The CNB Bank Board approved revisions to the prudential regulations on capital adequacy, credit exposures and liquidity regulations 1 . Following an assessment of the results of audits of large banks, financed by Phare, the Banking Supervision Group produced minimum requirements for the content of bank performance reports. After discussions with banks and their auditors, these were distributed to banks and their branches in the form of recommendations for audit work on the 1993 results. The Department also worked with the Czech Chamber of Auditors on establishing basic auditing standards targeted at verifying the most important and risky areas - especially banks' systems of risk management.
The Banking Supervision Group also contributed to work on legal norms to introduce building savings and a new act on mortgage banking. This act proposed establishing specialised banks for mortgages. Although the act was not passed in the proposed form, passages on definitions and security parameters for mortgage banking were incorporated into the Act on Bonds. On 1 January, the Act on Reserves for Determining the Income Tax Base entered into force, allowing banks to create reserves for loan receivables and for guarantees provided within stipulated limits as a tax expense. Despite warnings from the Banking Supervision Group, the issue of provisioning for securities remained unresolved. The Banking Supervision Group co-operated on devising laws to establish a state export support institution (EGAP) and worked its insurance terms into the prudential regulations.
There was increasing awareness of the Banking Supervision Group among specialists, including at international level. The Department took part in a number of discussions with rating agencies and missions from the OECD, IMF, etc. The CSSB Banking Supervision Group was charged with the presidency of the Group of Banking Supervisors from Central and Eastern Europe.
Control and analytical work
This area of the Banking Supervision Group's work gradually became more dynamic. A detailed analysis of developments in the banking sector in 1990-1992 was produced and discussed in the CNB Bank Board. Producing the report was demanding owing to a lack of data, missing time series and technical problems. The Banking Supervision Group therefore proposed and produced a more modern method for comparative analyses of banks in the form of a uniform appraisal system based on dividing banks into comparable groups and assessing selected absolute and relative indicators for banks' financial results.
The development of on-site inspections in banks continued, with completed inspections resulting in increasing pressure on banks in the form of recommendations and remedial measures. However, the number of banks and the limited capacity of the Banking Supervision Group remained an obstacle to more frequent inspections and to concentrating on resolving the more serious problems facing individual banks. Nevertheless, problems were identified and resolved concerning banks' credit portfolios, commitments to closely related parties, machinations with the payment of capital and banks' accounting. Organisational arrangements for banking supervision
The CSFR was dissolved and the CNB (and SNB) were established. The new national arrangements were also apparent in the splitting of banking supervision in the Czech Republic and Slovakia. The Banking Supervision Group participated in preparing and implementing the division of the federation (communications with banks, splitting balance sheets and exchanging shares between the National Property Funds, the Konsolidační banka portfolio, etc.). As regards the organisational arrangements for banking supervision, the existing department at the CSSB headquarters (or CNB) merged with the republican department. The Banking Supervision Group now had three divisions - methodology, licensing, analyses and inspection. The total number of staff did not exceed thirty (around 25-27) and supervisory work was limited by the given capacity and considerable overloading, particularly in management positions.
The banking sector
The first significant difficulties became apparent in the banking sector. This chiefly concerned Kreditní a průmyslová banka, where acute shortcomings in liquidity and capital led to the introduction of conservatorship. This case also pointed to the risk of banks being negatively influenced by shareholders and management.
Stricter rules for banks' access to CNB refinancing and the interbank market had a negative affect on the liquidity of several small banks with weak capital. These banks suffered from a considerable imbalance in the time structure of their assets and liabilities. This situation led to a series of talks with banks' management, shareholders and auditors. A liquidity team was set up at the CNB at Vice-Governor level. Banks' cash flow was monitored in detail and remedial measures were proposed and implemented.
Konsolidační banka's conduct and financial situation did not correspond to the supervisory requirements, and the Banking Supervision Group put pressure on the bank and the Ministry of Finance as its founder. This pressure resulted in the Ministry of Finance issuing a guarantee for the bank's finances and its capital was increased from NPF funds.
There was a decline in issuing of licences and establishing of new domestic universal banks in 1993. Of the ten banks newly licensed that year, four were building savings banks, four were branches of foreign banks and two were banks with foreign ownership.
The provision on capital adequacy made the calculation of banks' capital adequacy more strict by deducting credit exposures vis-a-vis related parties and uncovered losses from capital, including capital investments in legal entities in which a bank had control. At the same time, EGAP was classified as an institution with government support under the category of assets with a 20% risk weighting. The capital adequacy limit (the ratio of capital to risk-weighted assets) was set at 6.25% and banks were required to achieve it by 31 December 1993, with a limit of 8% to be met by 31 December 1996. The credit exposure provision introduced a duty for banks to set limits for economic sectors and geographical territories, and the liquidity provision established the duty to submit a preliminary report for the elapsed calendar year by the thirtieth day of the following calendar year.