In 2002, the Medium Term Conception of Banking Supervision for Period 2002 - 2004 was approved, making its priorities particularly the preparation of methodology using a risk profile of a bank or a consolidated group, including definition of methods of supervision and co-operation with local and foreign institutions, carrying out regular controls in banks, in an interval determined by the total risk and significance of the bank in the context of the sector, gradual re-licensing of all banks and branches of foreign banks, implementation of standard procedures in reviewing new shareholders and top managers of a bank, when imposing sanctions and handling applications for banking licences, provision for banking supervision in relation to joining the single market of banking services, joint implementation of the project "Development and Implementation of the New Basle Capital Accord in the Conditions of the Czech Republic" by CNB, Czech Banking Association and the Chamber of Auditors of the Czech Republic, and others.
Harmonisation of legislation with the community law was one of the main undertakings of the Czech Republic in relation to the preparation for accession to the European Union. Amendment to Act No. 21/1992 Coll., on Banks, as amended, which is a special piece of legislation governing basic aspects of activities of banks, came into effect on 1 May 2002. It followed the objective of attaining full compatibility with the laws of the European Community and with other international standards of banking regulation. As regards the subject matter, it focused, in particular, on the area of the licensing procedure, consolidated supervision, relations with auditors, introduction of the institute of a universal banking licence, provision for operation of the Central Register of Credits, etc. As a part of the related by-laws, the Central Bank prepared and, in the course of 2002, published new or amended regulations regarding licensing, consolidated supervision, including the definition of prudential rules in banking for consolidated groups subject to banking regulation and of terms and conditions for access to information in the Central Register of Credits operated by CNB.
In the course of 2002, a set of provisions came into force which lay down the minimum requirements for the management of market and credit risk, as well as a provision which lays down minimum requirements for internal control systems. These provisions represent a new direction in the field of banking supervision - one which accentuates quality of evaluation of prudent banking. A provision regarding reviewing the quality of receivables and creation of provisions which includes also some elements of a previously effective provision on acquisition of some types of assets which was cancelled. In the interest of maintaining a balance between consolidated and unconsolidated supervision, a provision concerned with operational risk adequacy of banks was also amended, together with rules for prudent banking on individual basis.
As a result of the amended Act on Banks which introduced better provisions for using firms of auditors for purposes of banking supervision, the Czech National Bank issued a provision laying down requirements for verification of the management and controlling system of a bank, including its risk management system. Changes in the area of accounting, effective as of 1 January 2002, together with new requirements for disclosure in relation to risk management systems which came as a result of the new duty to disclose the information as a part of the financial statements, produced the need to amend CNB disclosure provisions.
The amended Act on Banks allowed CNB to operate the automated credit register, thus helping banks to exchange information on creditworthiness and trustworthiness of business clients. Decree of the Czech National Bank No. 164/2002 Coll., of 10 April 2002, on terms and conditions for access to information in the Czech National Bank information database - the Central Register of Credits, lays down in particular those conditions which govern the logging of banks into the Central Register of Credits with requests for information. The Central Register of Credits has been in development in CNB since May 2000 and went live on 1 November 2002 - on the day when all banks began to supply the complete files of data as required by the new provision which lays down the methodology for submission of selected data for the Central Register of Credits by banks and branches of foreign banks in the Czech Republic.
An addition to the regulations and provisions of CNB are official communications which serve the purpose of providing an elaborate explanation of, for instance, certain provisions of CNB regulations and provisions, or of making a recommendation for application of regulatory principles in areas concerned by the communication, etc. In 2002, the total of 7 official communications were issued for the area of banking supervision; they concerned controlling agreements, banking disclosure, requirements for verification of management and internal control systems and reviewing of persons nominated for top management positions.
As a part of preparation of the New Basle Capital Accord, in 2002 a joint project of the Czech financial sector was launched, involving CNB, Czech Banking Association (CBA), individual banks and the Chamber of Auditors of the Czech Republic (CA CR). Its goal is to develop and effective communication platform and to engage the stakeholders in the process of meeting tasks arising from the implementation of NBCA.
Co-operation with foreign regulators continued on the grounds of the so-called Memoranda of Understanding which were signed in the course of 2002 or at the beginning of 2003 by regulatory authorities in Austria (Bundesministerium für Finanzen), Germany (Bundesanstalt für Finanzdienstleistungsaufsicht), France (Commission Bancaire) and the United States of America (State of New York Banking Department). A memorandum with the Belgian regulator is ready for signing. Moreover, proposals for signing of Memoranda of Understanding with regulators of the Netherlands and Italy are in negotiation.
The tri-partite Agreement on Co-operation of 1998 was amended in the course of 2002, and the amended version signed at the beginning of 2003, between the present financial markets regulators, i.e. the Czech National Bank, Ministry of Finance of the Czech Republic and the Securities Commission, to introduce in particular a framework for quality consolidated supervision.
