The Czech financial sector remains stable, but risks persist
- The Czech financial sector remained stable in 2012 and 2013 Q1 despite the continuing economic recession
- The main risk for the Czech economy over the next two years is again a sharp contraction of economic activity leading to a decrease in corporate and household income
- The continuing economic slowdown is increasing the risk of growth in the banking sector’s credit losses and of a decline in its ability to generate income to cover those losses
- According to the stress tests, banks, insurance companies and pension funds are still highly resilient even to very adverse developments
The Czech financial sector remains stable and highly resilient to external risks. The banking sector – the core of the financial system – continues to be sound, well capitalised and, according to tough stress tests, able to withstand very strong shocks. According to Financial Stability Report 2012/2013, published today by the Czech National Bank, the greatest threat to maintaining financial stability in the Czech Republic is a continuing and deepening contraction in economic activity.
“The banking sector is stable and resilient, but there are risks going forward if the recession continues or even deepens. And we see certain risks in the financial markets associated with the search for yield,” said CNB Governor Miroslav Singer.
The main risk scenario for the Czech economy over the next two years remains a sharp contraction of economic activity. This would further worsen the income situation of corporations and households, whose financial reserves for repaying their debts could start to run out after a several-year downturn in the Czech economy. Such an adverse trend would lead to a reduction in the ability to service loans and to a deterioration in the quality of banks’ loan portfolios. The CNB will therefore pay increased attention to credit risk and banks’ resilience to such risk.
On the basis of the risks identified, the resilience of banks, insurance companies and pension funds was tested by means of alternative economic scenarios. The Baseline Scenario is considered by the CNB to be the most probable. The Protracted Depression scenario describes a long-lasting decline in domestic economic activity over the next three years. The stress scenario was extended to include other sensitivity analyses complementing the range of potential risks.
The stress tests showed that the banking sector has sufficient capital to absorb negative shocks and maintain an overall capital adequacy ratio well above the 8% regulatory threshold in all the assumed alternative adverse scenarios. Insurance companies and pension funds also passed the stress tests, mainly thanks to their high level of capital.
The credit union segment is still assessed as risky. A persisting threat is the maintaining of relatively high interest rates on deposits in the current period of low rates, which is leading to the granting of riskier loans. Some credit unions are exhibiting much less prudence in their business. “We will continue to pay increased attention to credit unions and suggest regulatory changes,” said Governor Singer.
Marek Petruš
CNB spokesman