The Czech National Bank (CNB) developed its banking supervision activities in 2005 in line with the newly approved CNB Medium-term Banking Supervision Strategy for 2005-2010, focusing on performing the tasks set for the first year of the relevant period. The key strategic objectives in the regulatory area were to systematically elaborate and prepare for the introduction of the new capital adequacy framework (Basel II) and to enhance the comprehensive regulatory framework for banks and consolidated groups in compliance with the principles applied in the European Union (EU) so as to ensure prudential banking business yet allow healthy competition. In order to improve banking supervision, the priorities were defined on the basis of the recommendations of the International Monetary Fund's Financial Sector Assessment Program mission and the approved integration of financial market supervision.
In 2005, CNB Banking Supervision helped to prepare a whole range of banking-related legislation. One example is the Act on Financial Conglomerates. Banks and the CNB worked hard to prepare for the implementation of the new capital adequacy framework. In addition, the CNB devoted a large part of its resources to the legislative and material preparations for the institutional integration of financial market integration in the Czech Republic.
Act No. 377/2005 Coll., on Supplementary Supervision of Banks, Credit Unions, Electronic Money Institutions, Insurance Corporations and Investment Firms in Financial Conglomerates and on the Amendment of Certain Acts (Act on Financial Conglomerates), the major part of which took effect on 29 September 2005, represented a substantial legislative change in banking regulation and numerous other areas. This Act is important primarily because it implements "supplementary supervision' of some regulated entities (including banks) in financial conglomerates into Czech law in compliance with Directive 2002/87/EC..Moreover, it transposes Directives 2001/17/EC and 2001/24/EC, regarding the reorganisation and winding up of insurance companies and credit institutions, and also Directive 2002/47/EC on financial collateral arrangements.
In the context of the Act on Financial Conglomerates, an amendment was adopted to the Act on Banks specifying certain harmonisation provisions of the Act (relating primarily to supervision on a consolidated basis and co-operation between supervisory authorities) and reflecting changes in the Bankruptcy and Composition Act linked with the transposition of Directive 2001/24/EC. Owing to the adoption of the legislation on supplementary supervision of financial conglomerates, it exempts from banking supervision on a consolidated basis groups headed by a mixed financial holding company which constitute a financial conglomerate. The Act introduces a requirement to check the trustworthiness and experience of natural persons in executive managerial positions of a financial holding company controlling the bank, and the power of the CNB to insist that the financial holding company replace a natural person in an executive managerial position of such a company if such person is not sufficiently experienced or trustworthy (for details, see Decree No. 14/2006 Coll.).
Act No. 413/2005 Coll., on the Amendment of Laws in Connection with the Adoption of the Act on Protection of Classified Information and on Security Clearance, with effect from 1 January 2006, represented another change. This Act included among the persons and authorities entitled to ask banks to provide information subject to banking secrecy without the consent of the client the National Security Authority, the intelligence services and the Ministry of Interior when conducting security proceedings under the Act on Protection of Classified Information and on Security Clearance.
In 2005, the CNB issued new provisions and decrees and amended the existing ones, regulating and changing the regulatory framework for bank business. Further to the Act on Banks, as amended by the Act on Financial Conglomerates, the CNB issued Decree No. 14/2006 Coll. of 29 December 2005 regulating the supporting documents proving the trustworthiness and experience of persons in executive managerial positions of a financial holding entity. The Decree took effect on 16 January 2006. Provisions regulating the methodology and technology for reporting by banks and foreign bank branches to the Czech National Bank were issued.
In 2005, the CNB issued in its Bulletin two official information documents, Official Information stipulating the minimum requirements for disclosure of information by banks and Official Information of the CNB regarding the provisions of Article 41c (6) of Act No. 21/1992 Coll. on Banks, as amended. Official information documents are explanatory opinions or recommendations of the CNB; they do not constitute legal rules.
In 2005, the Czech National Bank continued its work relating to the preparation for, and implementation of, the new capital framework - usually referred to as Basel II. The first draft of the new framework was prepared by the Basel Committee on Banking Supervision (BCBS) in 1999. The most recent revised version, entitled "International Convergence of Capital Measurement and Capital Standards", was published by the BCBS in November 2005. The aim of the new capital framework is to support the stability of the financial system and the competitive environment on the financial services market and also to strengthen management responsibility. The new framework concentrates on more accurate risk measurement and on promoting enhanced risk measurement in banks. By applying more risk-sensitive approaches, banks can make better and more efficient use of capital to cover their risks.