Control and analytical work
Regular monitoring of activities of the bank is based in particular on regular quarterly analyses of the financial situation of banks, controlling observance of the principles of banking prudence and limits, and on monitoring changes in individual banks in a standardised structure. In order to capture any potential negative developments, every month signal information on the development of individual banks is evaluated for the purposes of banking supervision management, together with proposals for further actions and measures of Banking Supervision in relation to banks which display a negative trend. Like in the previous years, quarterly reports on the development of the banking sector including the rating of banks are made for the CNB Bank board, a new-type analysis oriented on the effect of macroeconomic conditions on the development of the banking sector and the outlook for new trends in relation of the expected accession to the EU and a public report on banking supervision in year 2001.
Based on the findings of off-site supervision and using the outcomes of on-site examinations, remedial measures were imposed on 13 banks, building societies and branches of foreign banks. The measures were principally obliging the bank in question to eliminate shortcomings in its activities, with a set deadline for remedy. The total of 126 non-administrative decisions were adopted which contained particularly approvals of external auditors of banks and setting the scope of requirements for the verification of the management and controlling systems of banks, approvals of shareholder structures before general meetings, approvals of inclusion of subordinated debt into a bank's equity, approval of consolidated groups of banks and opinions on proposals for amendment of general terms and conditions of building societies. Banking supervision issued 35 opinions on persons nominated for top management positions in banks, based on written documents presented and, in most cases, following an interview with the candidate in question. In the area of licensing and permissions, Banking Supervision, acting on its statutory powers, issued the total of 17 administrative decisions in 2002; in addition to granting new banking licenses, they concerned acquisitions of ownership interests in a bank. Further 5 administrative proceedings were instigated in 2002.
In the course of 2002, on-site examinations were made in ten banks, of which one was comprehensive and the rest partial, covering selected risk areas of the banks. On-site supervision includes also verification of the banks' own models, in relation to the possibility of the bank to use its own model for determination of operational risk requirements for their market risk and option contracts provided they have an approval of Banking Supervision to use it (first applications of banks for reviewing of their own models were received by Banking Supervision as late as December 2002), controls of information systems in banks and controls in the field of prevention of money laundering and financing of terrorist activities.
In order to obtain additional information on activities of banks, 25 small and medium banks and branches of foreign banks were paid the total of 56 informative visits in 2002, 53 of which were partial and 3 were comprehensive. Some of the calls were a part of the banking supervision survey of risk management in branches of foreign banks. Outcomes of the survey were used in preparation of the methodology for supervising branches of foreign banks.
In 2002, a more intense co-operation with regulators of other countries which supervise mother banks with daughter banks on the territory of the Czech Republic, or with head offices of foreign banks which operate in the Czech Republic, respectively. New contacts were established or present contacts enhanced with regulators in Slovakia, France, Germany, the Netherlands, Belgium and the United States of America.
Organisational arrangements for banking supervision
In 2002, the department Banking Supervision experienced changes aimed at adapting the organisation structure to tasks of Banking Supervision which arise from the Medium Term Conception. Starting from the beginning of 2002, off-site supervision (monitoring, analyses, relations with banks) concentrated into two divisions which always cover a whole group of banks sorted by size and orientation (large banks, building societies and specialised institutions in one division, medium, small banks and branches of foreign banks in the other). This arrangement allows for a better consideration of group specifics in discharging the functions of Banking Supervision. Issues related to administrative proceedings in the area of licences and sanctions are concentrated into one department concerned with licences and authorisation which also provides for the agenda of banks following a licence revocation.
On-site supervision is done by two dedicated departments which consist of four sections specialising in controlling individual risk areas. The first department covers the area of credit risk and management and internal control systems, the second one deals with market risk and information systems of banks. This arrangement created better grounds for more in-depth specialisation of banking supervision inspectors and for introduction of supervision in the area of information systems of banks.
As of 1 January 2002, the name of the department Banking Supervision Policy was changed to Banking Regulation Department. The number of employees of Banking Supervision was approximately 110 in the course of 2002.
The banking sector
As at 31 December 2002, the Czech banking sector comprised 37 banks and branches of foreign banks. In the course of 2002, the total number of banks decreased by one. After two years, on 16 June 2002, conservatorship imposed on IP banka was terminated. Based on a resolution of its general meeting of shareholders, the bank handed in its banking licence and terminated its banking operations as of 7 August 2002. As at 31 March 2002, the licence of the Prague branch of Societe Generale expired. Activities of this branch were gradually integrated into Komerční banka, a.s., following the entry of the parent bank Societe Generale into this banking house. One new banking licence effective as of 31 October 2002 was issued to company Wüstenrot hypoteční banka, a.s.