On 1 February, the new banking acts - Act No. 22/1992 Coll. on the CSSB and Act No. 21/1992 Coll. on Banks - entered into force. This entailed an important change in the legal basis of banking supervision and the framework for such activities. The content of the work of banking supervision was defined as follows:
- assessing applicants for banking licences in accordance with the Act on Banks,
- overseeing compliance with the terms of banking licences in accordance with the Act on Banks and of licences in accordance with special acts,
- checking compliance with regulations issued by the CSSB and compliance with laws in cases where it is authorised to do so,
- imposing remedial measures and fines when shortcomings are detected.
The Act on Banks was based on the German model, with certain provisions based in part on the wording of the European Commission's banking directives. At the time they entered into force, the new banking acts appeared to be a sufficient instrument for the central bank to impose discipline and transparency in banking. The shortcomings in the Act on Banks (entry of and changes to banks' shareholders and managers, the establishment of prior consent, remedial measures, the establishment of conservatorship, the exit of a bank from the sector, etc.) were not so evident at the time it began to be used.
From the beginning of the year, the supervisory authority focused chiefly on implementing the new laws. The main work and priorities were directed towards issuing prudential regulations for banks and improving licensing procedures. The CSSB Bank Board gradually approved "provisions" (regulations) on capital adequacy, credit exposure, liquidity and limits for banks' open foreign exchange positions, and provisions stipulating the requirements for establishing new banks (e.g. the requirement for depositing capital was increased to CZK 300 million, including for banks already in existence). Banking supervisors also concentrated on formulating supervisory procedures for on-site inspections in banks, which had gained support under the new legislation.
The Banking Supervision Group contributed to other activities, which were important for running banks and conducting banking supervision. Following discussions with the Federal Ministry of Finance, a CSSB and FMF Directive was approved which included principles for creating reserves and provisions for banks' risk assets (receivables and securities). The principles classified banks' assets according to their quality (standard, substandard, doubtful and loss), recommended provisioning levels for specific assets at 20%, 50% and 100%, and stipulated accounting procedures for classified loans. At the same time, the FMF issued a statement that banks could create reserves up to a level of 2% of their assets as of 31 December 1992. The legislation for this area was established by Act No. 593/1992 Coll. on Reserves for Determining the Income Tax Base, of 20 November 1992, which set out the maximum limits for creating bank reserves. The approved wording of the Act was in force in unaltered form from January 1993 to July 1995. The Banking Supervision Group continued to work towards greater co-operation with banks' auditors and commenced mapping out the options for codifying this co-operation under the directives for conducting audits issued by the newly established Chamber of Auditors. The thematic areas for auditing the accounts and financial results of large Czech and Slovak banks were elaborated in co-operation with Phare. Following a series of discussions with bank representatives, a tender was organised at the CSSB and the selected auditors began work in the autumn.
The Banking Supervision Group also worked on promoting awareness, arranging training for commercial banks on the new set of prudential regulations (conducted in the Czech Republic with the participation of around 400 bank representatives and in the Slovak Republic with the participation of around 200 bank representatives). The publication "Banking Supervision Communication" was launched as an information and communication medium for commercial banks and other interested parties. The Banking Supervision Group initiated a number of consultations on money laundering and financial crime with representatives from the departments and authorities concerned. In its international activities, the Banking Supervision Group organised an international conference for the Group of Banking Supervisors from Central and Eastern Europe.
Control and analytical work
Control work at that time was objectively aimed at acquiring experience in this area of supervision. Several controls were carried out and during some of them experts from the Federal Reserve Bank of New York relayed their experience to the staff of the Banking Supervision Group. The quality and frequency of the supervisory work was very limited owing to capacity constraints. The results corresponded to the level of expertise and experience of the supervisors at that time. The Banking Supervision Group attached great importance to commencing active analytical work, especially work with bank reports. As a new body, the Banking Supervision Group had not, however, yet achieved a sufficiently high standing within the CSSB, and IT support for its work was inadequate. The analytical work was therefore developed under very difficult conditions. Supervisors concentrated nevertheless on improving the construction of bank reporting and linking prudential reports to the chart of accounts for banks. Alongside this, they worked to improve information flows between banks and the Banking Supervision Group. Despite the complications, during the year reports began to be produced on the situation in the banking sector and in individual banks, including development trends. These reports were regularly submitted to members of the Bank Board (with quarterly reports the objective).
Organisational arrangements for banking supervision
The exercise of banking supervision was affected by the federal arrangements within the CSSB, i.e. the efforts by both republics to transfer as many powers as possible to the CSSB's republican headquarters. On the basis of a document discussed by the Bank Board, the work of the Banking Supervision Group was split so that the department at the federal headquarters was responsible for methodology and the republican departments for licensing and control work. The result was that licensing work for new banks was transferred to the republican banking supervision groups, including a complicated management mechanism via the management of both main institutions. The dividing line for supervisory work was not entirely clear and did not provide adequate possibilities for the effective performance of banking supervision.
A constant problem for banking supervision was the lack of staff with the required expertise and experience, although total staff numbers did gradually increase. The federal headquarters' Banking Supervision Group came to employ 21 people in the course of the year, with the republican departments having ten and seven staff respectively, but on the other hand a number of more experienced staff left the supervisory structures.
The banking sector
With the agreement of the Federal and Republican Ministries of Finance, the CSSB licensed seventeen new banks in the Czech Republic, of which six were branches of foreign banks, six were banks with foreign ownership and five were banks with Czech capital. The rapid expansion of the banking sector thus continued. The "small" privatisation was proceeding at full speed and work was also commenced on privatising the large banks, which first of all acquired the status of joint-stock companies. Banks with Czech capital played a relatively important role in financing privatisation. The large banks began establishing investment privatisation companies and funds for the first wave of voucher privatisation.