Press releases
6. 3. 2012
  • Regulation, supervision

Czech banks would withstand even a deep recession in Europe

  • The banking sector is stable thanks to good capitalisation, profitability and balance sheet liquidity
  • The capital adequacy ratio of the banking sector remains above the minimum of 8% over the entire three-year stress test horizon

According to stress tests performed by the Czech National Bank, the Czech banking sector remains resilient to a significant domestic and European economic downturn and an escalation of the euro area debt crisis. “Strong capitalisation, profitability and balance sheet liquidity are the foundations of the stability and resilience of Czech banks,” said Pavel Řežábek, the CNB Bank Board member responsible for overseeing financial stability issues. The stress tests were conducted using end-2011 data.

“To capture the effects of shocks more accurately, the previous two-year test horizon has been extended and the resilience of banks to strongly adverse developments is now tested for a period of three years. The capital adequacy of the banking sector remains above the regulatory minimum of 8% over the entire test period,” said CNB Bank Board member Pavel Řežábek. According to the end-2011 data, the capital adequacy ratio of the Czech banking sector was 15.2%.

The Debt Crisis stress scenario assumes an extreme fall in economic activity due to a marked escalation of the euro area debt crisis, which would lead to a slump in economic activity in the Czech Republic’s main trading partners followed by a sharp fall in domestic economic activity. The general uncertainty in the financial markets would result in a loss of investor confidence, a rise in risk aversion and a fall in Czech government bond prices. The stress scenario also assumed some impairment of exposures to all highly indebted EU countries.

The Debt Crisis stress scenario was also extended to include a simulation of an additional stress due to the impairment of one-third of all exposures of the largest domestic banks to their parent groups, which the CNB regards as a highly unlikely and extreme stress situation. In this extraordinarily adverse scenario, the capital adequacy ratio of the banking sector would decline towards the 8% level.

Marek Petruš
CNB spokesman