Česká národní banka

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Banks are able to withstand an economic deterioration

23 Feb 2010

The Czech banking sector remains resilient to shocks that it might face in the coming two years according to stress tests conducted by the Czech National Bank. Not even in an extreme and highly implausible economic deterioration scenario does the capital adequacy of the entire sector fall below the regulatory minimum of 8%. So say the stress test results published by the CNB.

“Foreign observers are surprised to see how little the domestic banking sector has been affected so far by the global financial crisis and the subsequent recession. From our perspective it is important that it remains profit-making and enters the period ahead well-capitalised,” said Jan Frait, the CNB’s main financial stability expert. “According to the CNB’s analyses, it should be able to remain resilient to potential shocks in the coming two years, despite the expected weak economic growth,” he added.

For the next two years, the risks to financial stability remain high in the Czech Republic. A renewed recession in Europe is the major risk. A potential loss of financial market confidence in governments’ ability to finance growing national debts is another significant risk arising from the current fiscal trends in some European countries. The macroeconomic stress scenarios chosen capture these risks. According to these stress scenarios, rising NPL losses and weaker operating profit stemming from potential adverse macroeconomic developments in the Czech Republic could put some banks into a loss-making situation.

Although the sector as a whole maintains its capital adequacy above the regulatory threshold, this indicator could drop below 8% in several banks owing to losses, and the shareholders of such banks would be forced to increase their capital. Even in the worst scenario, however, smaller capital injections would be needed to make up the capital adequacy of all banks having their registered offices in the Czech Republic to the required minimum than suggested by the last published bank stress tests results in the June 2009 Financial Stability Report. According to the current stress tests, the increase in regulatory capital necessary in the most pessimistic scenario is estimated at roughly CZK 13 billion, i.e. no more than 5% of the existing bank regulatory capital and less than 0.5% of GDP. In last year’s Financial Stability Report, the capital injections necessary in the worst stress scenario were calculated at CZK 15.7 billion.

The capital adequacy of the banking sector stood at 13.41% at the end of November 2009, with none of the banks recording a figure lower than 10%.

Marek Petruš
CNB Spokesman