banking supervision” issued by the Basel Committee in 2019, the “Insurance core principles” issued by the IAIS in 2019, and the “Objectives and principles of securities regulation” issued by IOSCO in 2017.
Hence this strategy:
- reflects, in its structure, the principles of this document relevant to supervision,
- indirectly declares identification with its specific requirements,
- briefly comments on how those requirements are implemented,
The principles set out below are described in more detail in the Long-term supervisory strategy (pdf, 1.1 MB) updated in September 2024 [1].
Responsibilities, objectives, powers, independence, accountability and resourcing
The Czech National Bank is developing a system of financial market supervision based on a clear definition of responsibilities and objectives. In its supervisory activities, it effectively applies its legal powers, all the while pursuing its main objective, namely to safeguard the stability of the financial system of the Czech Republic. Supervisory actions are taken in a timely manner in a form appropriate to the situation to which they respond. When proposing penalties, the supervisory authority draws on the full range of options laid down in legislation. It carries out its work with respect to the powers of other branches of the state, with the aim of effectively fulfilling the Czech National Bank’s supervisory mission.
The Czech National Bank also exercises its independence as defined by legislation in the supervisory area. This independence gives it full discretion to take actions against supervised institutions. The Czech National Bank takes organisational measures to ensure that supervision is independent of any other of its activities that might give rise to a conflict of interest with its supervisory work. In its supervisory work, the Czech National Bank takes into account the conclusions of financial stability analyses conducted within the framework of its macroprudential policy and provides feedback to ensure that the regulatory framework reflects practical supervisory experience.
To ensure that supervision is transparent to the public, the Czech National Bank issues reports on its supervisory activities[2] and communicates major supervisory steps and selected findings and approaches in a prompt and flexible manner.
The supervision is organised so that information flows smoothly and appropriate decisions are taken at every level of governance. The Czech National Bank applies measures to avoid conflicts of interest between its supervisory work and the private interests of its staff. The Czech National Bank provides adequate resources, including material resources, to ensure independent, competent and effective supervision. When allocating its resources, it takes into account systemic supervisory priorities based on the risk profile and systemic importance of the supervised institutions.
Approach to supervision
The Czech National Bank performs supervision that is based on a forward-looking assessment of the risk profile of the supervised institutions, proportionate to their systemic importance. This system identifies material risks relating to their activities and quantifies their impact. It also captures systemic risks regarding the behaviour of financial market participants. The Czech National Bank sets the intensity of its supervision in relation to individual areas of the financial market and to specific institutions based on the outputs of this system. In its supervision, the Czech National Bank assesses compliance with the obligations imposed by legislation in the areas of prudence and conduct of business. These two areas are supervised in a mutually consistent manner, reflecting the links between them. The priority is the protection of retail clients, while the protection of financial professionals and qualified investors is addressed by the Czech National Bank mainly reactively and on the basis of complaints.
Supervisory methods and tools
The Czech National Bank applies its supervisory powers by means of off-site supervision and on-site inspections. The form of supervision is always chosen with regard to its effectiveness in the specific case. Supervisory work is planned and performed systematically in accordance with internal procedures ensuring internal consistency.
The Czech National Bank bases its supervisory activities on a broad information base. The information obtained is subject to both regular and extraordinary (thematic) assessments based on analytical tools developed by the Czech National Bank. Specific supervisory analytical tools include regular supervisory stress tests for banks and insurance companies and a system for monitoring financial market transactions. Relevant supervisory findings are communicated to the supervised entities. The supervisory authority undertakes follow-ups to check that corrective action has been taken.
The Czech National Bank generalises selected findings and expectations, and publishes them in the form of official information and replies to frequently asked questions.
Reporting
The Czech National Bank has a system for regular reporting by supervised institutions and their consolidated groups. The reports defined by the Czech National Bank contain both financial and non-financial data. Supervised institutions must have internal mechanisms in place to ensure that the reported data are correct.
The range of information that the Czech National Bank uses for supervisory purposes extends beyond the regularly reported information. The Czech National Bank may, for example, request internal analyses, internal documents on specific transactions (including primary accounting documents) and other internal documents of the supervised institution. In the case of selected surveys, it is also entitled to request information from persons not subject to its systematic supervision.
Consolidated supervision
An essential part of the Czech National Bank’s supervision is its supervision of financial institution groups on a consolidated basis. The aim of this activity is to identify links between the risks that can arise at group level and the stability of the supervised institution. When performing consolidated supervision, the Czech National Bank requires these risks to be managed effectively.
