Organisational arrangements for banking supervision
At the beginning of 1991 a new group was established in the CSSB with the task of preparing the necessary conditions for developing banking supervision with attributes similar to those in developed countries. This group, composed of CSSB staff, employed a total of seven desk officers and one manager. By mid-1991 a document had been produced containing a plan for the exercise of banking supervision as a true regulatory authority within the CSSB, including working methods, banking supervision methods and an organisational structure. Following its approval by the CSSB Bank Board, work commenced immediately on incorporating these proposals into legal norms.
As regards organisational structure, in view of the existence of the Czechoslovak Federation the CSSB was split into a federal headquarters and "main institutions" for the Czech and Slovak Republics. Both republican institutions worked to establish their own banking supervisory bodies. Of the two options for the organisational arrangement for banking supervision - centralised supervision (as supported by the IMF adviser) or decentralised supervision - it was decided, under the pressure of circumstances, to introduce a decentralised model for banking supervision in the Czech and Slovak Federal Republic (CSFR). Separate banking supervision groups were set up at the main institutions for the Czech Republic and Slovak Republic within the CSSB organisational structure, with no direct management links to banking supervision at the federal headquarters. As part of the process of drafting new acts on the CSSB and on banks, the Banking Supervision Group at the federal headquarters drafted an analysis of the basic aspects of bank regulation - matters relating to banks' universality and specialisation, the work of foreign bank branches, ownership interests by banks and restrictions on them, etc. Simultaneously, work began in co-operation with a foreign adviser on drafting the central bank's first set of prudential regulations to mitigate banking risks, so that they could be available from the moment the new set of banking laws entered into force. In this context, work also began on drafting entirely new requirements for establishing banks. 1
The rapidly increasing demands on banking supervision put great pressure on the Banking Supervision Group's capacity. Staff numbers, structure and qualifications represented a significant limiting factor for the effectiveness of the Department's work. Moreover, at that time the CSSB was facing a marked outflow of capacity into the banking sector and private enterprise, and the labour market did not provide a quality response to the Banking Supervision Group's recruitment efforts.
Control and analytical work
As part of the preparations for banking supervision, a draft "Banking Supervision Development Action Plan" was produced, including a detailed timetable for work on regulations, the use of a permanent IMF expert within the CSSB as a banking supervision adviser, the gaining of practical experience for supervisory staff by means of direct co-operation with foreign experts in supervisory activities, and training for supervisory staff. The CSSB supervisory body gradually reached a stage at which it could actively participate in international co-operation. In March 1991, it became a co-founder of the Group of Banking Supervisors from Central and Eastern Europe. 2
The growing importance of banking supervision entailed increasingly frequent involvement in activities relating to decisions on the future direction of the banking sector. The Banking Supervision Group participated in the first wave of privatisation of banks, assessing banks' draft privatisation projects and elaborating privatisation parameters. It co-operated with the banks and central institutions concerned in "Consolidation Programme I". This included establishing Konsolidační banka, transferring selected assets from commercial banks to Konsolidační banka, increasing the large banks' capital with state subsidies for their reserve funds and improving the quality of banks' portfolios by means of government bonds. This was the first (and, the government declared at the time, the last) mass action by the government to clean up and capitalise the banking sector, with the objective of improving the situation for the large Czech and Slovak banks.
In 1991 the Banking Supervision Group commenced work, in the first phase taking over responsibility for dealing with requests for banking licences, which had until then been covered by other CSSB departments. It also commenced preparation of the information arrangements for its analytical functions, particularly with regard to the receipt of regular information and data from banks. An important condition for the performance of banking supervision was co-operation with the Federal Ministry of Finance on transforming the chart of accounts for banks, including basic accounting records, and initiating contacts with bank auditors. Communications were likewise opened with the Federal Ministry of Finance on the taxation aspects of banking, as there was no legislation governing the creation of reserves for banking risks. The Federal Ministry of Finance subsequently stipulated a limit for the annual creation of reserves from banks' expenses at a level of 1.5% of their loans as at 30 June 1991.
The banking sector
The banking sector in 1991 was influenced by the "small" privatisation process underway at the time, which was financed mainly from bank loans. To ensure sufficient funds for such financing, the CSSB provided banks - and especially the new banks - with considerable refinancing loans. At the same time, it oversaw the construction of a monetary plan for the privatisation boom then underway. The forecast volume of loans for the "small" privatisation was recorded separately from standard loans, with these funds sterilised following payment to the National Property Fund (NPF) for the units auctioned.
In the course of the year, the CSSB, with the agreement of the Federal and Republican Ministries of Finance, licensed thirteen new banks in the Czech Republic, as in the preceding year. Six of these were banks with Czech capital, one was a state bank (Konsolidační banka) and six were banks with foreign ownership (mainly subsidiaries of foreign banks).
Drafting the new banking supervision regulations was unusually complicated. Each type of risk involved an entirely new subject matter which had not been clearly classified in any foreign regulations. As foreign banking supervisors in developed countries are not generally familiar with the form of separate regulations (known as "provisions"), the CSSB's approach to drafting such regulations represented a progressive element, with its focus on a specific type of risk and on transparency. This is also true of the provision dealing with the requirements for establishing banks. The CSSB's best supervisory staff worked on the draft provisions, taking away a substantial part of the capacity for the actual performance of supervision.
2 The main purpose of the Group of Banking Supervisors from Central and Eastern Europe is to promote the exchange of experience and information on policy application and practical supervisory issues and to organise joint training events with the aim of making procedures consistent with practice in developed countries and with the recommendations of the Basle Committee. The group has no executive powers and the conclusions from conferences of the supervisory authorities' main representatives are not binding. It was decided to hold regular conferences, and a method for changing the Group's chairman and a range of other organisational and technical aspects of the Group's work were also agreed.