Negative trends in the small banks subsector and practical experience in eliminating banks' shortcomings revealed gaps in the legislation (notably the Banking Supervision Group's limited powers in cases where it had detected temporary or persistent shortcomings in banks' activities, where they had negative financial results, where there was obvious fraud, etc.). The response was a revision of the Act on Banks, which strengthened the CNB's remedial measures and powers and included the option of reducing a bank's capital. The conception of conservatorship was refined and insurance was introduced for deposits of natural persons.
The greater activity by the CNB in the legislative area also resulted in the regulatory framework being supplemented. Work continued on improving licensing procedures, which became substantially stricter and limited access to the sector, including an increase in the minimum level of capital to CZK 500 million 1 . Banks were approached concerning the timetable for increasing capital to the prescribed level. New CNB provisions were issued forbidding banks from providing certain kinds of loans or making certain investments in ownership interests. There were new regulations on classifying loan receivables and the method for creating reserves and provisions. A commission was established to appraise bank managers' professional and management skills. The Banking Supervision Group also produced a methodology for assessing the quality of work of auditing companies, together with a new CNB provision stipulating the minimum requirements for bank performance reports. The CNB subsequently revised and issued new official communications on registering the representations of foreign banks and financial institutions in the Czech Republic and on Article 17 of the Act on Banks (banks' ownership interests in other companies).
Methodological work also focused on the Banking Supervision Group's internal procedures, especially those concerning inspection work, administrative proceedings and the introduction of conservatorship in a bank.
The Banking Supervision Group devoted its attention to the draft Act on Preferential Export Financing (establishing Česká exportní banka) and, as part of work on revising the Act on Reserves for Determining the Income Tax Base, to legislation for banks to create tax deductible reserves and provisions from expenses.
Control and analytical work
The year commenced with discussion in the Bank Board of an analysis of developments in the banking sector in 1993, with the Board raising a requirement for a deeper analysis of the financial health of the small banks subsector. Staff from other CNB departments were temporarily attached to the Banking Supervision Group for this purpose, and the Group organised short-term inspections of a selected group of banks, focusing on the quality of their credit portfolios, the management of lending procedures, liquidity, management quality and information systems. The results of these inspections, which revealed a number of fundamental shortcomings in banks' activities, became the subject of a series of talks with the management of the banks concerned, including measures by the Banking Supervision Group to remedy these shortcomings, which in some cases meant restricting banks' activities or producing consolidation programmes for their overall recovery. The Banking Supervision Group also carried out ten comprehensive and partial inspections in banks and a series of information visits to banks.
Organisational arrangements for banking supervision
After assessing developments in the banking sector, the Bank Board decided to enhance the standing of the Banking Supervision Group and reorganise it. For the first time, banking supervision was made the direct responsibility of a member of the CNB Bank Board - a senior director - and was split into two departments: the Banking Supervision Policy Department, which included the Methodological and Licensing Divisions, and the Bank Analyses and Inspection Department. The latter department was divided into three inspection divisions (for small, large and foreign banks) and one analytical division. Extensive staff recruitment was commenced, with a wide-ranging training programme for new staff devised in co-operation with the Federal Reserve Bank of New York. The number of supervisory staff increased to approximately 60 during the year.
The banking sector
Owing to fraudulent financial transactions by Banka Bohemia that directly jeopardised its existence, it was decided to introduce conservatorship. The bank's activities were subsequently terminated by a decision taken at the general meeting. In view of the non-existence of deposit insurance, the situation of the bank's clients was resolved with the deposits being taken over by ČSOB. The CNB and the state, represented by the Ministry of Finance, undertook to cover ČSOB's losses and expenses from this operation.
The Banking Supervision Group, in agreement with the Ministry of Finance, also commenced administrative proceedings to revoke AB Banka's licence owing to serious problems with liquidity and insufficient capital. On the basis of a statement by the bank's shareholders and its largest creditor, Česká spořitelna, on the bank being taken over by Česká spořitelna (confirmed at the bank's general meeting), these administrative proceedings were halted. In this case, the CNB and the state, represented by the Ministry of Finance, again undertook to cover ČS's losses and expenses from this operation.
Only two buildings savings banks, one foreign bank and one foreign bank branch were licensed in this year, although the number of active banks in the banking sector peaked at 55, of which 32 had Czech capital, 15 were dominated by foreign capital and 8 were branches of foreign banks.
Approved by the CNB Bank Board in January 1994.