The Supervisory Strategy of the Czech National Bank
The Czech National Bank endeavours to supervise the financial market and its institutions in accordance with international standards. It actively monitors developments in this area and prudently implements new requirements or initiates steps to implement them.
The key strategic framework for the supervisory work of the Czech National Bank is the Core Principles for Effective Banking Supervision1) published by the Basel Committee for Banking Supervision in 2012. This strategy therefore:
- reflects, in its structure, the principles of this document relevant to supervision,
- indirectly declares identification with the specific requirements of this document, and
- briefly comments on how those requirements are implemented.
Responsibilities, objectives, powers, independence, accountability and resourcing
The Czech National Bank develops a system of financial market supervision that has clear responsibilities and objectives2). In its supervisory activities, it effectively applies its legal powers, all the while pursuing its main objective, namely to safeguard the stability of the financial system of the Czech Republic. Supervisory actions are taken in a timely manner in a form that is appropriate to the situation to which they respond. When proposing sanctions, the supervisor draws on the full range of options laid down in the legislation. It does its work with respect to the powers of other units of the state, with the aim of effectively fulfilling the Czech National Bank’s mission in the supervisory area.
The Czech National Bank applies its legally defined independence in the area of supervision3). This independence gives it full discretion to take actions against supervised institutions. The Czech National Bank takes organisational measures to ensure that supervision is independent of any other activities that might give rise to a conflict of interest with its supervisory work. In its supervisory work, it takes into account the conclusions of financial stability analyses conducted within the framework of macro-prudential policy and provides feedback to ensure that the regulatory framework reflects practical supervisory experience.
To ensure that supervision is transparent to the public, the Czech National Bank issues reports on supervisory activities4) and communicates major supervisory actions and selected findings and approaches in a prompt and flexible manner.
Supervision is organised so that information flows smoothly and appropriate decisions are taken at every level of governance. The Czech National Bank applies measures to avoid conflicts of interest between its supervisory work and the private interests of its staff. The Czech National Bank provides adequate resources, including material resources, to ensure independent, competent and effective supervision. When allocating its resources, it takes into account systemic supervisory priorities based on the risk profile and systemic importance of supervised institutions.
The Czech National Bank performs supervision that is based on a forward-looking assessment of the risk profile of supervised institutions, proportionate to their systemic importance5). This system identifies material risks relating to their activities and quantifies their impact. It also captures systemic risks regarding the behaviour of financial market participants. The Czech National Banks determines the intensity of its supervision of individual areas of the financial market and specific institutions on the basis of the outputs of this system. When performing supervision, the Czech National Bank assesses compliance with legal requirements in the areas of prudence and professional care. These two areas are supervised in a mutually consistent manner, reflecting the links between them.
Supervisory techniques and tools
The Czech National Bank applies its supervisory powers by means of off-site and on-site supervision6). Off-site surveillance is chosen with regard to its effectiveness in each specific case. Supervision is planned systematically and performed in accordance with internal policies to ensure internal consistency.
In its supervisory activities, the Czech National Bank uses a wide information base encompassing both publicly available and confidential information. The information obtained is subject to both regular and extraordinary (thematic) assessments based on analytical tools developed by the Czech National Bank. These tools include regular Supervisory stress tests of banks and insurance companies7) and a system for monitoring financial market transactions. The supervisor communicates relevant findings to supervised entities using both formal and informal communication tools. The specific form of communication is selected with regard, among other things, to the need to ensure that effective corrective action is taken and that supervision has a preventive effect. The supervisor undertakes follow-up to check that corrective action has been taken.
The Czech National Bank generalises selected findings and expectations and publishes them in the form of official information or replies to frequently asked questions.
Czech National Bank supervisors are in frequent contact with the senior management of systemically important institutions and communicate on an ongoing basis with middle management. The purpose of such contacts and communication is to develop a detailed knowledge of the strategy of the supervised institution and a general overview of its governance and relations with other members of the business group to which it belongs. The senior management of systemically important institutions is also directly presented with material supervisory findings and any other topics of special importance.
The Czech National Bank has a system of regular reporting by supervised institutions and their consolidated groups8). The reports defined by the Czech National Bank contain both financial and non-financial data. Supervised institutions are obliged to have internal mechanisms in place to ensure that the reported data are correct. Czech National Bank supervisors verify the reported data and request corrections where shortcomings are identified. The management of the supervised institution is responsible for the correctness of the information reported.
The range of information that the Czech National Bank uses for supervisory purposes extends beyond the regularly reported information. The supervisor may, for example, request internal analyses, internal documents on specific transactions (including primary accounting documents) and other internal documents of the supervised institution. In some cases, it is also entitled to request information from persons not subject to its systematic supervision.
An essential element of supervision is that the Czech National Bank supervises groups of financial institutions on a consolidated basis9). The aim of this activity is to identify links between the risks that can arise at group level and the stability of the supervised institution. When performing consolidated supervision, the Czech National Bank requires these risks to be managed effectively.
Consolidated supervision involves regularly collecting and assessing relevant data on the group. The supervised institution (responsible person) is obliged to give the Czech National Bank access to all material information from individual subsidiaries and branches in the group, without the need for assistance from any other (foreign) supervisory authority. In the framework of consolidated supervision, the Czech National Bank works in cooperation with foreign supervisory authorities, regularly communicates with the management of important subsidiaries and branches that are members of the consolidated group, and examines their risk profile and systemic importance. Where significant risks are detected in the activities of such subsidiaries and branches (risks having an impact on the consolidated group), the Czech National Bank initiates corrective action.
Cooperation with other supervisory authorities
The Czech National Bank has a framework – based on legislation or specific agreements and arrangements – for cooperation with other (foreign) supervisors10). Among other things, the framework provides for protection of confidential information shared by supervisory authorities.
The Czech National Bank cooperates actively with other (foreign) supervisors to ensure effective supervision within its area of competence and coordinated handling of crisis situations.
Where the Czech National Bank is the home supervisor, it establishes a supervisory college and manages the work of the college, which is the basic platform for cooperation. In doing so, it takes into account the risk profile and systemic importance of the supervised group and of the individual institutions that make up the group.
Where the Czech National Bank is the host supervisor, it coordinates and plans its activities in cooperation with the home supervisor, identifying areas of common interest. It aims for open communication and close cooperation with the home supervisor in order to cover its area of competence effectively. Such communication mainly concerns material risks relating to the supervised group or to the institution subject to supervision by the Czech National Bank. The Czech National Bank participates in on-site inspections organised by the home supervisor and allows the home supervisor to participate in inspections conducted by the Czech National Bank.
Cooperation with European institutions
The Czech National Bank cooperates in the area of supervision with European institutions (the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority) on unifying supervisory procedures and creating conditions for close cooperation between home and host supervisors.
1) In terms of content, these standards are broadly equivalent to similar documents published for other sectors, for example the Insurance Core Principles, Standards, Guidance and Assessment Methodology published by the International Association of Insurance Supervisors.
2) Principle 1: Responsibilities, objectives and powers.
3) Principle 2: Independence, accountability, resourcing and legal protection for supervisors.
4) Financial market supervision reports, which the Czech National Bank is legally obliged to produce and which are discussed by the Parliament of the Czech Republic.
5) Principle 8: Supervisory approach.
6) Principle 9: Supervisory techniques and tools.
7) Bottom-up stress tests based on detailed information about individual supervised institutions.
8) Principle 10: Supervisory reporting.
9) Principle 12: Consolidated supervision.
10) Principle 3: Cooperation and collaboration; Principle 13: Home-host relationships.