Bilateral co-operation between CNB Banking Supervision representatives and partner banking supervision institutions and co-operation within international, mostly European, structures strengthened in 2005. This was due to the need to co¬operate closely in preparation for the implementation of Basel II and the CNB's active involvement in the work of the Committee of European Banking Supervisors (CEBS) and the European Banking Committee (EBC) and in the activities of the working groups established by these committees.
The area of memoranda of understanding (MoU) remains unchanged. The CNB has so far concluded eight memoranda of understanding: with the Netherlands, Italy, Slovakia, Austria, Germany, the USA (or, more precisely, the state of New York), Belgium and France. An MoU with the Russian Federation is under negotiation and is conditional on agreement being reached on the terms and conditions for co-operation with Russia at the EU level.
Until 31 March 2006, financial market participants were regulated and supervised by four different institutions in the Czech Republic. The Czech National Bank was responsible for the regulation and supervision of banks and consolidated groups containing banks; the Czech Securities Commission regulated and oversaw capital market participants; and the Czech Ministry of Finance was responsible for the regulation and surveillance of insurance companies and pension funds and partly for capital market regulation. The credit unions sector was supervised by the Office for Supervision of Credit Unions and regulated by the Czech Ministry of Finance. This diversified regulatory and supervisory structure required close co-operation.
In May 2004, the Czech Government decided on a plan to gradually integrate financial market supervision in the Czech Republic into a single institution. On 24 August 2005, the Government approved a proposal of the Czech Ministry of Finance and the Czech National Bank to accelerate the integration process and decided that supervision would be integrated into the Czech National Bank as of 1 April 2006. The integration involved the Czech National Bank, which has been responsible for performing banking supervision since its establishment, taking over as of this date supervision of credit unions from the Office for Supervision of Credit Unions, supervision of the capital market and collective investment from the Czech Securities Commission and supervision of insurance companies and private pension schemes from the Czech Ministry of Finance.
As an integrated regulator, the CNB is responsible for the financial regulation and supervision of the business activities of regulated financial institutions. The first mentioned competency consists mainly in the CNB, under the relevant laws, issuing subordinate legal rules and thereby setting detailed prudential rules for regulated financial institutions, and the latter competency involves licensing, off-site supervision, on-site supervision and imposition of remedial measures. Primary legislation falls within the field of competence of the Finance Ministry.
The integration of supervision into the Czech National Bank creates the necessary conditions for unifying the regulatory rules and the demands placed by the supervisory authority on the activities of bank and non-bank financial institutions. It will have the positive effect of enhancing competition. It will also be welcomed by financial institutions, as significant cost savings are expected to ensue.
The integration of supervision necessitated changes to the legislation, which were implemented through Act No. 57/2006 Coll., on the Amendment of Acts in Connection with the Integration of Financial Market Supervision. This Act transfers powers in the area of financial regulation and supervision to the CNB and amends dozens of other laws. Starting on 1 April 2006, most of the employees of the original supervisory authorities joined the Czech National Bank, which guaranteed them good working conditions. Continuity of supervision of financial institutions was retained. Numerous internal rules of the Czech National Bank were amended, the information system was adapted to the needs of integrated supervision and hundreds of employees were relocated to new offices in the CNB building.
The Committee on the Co-ordination of Financial Market Supervision, which dealt with co-operation between the CNB, the Ministry of Finance and the Czech Securities Commission, met three times in 2005. In addition to exchanging information and opinions on current banking regulation and supervision issues, the Committee focused primarily on the integration of financial market supervision and the merger of all the supervisory authorities into the CNB.
