In 2001, two principal pieces of legislation which came into effect in the following year were prepared with a close input of Banking Supervision. The amendment to the Act on the Czech National Bank provides for the legal position of the Central Bank, fully compatible with the requirements of the community law, including a definition of maintaining price stability as a priority objective. Secondly, it was the Act on Banks bringing the domestic legislation governing banking into compliance with EC law, in particular in those parts which concern licensing procedure, acquisition and increasing a qualifying holding in a bank, provision for relations between a bank, majority shareholders and related entities, broadening of supervision on a consolidated basis to include financial and non-financial holdings with participation of a local bank. This amendment provides also for the launch of the Central Register of Credits to be operated by the Central Bank.
Moreover, Banking Supervision participated in the preparation of an amendment to the deposit guarantee scheme (extending the insurance cover to deposits in foreign currencies, increasing the insurance cover to the equivalent of EUR 25 thousand), actively participated in the process of commenting the amendment to the Accounting Act (effective as of 1 January 2002).
As regards by-laws, the CNB department Banking Supervision prepared, in the course of the year, measures determining the methodology for submission of selected information, to be captured as debtor data in the Central Register of Credits, and CNB Provision on Standards for Liquidity Management of Banks (laying emphasis on the bank's own strategy for liquidity management, laying down the required minimum standards).
In 2001, the need was becoming more and more evident for continuous improvement of efficiency of communication and co-operation of CNB with other regulators, both local and foreign, as a result of the key position of the banking sector within the financial system of the Czech Republic, improving the role of financial groups and installing the decisive role of foreign operational risk in domestic banking. Preparation started of the new tri-partite Agreement on Co-operation between CNB, KCP (the Securities Commission) and the Ministry of Finance of the Czech Republic (giving a clear definition to the forms of co-operation in the field of consolidated banking supervision). In relation to the terrorist attacks on the United States of America, Banking Supervision enhanced its co-operation with involved authorities, in particular with the Financial Analytical Unit of the Ministry of Finance.
Co-operation with foreign regulators is based on Memoranda of Understanding, detailing the primary areas of co-operation, information exchange and joint actions vis-a-vis subsidiary companies and branches of foreign banks in discharging banking supervision. In 2001, a Memorandum of Understanding was signed with the Ministry of Finance of Austria, and similar agreements with authorities of other countries whose banks operate in the Czech Republic were in preparation. Informal co-operation with foreign supervisory authorities in provision of information of shortcomings found in their home country banks operating in the Czech Republic also continued. Moreover, co-operation within the regional banking supervision group for Central and Eastern European countries also continued.
Banking supervision actively engaged in the preparation of the New Basle Capital Accord. The new rules are more sensitive in terms of measuring and managing credit risk, newly include operational risks and are consistent in the area of market risk. It is a comprehensive system of rules for improving the method of measuring banking business risk.
At the beginning of 2001, the Financial Sector Assessment Programme (FSAP) was completed; it was a programme organised by the joint mission of IMF and the World Bank. At the end of 2001, in the presence of experts of the European Commission, the so-called Peer Review took place, directed at verification and evaluation of progress in the area of harmonisation of the Czech law with the EC law in the area of banking, financial markets and transactions on one hand, and at the extent with which the legislation is being integrated in the discharge of banking supervision and supervision over other entities of the financial system on the other. Both missions appreciated the progress made by CNB Banking Supervision so far and recommended to direct future efforts in particular on the issues of the banking supervision on a consolidated basis for financial and mixed-activity holdings, reviewing risk profiles of banks, concentrating on qualitative issues of supervision, in particular when on-site examinations are concerned, implementation of a system for quality assurance and effectiveness of banking supervision, etc.
Control and analytical work
As a part of its analytical function, Banking Supervision focused regular activities of the past years. The Bank board was presented with quarterly periodical summary analyses of the banking sector development, with emphasis on evaluation of banking risk, including the rating of individual banks. Based on a detailed analysis, an estimate of the main directions for development of the banking sector. Like every year, the report on the banking sector in the previous year was published. In addition to the signal information, detailed analyses of activities of individual banks were prepared on as needed basis, to be used as a starting position for proposing further actions in the event of a negative development.
Practical discharge of banking supervision was based on the practices of off-site supervision and on-site examinations, including all related activities. As concerns off-site supervision, the activities focused primarily on processes relating to the restructuring of the banking sector, by way of completion of privatisation of state stakes in large banks and concentration of the sector by means of mergers and acquisitions.
In 2001, CNB Banking Supervision adopted 17 administrative decisions (in particular regarding amendments to licenses to operate as a bank, acquisitions of ownership interests in banks, sale of a company or its part), two additional administrative proceedings were instigated. In addition to the administrative decisions, 89 other decisions (opinions on auditors of banks, approvals of shareholder structures before general meetings, approvals of inclusion of subordinated debt into equity and approvals of consolidated groups) were adopted. In 30 instances, CNB Banking Supervision gave its opinion on persons nominated for top executive management positions in banks. The total of 13 banks were imposed 17 remedial measures, primarily an order to eliminate shortcoming in their operations.
In 2001, the total of 12 on-site examinations were made, of which 9 were comprehensive and 3 were selective - focusing on specific types of banking risks. Activities in on-site examinations have largely shifted to evaluating management and internal control systems of banks. Another important aspect of on-site examinations is the verification of integrity of reporting to the regulator, and quality, safety, reliability and appropriateness of information systems and technology. Another part of supervision are informative visits of which 19 were made in 11 banks during the course of 2001. They covered primarily the areas of strategy, business plans, financial performance of banks, partial examinations of credit portfolios, controlling the compliance with measures imposed for remedy of shortcomings and the preparation of on-site examinations. In the area of fighting terrorism, Banking Supervision was the co-ordinating unit between the Financial Analytical Unit of the Ministry of Finance of the Czech Republic, the Ministry of Foreign Affairs banks and branches of foreign banks, in the course of identification of bank accounts of persons suspected of illicit financial transactions.
Organisational arrangements for banking supervision
In the course of 2001, Banking Supervision incurred partial changes in terms of its organisation, all aimed at making the activities of banking supervision more efficient. In the department Banking Supervision Policy, a separate section was established to deal with legal issues. In the department Banking Supervision, a more of a principal change was being prepared in the concept, in particular of the on-site examination, to be implemented in 2002. In 2001, recruitment of additional 15 members of staff for banking supervision was approved (partly effective as of 1 January 2002), in pursuit of strengthening of the methodological and analytical function of supervisory teams. Yet, the scheduled number of staff was still not reached.
The banking sector
The number of banks in the banking sector declined in the course of 2001 to the final 38 banks and branches of foreign banks. The reduction in the number of banks by two came about as a result of a merger of HypoVereinsbank CZ and Bank Austria Creditanstalt Czech Republic into a new entity HVB Bank Czech Republic, a. s., and of transformation of Konsolidační banka to Česká konsolidační agentura (Czech Consolidation Agency, no longer operating as a bank). The privatisation of the state stake in Komerční banka was concluded by way of a sale to Societe Generale of France. IP banka continued to operate under conservatorship.