Zdeněk Tůma, Governor, CNB
Prague, 27th February 2006
- The banking sector and banking supervision in the transition period
- The contribution of international assistance
- Two challenges for the future
Ladies and Gentlemen,
The topic of our conference is the institutional foundations for sound finance. As the Czech National Bank has been responsible for the supervision and regulation of the banking sector, let me focus on our experience gained over the past ten years.
The banking sector and banking supervision in the transition period
Seeing to the sound operation and stability of the banking sector has been one of the statutory objectives of the Czech National Bank since its establishment in 1993, when it took over the activities of the former State Bank of Czechoslovakia. At present, households, businesses and the government can rely on banking sector stability. Banks provide them with a wide range of traditional and modern products and services.
Achieving banking sector stability was no easy task. The banking sector came into being through the transformation of state-owned banks surviving from the period of central planning, the establishment of new banks controlled by domestic private investors, and the entry of foreign banks into the Czech market. While foreign banks entered our market with the latest know-how, the behaviour of domestic banks was greatly affected by the legacy of the centrally planned economy. Not much of this legacy was applicable in the market economy. A lot of knowledge was missing, so domestic banks had to learn what was common in advanced countries from scratch. Banking supervision came into being at the same time as the banks, but initially it was compliant with the principles for effective banking supervision to only a limited extent. The supervisory authority was understaffed, poorly equipped and suffered from a shortage of experts. Moreover, it did not even have the necessary regulatory tools, since the regulatory framework initially had considerable loopholes. The country was undergoing a transition. And this process was characterised, among other things, by a situation where progress with the legislation failed to keep pace with the dynamic growth of the markets and the buoyant rise in the number of businesses and transactions in those markets.
The contribution of international assistance
The situation today is vastly better than in the early and mid-1990s. International assistance played a crucial role in the push to establish effective banking supervision. The US Fed provided a great deal of assistance as early as the mid-1990s. Its experts managed to cope with the different legal culture here, defined the most important areas of banking supervision and set the right priorities for the phase of establishment of banking supervision. Moreover, a large number of the CNB's supervisory staff were given an invaluable opportunity to acquire practical experience directly in the Fed. The assistance provided by the European Union under the PHARE programme was also of great importance at that time and later on. In the late 1990s, when the supervisory authority was already functioning well, the FSAP missions organised by the IMF and the World Bank helped to fine-tune numerous regulations, processes and instruments. All this resulted in international standards for effective banking supervision being gradually incorporated into the Czech National Bank's banking supervision regulations, methods and processes.
If shortcomings in the financial institutional infrastructure are to be eliminated, we need to start by identifying those elements of the institutional infrastructure which are not working as they should. In today's globalised world, the view from outside can play a major role. This applies to advanced economies and even more so to transition economies. The role of the external observer is, however, complicated by the fact that the institutional infrastructure is country specific, as it is based on each country's legislation. For example, in the administrative and commercial legislation there are important aspects which an external observer might find difficult to grasp at first sight. Consequently, this observer will sometimes arrive at a rather different diagnosis and make a rather different assessment than the government or supervisory authority of the country concerned. Nonetheless, this problem is not insurmountable. And so we can say that for the Czech Republic, and I believe for many other countries as well, the missions of international institutions have frequently played a positive role in pointing out shortcomings in the functioning of the institutional infrastructure and in providing imaginative proposals for eliminating them.
In this context I regret to some extent the fact that the assessment missions of international organisations did not visit the Czech Republic until the end of the 1990s, i.e. when the consolidation of the banking sector had already been addressed and international standards had largely been incorporated into banking regulation and supervision. So, although these missions were useful to the Czech Republic and to the Czech National Bank, the benefits could have been even greater had they come earlier.
Two challenges for the future
Let me turn now from the past to the future: We can see that the Czech National Bank faces two big regulatory and supervisory challenges. The first of these involves integrating financial regulation and supervision into the Czech National Bank, and the second consists in further developing international cooperation within the European Union and to a certain extent also developing cooperation with supervisory authorities in other countries.
As to the first challenge, recently the Czech government and subsequently the Parliament have decided to integrate supervision of the Czech financial system into the Czech National Bank. This means in practice that the Czech National Bank is taking over supervision of the capital market and collective investment from the Securities Commission, supervision of insurance companies and private pension funds from the Ministry of Finance, and supervision of credit unions from the Office for Supervision of Credit Unions.
The integration process is proceeding rapidly and successfully and is currently entering its final phase. The Czech National Bank has, within a short period of time, adjusted its internal regulations to the new duties and it is finalising the logistics of the whole process. The progress made with the integration so far leads us to expect that this operation will be successfully completed without our day-to-day supervisory work being significantly disrupted.
The Czech National Bank is meanwhile mindful of the fact that the transfer of staff, information and information systems from the former supervisory authorities to the Czech National Bank is only the first step towards creating truly integrated financial market supervision in the Czech Republic. This will consist in removing duplication of supervisory activity, introducing easier reporting, harmonising the legislation across the individual parts of the financial market and so on. By and large, the aim of integrating supervision and regulation is to perform it better and more effectively. The Czech National Bank possesses the necessary know-how, human capital, infrastructure and funding to perform this task successfully.
As to the second challenge, the Czech economy is a very open one and its financial services market has been greatly integrated into the single European financial services market; foreign investors - especially European ones - are key players on the Czech market. The Czech National Bank hence has much work ahead of it within the relevant EU committees and also in partnership with supervisory authorities in other countries.
A major benefit of our accession to the EU in this respect is that the Czech National Bank is involved in the standardisation of methods and procedures applied in the European context. There is also a strong stimulus arising from the transposition of the Basel II regulatory framework into European law. A similar effort has also been going on in other parts of the financial market and supervision, such as collective investment and the insurance and private pension scheme industries.
Ladies and Gentlemen, I am sure you will agree that developing the financial sector and the regulatory and supervisory framework is a never-ending effort. This conference will provide a number of reflections on this process, and its brainstorming format is the ideal platform for exchanging opinions and experience. I hope that you find the conference fruitful and that you have a good stay in Prague. Enjoy the evening.