In 1997 the Banking Supervision Group started work on revisions to Act No. 21/1992 Coll. on Banks, designated the "small" and "large" amendments. These responded to shortcomings in banking legislation on the basis of practical experience and an identification of potential weaknesses, especially in terms of the causes underlying the failure of several banks and the Banking Supervision Group's options for dealing with such cases. They also reflected the requirements of the Government's "packages" for correcting economic policy and cultivating the legal framework of the Czech economy.
At the same time, the Banking Supervision Group continued its work to supplement and refine the prudential rules for banks. There were revisions to the CNB provision on capital adequacy, the provision stipulating restrictions and conditions for banks for certain kinds of loans and investments in ownership interests, the provision on the principles for creating portfolios of securities and holdings and covering the risk of the devaluation of securities and holdings through provisioning, and the provision setting out the principles for classifying loan receivables and provisioning for those receivables After an evaluation of performance reports and the quality of bank auditors' work for 1996 (as in previous years), a new provision was issued stipulating the requirements for bank performance reports.
In view of the need for various risk factors in banks' financial positions to be better assessed, the Banking Supervision Group commenced work in 1997 on a new provision on capital adequacy, which would, in accordance with newly adopted international standards, incorporate market risk, and on a provision to monitor capital adequacy on a consolidated basis. In international relations, the CNB Banking Supervision Group was asked by the Basle Committee on Banking Supervision to participate in an expert group producing international banking supervision standards (the Core Principles for Effective Banking supervision).
Control and analytical work
Aggregate analyses of developments in the banking sector, including ratings for individual banks, were submitted to the CNB Bank Board at the end of each quarter. The Banking Supervision Group also produced and published a report on banking supervision and the banking sector for 1996. In addition to these aggregate reports, analyses of individual banks requiring greater attention from the Banking Supervision Group were produced. In this year, the Banking Supervision Group conducted 12 comprehensive and partial on-site inspections and 18 information visits to banks.
The implementation of the Stabilisation Programme was important for the Banking Supervision Group's work. Six banks - Banka Haná, Zemská banka (now Expandia banka), Pragobanka, Moravia banka, Universal banka and Foresbank - expressed an interest in joining the programme and subsequently submitted their individual stabilisation programmes, gradually joining the programme in the course of 1997. This entailed them starting to sell their bad receivables to Česká finanční. Programmes for Pragobanka, Moravia banka and Banka Haná were ready in January and were subsequently approved by the CNB Bank Board for inclusion in the stabilisation programme. During the first half of the year, admittance was negotiated for Foresbank, Universal banka and Zemská banka (after granting consent to the entrance of a new investor - the Expandia group - into Zemská banka). Once the conditions had been met, these banks were also included in the Stabilisation Programme.
1997 also saw ongoing work to complete Consolidation Programme II. The CNB Bank Board discussed concrete proposals by the Banking Supervision Group for banks under conservatorship. In the case of Podnikatelská banka, the court, at the proposal of the conservator, approved a settlement process and the subsequent approach proposed was sale to a new investor. The solution for Agrobanka was highly complicated, with the most viable approach being to split the bank up and sell only the sound part to a new investor. Despite intensive negotiations by the conservators, no suitable investors could be found for Velkomoravská banka or COOP banka.
Organisational arrangements for banking supervision
In March 1997, the CNB Bank Board discussed a document entitled "The institutional classification of banking supervision in the Czech Republic", and, after weighing up the arguments submitted, it opted to keep banking supervision within the CNB. In the course of the year, the Bank Board then approved a proposal to reorganise the Banking Supervision Group in the CNB with effect from December 1997 1 . The Bank Analyses and Inspection Department was split into two banking supervision departments, of which each had two inspection divisions and two inspection teams. The Banking Supervision Policy Division had two departments - methodological and analytical, while the licensing department was closed. A separate Non-standard Activities Division aimed at the issue of banks whose licences had been revoked and matters relating to crime in the banking sector, was created. It was also decided to increase the number of supervisory staff. The changes made in this year led to the total number of supervisory staff increasing to 86.
The banking sector
In the first half of the year, it was decided to revoke the licences of three banks (Bankovní dům Skala, Ekoagrobanka and Evrobanka), whose activities were taken over by Union banka as part of the integration process. It was also decided to revoke the licence of Realitbanka, which was declared bankrupt by the court at the proposal of the conservator.
Prior to the implementation of these changes, the Foreign Exchange Control Division was brought within the Bank Analyses and Inspection Department.