The supervisory work in 1999 was governed by the plan approved by the CNB Bank Board at the beginning of the year. This plan was an elaboration of the medium-term conception adopted in the preceding year.
Two key CNB provisions were issued in July - one on banks' capital adequacy, including credit and market risks, which will enter into force on 1 April 2000, and one stipulating the terms for supervising banks on a consolidated basis. In view of their importance, great attention was paid to the drafting of both provisions, including consultations with banks and the Banking Association. The two provisions mean a qualitative change in banking supervision methodology. A CNB provision and decree were also issued regulating the procedures for licence applications and for requests for permission to acquire bank shares.
The Banking Supervision Group actively contributed to the drafting of amendments to the Act on Banks and the Act on the CNB to harmonise them with EU law, and commented on revisions to other acts concerning the financial market and the banking sector (revisions to the Act on Securities, the Act on Bonds, the Bankruptcy and Composition Act, the Public Auctions Act and the Commercial Code).
In shaping the structure of the banking sector, the Banking Supervision Group contributed to preparing the privatisation of large banks and the restructuring of transformation institutions in accordance with the decisions of the Czech Government (Konsolidační banka, Česká exportní banka, Českomoravská záruční a rozvojová banka and Česká finanční).
In 1999, the Twinning Programme 1 for banking supervision was launched. This is aimed at bringing regulatory methodology (market risk, supervision on a consolidated basis, capital requirements based on a bank's risk profile) and the practical implementation of supervision (analyses of banks' financial positions, procedures for on-site inspections) into line with the standards usual in the EU.
In international relations, an agreement was concluded on co-operation in banking supervision between the CNB and the Slovak National Bank, while negotiations on co-operation with the banking supervisory authorities in Germany, Holland, Austria and Poland are at an advanced stage. The fundamental obstacle to closer co-operation with our partners is, however, the fact that the Czech legislation does not allow the home banking supervisor to carry out on-site inspections in branches or subsidiaries of foreign banks in the Czech Republic.
International appreciation of our banking supervisory work was reflected in an invitation for representatives from the Czech Republic, and a number of selected countries outside the G10, to participate in work on a new framework for capital adequacy and on an evaluation of the Core Principles within the Basle Committee on Banking Supervision. In addition to this co-operation, intensive contacts continued with the World Bank, the International Monetary Fund and the Bank for International Settlements (BIS), and with banking supervisors in Central and Eastern Europe.
Control and analytical work
Supervisory activities that had proved their worth in previous years were retained. The Banking Supervision Group produced aggregate analyses of developments in the banking sector each quarter, paying greater attention to evaluating banking risks and including ratings for individual banks. The Banking Supervision Group also produced and published a report on banking supervision and the banking sector for 1998. In addition to these aggregate reports, analyses of individual banks and evaluations of signal information were produced for banking supervision management, with proposals for subsequent approaches and measures for banks displaying negative tendencies. Where banks had more serious problems, documents were produced for the CNB Bank Board containing proposals to adopt fundamental measures for individual banks (Universal banka, Foresbank and Moravia banka).
The Banking Supervision Group carried out five comprehensive on-site inspections in Živnostenská banka, Česká Spořitelna, J&T banka, Investiční a poštovní banka and Credit Lyonnais Bank. This lower number of comprehensive on-site inspections was the result of the capacity demands for inspections in large banks; owing to the size of their balance sheets and the complexity of their management mechanisms, such inspections must by carried out by at least two teams (e.g. around 15-20 inspectors worked for eight weeks on the inspection of Česká spořitelna). In view of the situation in the Czech Republic, the main weight of the inspection teams' work consists in assessing the quality of assets, above all the credit portfolio, as credit risk remains the most significant risk for banks. However, in line with international trends, inspections are focusing more on appraising banks' risk management and internal audit systems.
In addition to comprehensive inspections, there was a series of information visits aimed at individual areas of banks' activities. In addition to ordinary banking activities, considerable emphasis was placed in 1999 on preparing banks for problem-free transition to the year 2000 (the Y2K problem). The Banking Supervision Group therefore visited all banks and branches of foreign banks at least once to ascertain their readiness and to implement the relevant CNB provision for this issue.
Organisational arrangements for banking supervision
There were no changes to the organisational arrangements for banking supervision. Unfortunately, it was not possible to fulfil the plan to establish four inspection teams, so three teams carried out the inspection work. The average number of supervisory staff was just under ninety during the year.
The banking sector
The number of banks and branches of foreign banks operating in the Czech-banking sector fell further to 42. At the beginning of the year, Universal banka's licence was revoked - in 1998 it had been taken out of the Stabilisation Programme and administrative proceedings had been commenced against it owing to its capital adequacy falling to below one third of the prescribed limit. At the end of March, Foresbank's general meeting decided to terminate its activities. Following its partial sale to Union banka, Foresbank had not conducted any further activities and had settled its payables due to depositors. In November, Moravia banka's licence was revoked owing to persistent serious shortcomings in its activities.
The ongoing economic decline and the related worsening in the economic situation of debtors continued to adversely affect banks' financial results and the quality of their assets. Persistent shortcomings in the legal environment preventing banks from recovering receivables from debtors, together with the diminishing creditworthiness of the business sector, contributed to a decline in lending and the maintenance of a relatively high ratio of classified loans to total loans. These negative trends also affected large banks. The state, as main shareholder, contributed to strengthening Česká spořitelna and Komerční banka's capital and cleaning up their balance sheets.
Significant in terms of the future of the banking sector was the progress made in the privatisation of the large banks. The Belgian KBC Bank became the majority owner of ČSOB, while exclusive discussions are underway on Česká spořitelna with the Austrian Erste Bank. An advertisement for the sale of the state's holding in Komerční banka was published and an information memorandum is being produced. According to forecasts, the sale of both banks should be completed by mid-2000. Several private banks were also looking for strategic partners - without a transfer of know-how and capital, these banks have no prospects in the increasingly competitive banking market.
Under the programme, countries wishing to join the EU are allocated a partner country which assists in preparations for accession. The Czech Republic's partner for supervising banks and insurance companies is Germany, with Greek experts participating in parts of the programme.