Control and analytical activities
In 2005, the Czech National Bank performed the role of regulator and supervisor of the banking sector. The powers of home and host supervisors were redefined after the country's accession to the EU. The CNB's banking supervisory competencies were partially limited. A change occurred in the case of foreign bank branches from EU countries, which the Czech National Bank continues to supervise primarily in the liquidity area and also monitors their compliance with the obligations set forth in the Act on Banks. In 2005, a total of 12 foreign bank branches having their registered offices in EU Member States operated in the Czech Republic under the single licence and the supervisory activities of the CNB have been significantly reduced in respect of such branches. Conversely, monitoring of notifications by foreign banks offering banking products and services on the Czech market has become part of the CNB's supervisory work. Owing to the high share of foreign owners in Czech banks and their prevailing orientation towards EU countries, the emphasis is on closer co-operation and communication with partner supervisory authorities in EU countries.
Banking supervision in the Czech Republic continues to take the form of off-site surveillance and on-site examinations. The main analytical instrument employed in off-site surveillance is regular comprehensive analyses of the financial condition of banks in relation to the risks they face. To identify potential negative tendencies in time, the monthly early warning information on each bank is regularly appraised, with development of the banking sector as a whole, and, where appropriate, individual segments, being also subject to analysis. Detailed, up-to-date aggregate information on the banking sector for professionals is published on the CNB website.
On the strength of the findings from off-site supervision and on-site inspections, remedial measures were imposed on a total of 13 banks. These measures required the banks concerned to eliminate shortcomings in their activities within a set timeframe. The elimination of shortcomings is monitored. In 2005, CNB Banking Supervision opened no penalty proceedings to revoke licences or impose fines for violations of the Act on Banks.
One application for a licence was submitted to the CNB as the banking regulator by an applicant based in a country outside the EU. The administrative proceedings had not been completed by 31 December 2005. The Czech National Bank obtained three notifications of the establishment of branches under the single banking licence principle. These notifications were received from home regulators supervising the foreign banks (the head offices of branches with a single banking licence).
In all, 14 administrative decisions were issued in 2005. The Czech National Bank issued four prior consents to the acquisition a qualifying holding in a bank; five administrative proceedings involved changes to banking licences (licence extensions at banks' request); one merger of two banks was approved; one bank was converted into a branch under the single licence; and one banking institution was allowed to open a branch under the single licence principle in Slovakia.
EU accession also opened up the Czech banking market to other banking institutions entitled to benefit from the free movement of services. In 2005, a total of 45 other institutions from EU Member States announced their intention to offer and carry on the mutually recognised activities in the Czech Republic (43 of which being banks, one a financial institution and one an institution authorised to issue electronic money instruments). By 31 December 2005, the total number of these institutions had risen to 108. Provision of cross-border banking services is not subject to a reporting duty to the CNB, but should not have the character of permanent economic activity. These institutions are supervised by the home country regulator.
The on-site examinations conducted in 2005 concentrated on the areas of credit, market and operational risk management, money laundering prevention and overall assessment of internal control systems. The CNB carried out ten examinations in ten banks. In-depth examinations of all the aforementioned areas took place in five banks, and inspections of the management of selected risks were conducted in the remaining five. Five credit risk examinations were conducted in five banks, focusing on credit risk management systems for transactions with non-bank clients; seven on-site examinations aimed at verifying systems for managing market risks, liquidity risk, and risks associated with trading on the financial market were carried out; inspections focusing on the management of operational risk, information systems and information technology were performed in five banks.
Organisation of CNB Banking Supervision
In 2005, regulatory and supervisory activities were covered by just one Banking Regulation and Supervision Department. The number of supervisors fell to 95 in 2005.
Since 1 April 2006, the CNB has been ensuring fulfilment of all existing and new tasks in the area of financial regulation and supervision by means of three departments. The Banking Regulation and Supervision Department is responsible for supervision of the banking sector and the credit unions sector. The Insurance Companies Regulation and Supervision Department is responsible for supervision of the insurance companies sector and the insurance intermediaries sector. The Capital Market Regulation and Supervision Department is responsible for supervision of investment firms, investment companies, open-end mutual funds, pension funds and regulated market organisers.
The number of entities of the Czech banking sector was up by one bank in 2005. The structure of the banking sector underwent partial changes. Two entities operating on the domestic banking market merged. One former medium-sized bank was converted into a foreign bank branch under the single licence and two foreign bank branches started operation during the year. No licence was revoked. As of 31 December 2005, the Czech banking sector consisted of 24 banks and 12 branches of foreign banks.
10 November 2006