Supervision of credit institutions
Credit institutions consist chiefly of banks and credit unions. Credit unions differ from banks with respect to their legal form (credit unions can be established only as cooperative societies), the amount of capital they are required to have (CZK 35 million, as against CZK 500 million for banks) and the circle of clients for which they are authorised to carry on activities (for members only). Otherwise, credit unions are subject to essentially the same requirements as banks, especially as far as the prudential rules are concerned.
A credible and stable banking sector is one of the basic preconditions for a functioning economy. Unlike in the case of banks, the position of credit unions does not have fundamental bearing on the financial system as a whole. However, in addition to the historical reasons for the existence of credit unions, one should not overlook their significant positive effect on the current highly competitive environment, especially in the fields of retail deposit management and lending. Credibility, stability and competitiveness cannot be guaranteed by market mechanisms alone, so the activities of credit institutions are governed by a large number of restrictive and injunctive regulations, which chiefly take the form of legal rules (banking regulation). Overseeing adherence to these rules and ensuring accountability for any contravention of them is known as banking supervision (the term “banking supervision” often embraces banking regulation, too). Banking supervision forms a significant part of the supervision of credit institutions, which, in addition to banking supervision, includes supervision of credit unions.
Supervision of credit institutions is an integral part of maintaining the stability of the financial sector in the Czech Republic and promoting its sound and smooth development. This broadly defined objective means in particular supporting the sound development, market discipline and competitiveness of credit institutions, preventing systemic crises and strengthening public confidence in the banking system.It is not the aim of banking supervision, however, to prevent the failure of individual credit institutions at all costs, to substitute for courts and arbitrators in deciding on private law relationships between service providers and their clients, or to substitute for law enforcement authorities. The bodies of a credit institution are responsible for ensuring that its internal control system is functioning. The supervisory authority’s job is to carry out subsequent checks focusing on compliance with the regulations. The supervisor cannot itself prevent credit institutions from entering into loss-making transactions. If the supervisory authority uncovers any shortcomings, however, it is obliged to apply its remedial instruments, which can include revoking the credit institution’s licence or imposing conservatorship. These public law measures are intended to protect the financial market as a whole and to reduce the possibility of similar unlawful conduct happening in the future.
Under the Act on the Czech National Bank, supervision of credit institutions includes decisions on licence, permit and registration applications and prior approvals pursuant to special legal rules; inspection of adherence to the conditions stipulated in licences and authorisations; inspection of adherence to laws, insofar as the CNB has the power to conduct such inspections under the law or special legal rules; inspection of adherence to the decrees and provisions issued by the CNB; collection of information needed to perform supervision and its enforcement, and verification of whether it is true, complete and up-to-date; the imposition of remedial measures and penalties; and proceedings regarding administrative offences.
Banks’ activities are governed mainly by Act No. 21/1992 Coll., on Banks, as amended. The activities of credit unions are subject to Act No. 87/1995 Coll., on Savings and Loan Associations and Certain Related Measures and on the Amendment of Czech National Council Act No. 586/1992 Coll., on Income Tax, as amended. Under this Act, the CNB is authorised to issue provisions and decrees specifying more detailed licensing conditions and prudential rules for specific areas of business of credit institutions (Legislation).
Detailed information on banks: