Year 2003
In 2003, Czech National Bank's banking supervisory activities developed in line with the medium-term plan approved for the three years to the end of 2004. Priorities were defined in compliance with the principles of the Basle Committee on Banking Supervision and the recommendations of the Financial Sector Assessment Program mission 1 .
Methodological activities
In 2003, CNB Banking Supervision helped to prepare a whole range of banking-related legislation. This included, among other things, an amendment to Act No. 99/1993 Coll., on Building Savings Schemes and State Support for Building Savings Schemes, and the Act on Capital Market Business. The act relating to building societies, which entered into force on 1 January 2004, changed in particular the amount and terms and conditions of the state support and to some extent modified building societies' licensing and scope of activities. Act No. 256/2004 Coll., on Capital Market Business, harmonises the capital market business rules with EC law with effect from 1 May 2004.
In 2003, the Czech National Bank started to draft new provisions and decrees and amend existing ones regulating and changing the regulatory framework for bank business.
A Provision on the Internal Control System of a Bank was created by combining the original provisions on the internal management and control system of a bank, credit and market risk management and liquidity risk management, and by newly incorporating requirements for internal audit, operational risk management and information systems. This integrated set of regulatory requirements lays the groundwork for effective internal control systems in banks.
A separate provision stipulates minimum requirements for information disclosure, including requirements for the annual reports of banks only, not branches of foreign banks.
Based on the Anti-Money Laundering Act, a Provision stipulating the Internal Control System of a Bank for the Area of Money Laundering Prevention was issued, with the aim of minimising the risk of banks being misused for money laundering. The provision sets rules for applying the "know-your-customer" principle and defines procedures which will be modified by banks according to their size, the nature of their activities and their management methods.
An amendment to the Provision stipulating Rules for the Assessment of Financial Receivables and the Creation of Provisions and Reserves, and Rules for the Acquisition of Certain Types of Assets enables banks to acquire participations in affiliates, provided that the latter are not persons having a qualifying holding in the bank or acting in concert. For these cases the prohibition on acquiring a participation or subordinated receivable remains in force.
On 1 January 2003, a Provision on Capital Adequacy of Banks and Other Prudential Rules on a Solo Basis entered into force, aimed at harmonising the calculations of capital adequacy, credit exposure and other parameters of prudential business on a consolidated basis with those on a solo basis.
On the Czech Republic's date of accession to the European Union, the provisions of the Act on Banks concerning the single licence took effect. In 2003 preparations were commenced for applying the single licence. Discussions were held with both foreign and domestic regulators, focusing on regulations relating to entities operating under the single licence regime, on the reports and information to be submitted to the Czech National Bank and on methods of co-operation. As a result of the single licence, the banking supervisory powers of the host state have changed, requiring closer co-operation between the Czech National Bank and other regulators from EU member states. In this regard, the impacts on the supervisor's activities and the structure of the banking sector were analysed.
The Czech National Bank issued official information on certain provisions of the Act on Banks relating to the single licence, specifying the CNB's policy vis-à-vis entities enjoying the benefits of the single licence. Further supervision-related official information releases dealt with disclosure of information by banks and branches of foreign banks, the CNB's policy on the selection of auditing firms (defining independence criteria for auditors), the procedure for submitting shareholder lists prior to AGMs, the risk weight for receivables from the European Investment Bank, and the information duty compliance procedure.
The year 2003 also saw continued intensive work on the preparation of the new capital concept to be implemented in 2007, in a joint project of the CNB, the Czech Banking Association and the Czech Chamber of Auditors. Particular attention was devoted to the preparation of the EU directive in this area; the CNB has the option of making comments and thereby influencing the wording of the directive.
Owing to the Czech banking sector's prevailing foreign ownership and the preparations for EU accession, CNB Banking Supervision became increasingly involved in international co-operation. Banking Supervision representatives joined ECB and EC committees and working groups on banking supervision and stability as observers. Co-operation continued with the Basle Committee on Banking Supervision in the Core Principles Liaison Group and the Working Group on Capital. Particular emphasis is laid on bilateral relations with foreign supervisory authorities, based on Memoranda of Understanding. Six MoUs had been signed by the end of 2003, with the regulatory bodies in Austria (Bundesministerium fur Finanzen), France (Commission Bancaire), the USA (State of New York Banking Department), Germany (Bundesanstalt for Finanzdienstungsaufsicht) and Belgium (Commission Bancaire et Financiere). MoUs with regulators from the Netherlands and Italy are under negotiation.
