In August 1995, a amendment to Act No. 593/1992 Coll. on Reserves for Determining the Income Tax Base entered into force. This newly defined categories and limits for provisioning, in particular in accordance with a classification of individual receivables (see the CNB provision on classification 1 ). This revision was in force up to the end of 1997.
In this year, the Banking Supervision Group carried out its first aggregate appraisal of co-operation with banks' auditors. It assessed individual auditors' activities and results for 1993 and 1994 in relation to the CNB provision from the end of 1994 stipulating the requirements for bank performance reports.
In view of the expertise and experience gained, especially from inspection work, the basic prudential regulations were substantially revised, as they had ceased to correspond to conditions in the banking sector (the provision stipulating the limits and terms for banks' open foreign exchange positions, the capital adequacy provision, the credit exposure provision and the provision on bank performance reports).
As the legal norms reflecting the needs of mortgage banking had been revised with effect from the beginning of July 1995, the Banking Supervision Group prescribed criteria and procedural aspects for granting licences to banks for the issuance of mortgage bonds (i.e. mortgage banks).
Control and analytical work
At the end of each quarter, a supplemented and expanded aggregate analysis of developments in the banking sector, including trends and ratings for individual banks, classified according to uniform criteria into five groups, was submitted to the CNB Bank Board for discussion. In 1995, the Banking Supervision Group's inspection work became much more intensive. In total, 15 comprehensive and partial inspections were carried out in banks, together with 17 information visits. The on-site inspections revealed that banks had inadequate valuations of their credit portfolios and their provisions needed to be significantly increased, which in several cases meant a loss of capital to create them. On the basis of the inspections, the Banking Supervision Group demanded that individual banks remedy this situation (by reclassifying loans, creating additional provisions and increasing capital as part of consolidation programmes).
Following an appraisal of trends in the banking sector in the first three quarters of 1995, especially in the small banks subsector, the CNB Bank Board discussed and approved the basic principles of Consolidation Programme II. This programme signified a more strict approach by the Banking Supervision Group to those banks, which failed to meet the fundamental prudential regulation - real capital adequacy of 8% - and required the implementation of recovery programmes with the support of the shareholders of banks under threat. The programme was oriented primarily towards the small domestic banks subsector and was based on the requirement for banks to fully cover risks from their assets in accordance with auditors' valuations at the end of 1995.
Organisational arrangements for banking supervision
In connection with the stricter supervision of banks and the greater volume of work, the CNB Bank Board discussed issues connected with optimising the structure and activities of banking supervision and the prospects for its future development. The outcome of these discussions was support for proposals by the banking supervision organisational units and a decision to continue recruiting supervisory staff, in particular to strengthen the supervisory work. In the Bank Analyses and Inspection Department, the overburdened Small Banks Inspection Division was split into two divisions. Training programmes for supervisory staff continued, with the most important ones carried out with the assistance of regulators in developed countries, especially the USA and EU countries (the UK, France, Belgium), in the form of short-term attachments. The number of staff working in all the banking supervision organisational units rose to a total of approximately seventy.
The banking sector
The number of banks was in essence constant in 1995. Only one licence was issued, to Česká exportní banka, established by the state under a special legislative act.
In the second half of the year, the CNB Bank Board decided to revoke the licences of Kreditní a průmyslová banka, AB Banka and Česká banka owing to serious long-term shortcomings in their activities. These decisions by the CNB Bank Board (dating from December 1995 for AB Banka and Česká banka) were a feature of the implementation of Consolidation Programme II.
The total level for provisioning was limited to 3% of the average level of receivables for the tax year.