Consolidated supervision involves the regular collection and assessment of relevant data about the group. The supervised institution (responsible person) must give the Czech National Bank access to all material information from individual subsidiaries and branches in the group, without the need for assistance from any other (foreign) supervisory authority. In the framework of consolidated supervision, the Czech National Bank works in cooperation with foreign supervisory authorities, regularly communicates with the management of important subsidiaries and branches that are members of the consolidated group, and examines their risk profile and systemic importance. Where significant risks are detected in the activities of such subsidiaries and branches (risks having an impact on the consolidated group), the Czech National Bank initiates corrective action.
Cooperation with other supervisory authorities
The Czech National Bank has a framework for cooperation with other (foreign) supervisory authorities in place based on legislation and specific agreements and arrangements. Among other things, this framework provides for the protection of confidential information shared by supervisory authorities.
The Czech National Bank actively cooperates with other (foreign) supervisory authorities to ensure effective supervision within its area of competence and the coordinated handling of crises.
Where the Czech National Bank is the domestic supervisory authority, it establishes and manages the activities of a college of supervisors, the basic platform for cooperation. In doing so, it takes into account the risk profile and systemic importance of the supervised group and of the institutions that make up such group.
Where the Czech National Bank is the host supervisory authority, it coordinates and plans its activities in cooperation with the domestic supervisory authority, primarily identifying areas of common interest. It aims for open communication and close cooperation with the domestic supervisory authority in order to effectively cover its area of competence. Such communication mainly concerns material risks relating to the supervised group or to the institution subject to supervision by the Czech National Bank. The Czech National Bank participates in on-site inspections organised by the domestic supervisory authority, and allows the domestic supervisory authority to participate in inspections conducted by the Czech National Bank.
Cooperation with European institutions
The Czech National Bank cooperates in the area of supervision with European institutions (the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority) on unifying supervisory procedures and creating conditions for close cooperation between domestic and host supervisory authorities.
The Financial Market Supervision Department’s Supervisory Strategy in the AML/CFT Area
Supervision in the area of the prevention of money laundering and terrorist financing (hereinafter “AML/CFT”)[3], together with prudential supervision and supervision in the area of expert care, is a key pillar for ensuring financial market stability and integrity. The fight against financial crime and protecting the Czech financial market from abuse is one of the priorities of the Financial Market Supervision Department.[4] The possible presence of illicit funds on the financial market not only allows criminals to freely exploit their ill-gotten assets, but also has much broader implications that may threaten the health, stability and reputation of the financial market.
Following on from the Supervisory Strategy of the Czech National Bank, the Financial Market Supervision Department has detailed its AML/CFT supervisory objectives in The Financial Market Supervision Department’s Supervisory Strategy in the AML/CFT Area 2023–2026 (pdf, 543 kB), which aims to identify priority areas that have guided, and will continue to guide, its actions, in order to utilise the available capacity efficiently and maximise the effectiveness of AML/CFT supervision.
This supervisory strategy defines five priority areas for the Financial Market Supervision Department’s supervision in the AML/CFT area in 2023–2026: i) maintaining a forward-looking vision, ii) strengthening its risk-oriented approach, iii) applying a holistic view, iv) developing communication and cooperation, and v) supporting innovation and technology. In each of these five areas, the approach is further defined as regards i) the method of supervision and ii) the focus of supervision. The method of supervision sets out the Financial Market Supervision Department’s supervisory procedures and its organisational structure as the AML/CFT supervisory authority. In terms of the focus of supervision, these areas determine the key supervisory priorities, i.e. aspects of supervised entities’ operation that will be examined in more detail during supervision and regarding which the CNB expects increased attention from the supervised entities.
[1] The Czech National Bank has long strived for a high level of transparency in the area of financial market supervision. In connection with this objective, it publishes its Long-term supervision strategy. The latest version, from September 2024, updated the previous concept from 2017.
This updated strategy takes into account organisational changes in the area of supervision, i.e. in particular the incorporation of licensing and penalty agendas into both supervisory departments in 2023. The strategy also takes into account new regulatory requirements imposed on the financial sector.
[2] Where the AML/CFT area is mentioned, it analogously and appropriately also refers to the implementation of international, European and national sanctions. These include all international, European and national sanctions legally binding in the Czech Republic, including sanctions intended to prevent the proliferation of weapons of mass destruction.
[3] Pursuant to the CNB Organisational Statute, the Financial Market Supervision Department performs supervision in the area of AML/CFT over the following institutions: credit institutions, insurance companies when providing life insurance, reinsurance companies, pension management companies, central depositories and operators of markets in investment instruments and foreign branches of these institutions (hereinafter together “supervised institutions”).
[4] Financial market supervision reports, which the Czech National Bank is legally obliged to produce and which are discussed by the Parliament of the Czech Republic.