An amendment to the tripartite co-operation agreement between the domestic financial market regulators (the CNB, the Ministry of Finance of the Czech Republic and the Czech Securities Commission) was signed at the beginning of 2003 with a view to promoting quality supervision on a consolidated basis. In 2003, discussions on the possibility of establishing a single financial market regulator were opened in the Committee on the Co-ordination of Financial Market Supervision.
Control and analytical activities
In line with the regulations for banking supervision on a consolidated basis, the supervisor's work in this area was significantly broadened in 2003. Under the amendment to the Act on Banks, the concept of supervision on a consolidated basis was extended to groups headed by a financial holding company or a mixed-activity holding company. From the banking supervision perspective, banking financial groups form regulated consolidated groups headed by a controlling bank (parent undertaking). Banking supervision is performed with respect to general risk regulation and with respect to the risk arising from membership of a financial group. Banks started to submit consolidated reports on a quarterly basis, and the co-operation and exchange of information between domestic and foreign regulators was enlarged. In all, ten regulated consolidated groups are being supervised on a consolidated basis.
Banking supervision on a solo basis involves continuous appraisal of all available information on banks' activities, in particular the statements and reports regularly submitted by banks, auditors' reports, the results of on-site examinations and information-gathering visits, etc. The basic analytical instrument employed for off-site surveillance is regular comprehensive analyses of the condition of banks in relation to the risks they undertake. To catch negative tendencies in time, monthly signal information on each bank is regularly appraised, with proposals being made as regards further supervisory action in banks showing negative trends. In 2003, auditors' reports on banks' internal control systems and risk management systems for 2002 (commissioned for selected banks in a precisely specified scope tailored to their individual risk profiles) were used as a source of information for the first time.
Standard banking sector analyses containing bank ratings - submitted half yearly to the CNB Bank Board - remained a regularly processed analytical instrument in 2003. A "Financial Stability Report" - a detailed analysis of the banking sector to assess the mutual effects of macroeconomic influences and potential developments in the banking sector - was produced for the first time. The regular banking supervision report is targeted primarily at banking professionals.
On the strength of the findings from off-site supervision and on-site inspections, remedial measures were imposed on a total of 18 banks. Most of these measures required the banks concerned to rectify shortcomings in their activities within a set timeframe. The elimination of shortcomings is always monitored.
In the area of licences and permits, CNB Banking Supervision opened a total of 30 administrative proceedings in 2003 (five to extend a licence, two to revoke a licence and two to impose a fine, and the rest concerning changes in shareholder structure or the acquisition of holdings in banks by new, as a rule foreign, shareholders). A key activity was the re-licensing of banks and branches of foreign banks. Based on the harmonisation amendment to the Act on Banks, this process involved bringing banking licences into line with the banking regulations in force on the Czech Republic's EU accession date. By the end of 2003 the re-licensing process had been completed in 11 banks. The situation of branches of foreign banks will be dealt with under the single licence following EU entry.
In all, 124 decisions were issued outside the framework of administrative proceedings, including approvals of external bank auditors and specifications of the scope of requirements for auditing banks' control systems; approvals of shareholder structure prior to general meetings; consents to the inclusion of subordinate debt in capital; consents to early repayment of subordinate debt; approvals of internal models for the calculation of capital requirements for market risks; notifications of termination of supervision of a consolidated group; specifications of the type of a consolidated group; and, in the case of building societies, opinions on proposed changes to general business conditions. CNB Banking Supervision issued 21 opinions on persons nominated for managerial positions based on written documents and, in some cases, on interviews conducted with the candidates. One bank was given permission to use its own model for setting capital requirements for market risks.
In 2003, CNB Banking Supervision undertook 18 inspections in 15 banks and foreign bank branches (two of them comprehensive and 16 partial) focused on selected areas of risk faced by banks. All the main risk areas (comprehensive inspections) and specific risks (partial inspections) are subject to inspection.
Organisation of CNB Banking Supervision
There were no major organisational changes in CNB Banking Supervision in 2003. The number of supervisory staff also remained unchanged, at around 105.
The banking sector
Two banks in the Czech banking sector - Union banka and Plzeňská banka - had their banking licences revoked in 2003. After having been declared bankrupt, both banks are in liquidation and bankruptcy. No new bank has entered the domestic banking market.
As of 31 December 2003, the Czech banking sector consisted of 35 banks and branches of foreign banks.
7 June 2004
The Financial Sector Assessment Program was conducted by the International Monetary Fund and the World Bank on the basis of an identification of the sector's strengths and weaknesses and system problems, including areas which need to be improved so that the sector can develop and be stable. An integral part of the FSAP is an assessment of compliance with relevant international financial sector standards. The assessment of the Czech Republic's compliance was carried out between 28 November 2000 and 12 December 2000.