At the beginning of the year, the CNB Bank Board approved a "Conception for the further development of CNB banking supervision", which outlined the strategic medium-term objective for banking supervisory work. This was intended to contribute towards creating a stable and competitive banking sector, which would be the result of a dynamic balance between banking regulation and supervision, market discipline and the good governance of individual banks.
The Czech Parliament approved the small and large amendments to the Act on Banks, on the basis of which licensing terms became stricter, the approvals process for acquiring a holding in an existing bank was modified, restrictions were put on links between banks and the business sector, investment and commercial activities were organisationally separated, remedial measures for banks were made stricter, the procedures against shareholders adversely influencing a bank were modified and the deposit insurance scheme was improved (by increasing the maximum amount for deposit disbursement and extending insurance to legal entities).
At the start of the year, the most recent revision to Act No. 593/1992 Coll. on Reserves for Determining the Income Tax Base entered into force. This reduced the limit for provisioning from 3% to 2% of average valid loan receivables for the year, i.e. compared with the previous legislation it limited banks' options for creating a sufficient level of provisions in the form of tax deductible expenses.
In January the Czech Government decided to increase funding for the Stabilisation Programme by CZK 5 billion, and then in June it decided to terminate the Programme.
In the course of the year, there were revisions to the CNB provision on classifying loan receivables and provisioning for them. This gave a more realistic view of the returnability of lossmaking and long overdue loans secured by real estate. The provisioning requirements for these loans were also made stricter. This CNB provision was a response to the fact that shortcomings in the legislation to protect creditors in recovering receivables and exercising lien, in the work of the courts and the land registry offices, in the status of experts and asset appraisers and in the underdeveloped real estate market were preventing banks in practice from realising real estate pledged as collateral. In practice, the provision means that if a bank cannot realise lien on real estate within one year of the day the loan was due for repayment and the loan is rated as a loss loan, the bank must also provision for that part of the loan covered by the lien. If the conditions for realising lien change so much that banks can do so in good time, the regulation will cease to affect banks' financial results.
To ensure that the public is informed of important data on banks (basic information on a bank as legal entity, information on its shareholders, activities and financial results), the CNB issued a provision stipulating the minimum requirements for information published by banks and branches of foreign banks. A bank is obliged to publish the information stipulated on a quarterly basis at all of its premises, which are open to the public. The Banking Supervision Group also responded to the special problem of adapting information systems and other automatic systems for the change from 1999 to 2000 by issuing a CNB provision which is only in force up to the end of the year 2000. This provision stipulates basic requirements for banks with the aim of limiting the Y2K risk in relation not only to the banks themselves, but also to their clients and business partners.
In view of the passing of the Securities Commission Act, an Agreement on Co-operation in the Performance of Banking Supervision and State Oversight was signed between the CNB, Securities Commission and Ministry of Finance. This agreement forms the basis for the co-operation essential or the regulation and supervision of financial conglomerates and groups comprising not only banks, but also other types of financial companies.
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 1997. In addition to these aggregate reports, analyses of individual banks and evaluations of signal information were produced for the banking supervision management, with proposals for further progress and measures for banks displaying negative tendencies. Where banks had more serious problems, documents were produced for the CNB Bank Board with proposals for adopting fundamental measures for individual banks (Podnikatelská banka, Agrobanka, Velkomoravská banka, Foresbank, Banka Haná and Universal banka). Audits of the fulfilment of the Stabilisation Programme were carried out quarterly, including the production of an aggregate evaluation as of 31 March and 30 September 1998 for the Czech Government. In the course of the year, Pragobanka and Universal banka were taken out of the Stabilisation Programme owing to their failure to meet the set criteria, as was Banka Haná for the reasons specified below.
The Banking Supervision Group conducted seven comprehensive on-site inspections in the following banks and foreign bank branches: Universal banka, Všeobecná úverová banka, Banka Haná, Moravia banka, První městská banka, Erste Bank Sparkassen and BNP-Dresdner Bank. These inspections focused more on appraising the banks' risk management systems and internal audit systems, even though the main weight of the inspection teams' work remained the evaluation of the quality of their assets, especially credit portfolios. Information visits, usually at the level of the appropriate divisional director and inspector, took place at a total of 30 banks and foreign bank branches.
Organisational arrangements for banking supervision
The CNB Bank Board decided to make changes to the central bank's organisation and management. These took effect on 1 June 1998. There were no fundamental changes in banking supervision, as those had already been carried out under the reorganisation of the Banking Supervision Group at the close of 1997. However, the original two departments were merged into the Banking Supervision Department 1 , which now includes four bank inspection divisions and The Non-standard Activities Division. The plan to establish four inspection teams (one in each division) could only be partially fulfilled, despite repeated recruitment drives to raise the number of supervisory staff, and during the year inspection work was carried out by only two teams instead of the planned four.
The banking sector
Compared with 1997, the number of banks and foreign bank branches in the banking sector fell by 5 to 45. The licences of COOP banka, Velkomoravská banka, Agrobanka and Pragobanka were revoked owing to failure to comply with the prudential rules. Owing to mergers, the licences of Bank Austria (merger with Creditanstalt) and HYPO Bank (merger with Vereinsbank) expired. The licence of West Deutsche Landesbank (CZ) was also revoked owing to its failure to commence operations. GE Capital Bank, which took over Agrobanka's network and the main part of its balance sheet, received a licence. Similarly, on the basis of an agreement on the sale of part of the company, Investiční a Poštovní banka (IPB) at the end of the year took over the main part of Banka Haná's assets and liabilities, including its commitment to Česká finanční, and Banka Haná's stabilisation programme was terminated.
Following a judicial settlement under conservatorship, a new investor for Podnikatelská banka was approved. The bank now operates under the name J&T banka. Société Génerale Praha a.s. was transformed from a subsidiary into a branch. The privatisation of IPB was completed with the NPF selling its holding to the Japanese company Nomura, and a decision was taken on the state's advisers for the privatisation of the remaining banks with state ownership (ČSOB, KB and ČS).
Under the reorganisation of the CNB, the Czech-language designation of the CNB´s organisational units was changed; however to avoid confusion, the systém for naming these organisational units (departments and divisions) has been kept uniform throughout the English version of this report.