1 Stabilisation in the number of banks operating in the banking sector
2 Decisive influence of major banks
3 Structure of banks' operations is changing
4 Gradual increase in banks' capital
5 Growth in reserves and reserve funds
6 CNB provision on credit classification
7 Increase in classified credits
8 Kreditni a prumyslova banka still under conservatorship
9 Banka Bohemia is undergoing liquidation
10 Administration procedures for license withdrawal from AB banka
11 No signs of instability in the banking system
12 Banking supervision powers strengthened
13 Insurance introduced for natural persons' deposits
1) During 1994, the increase in the number of banks in the Czech Republic continued to slow considerably. The number of banks which had obtained a license to operate as a bank or as a foreign bank branch reached 58 by 30 September 1994. As a consequence of certain problems in the banking sector, evaluation of new applications for banking licenses has become significantly stricter and for that reason only two building and loan associations were permitted. Of the total number of 58 banks, one was under conservatorship (Kreditni a prumyslova banka) and one undergoing liquidation (Banka Bohemia).
Structure of the banking sector as of 30 September 1994
. 16 commercial banks without foreign participation
. 14 commercial banks with partial foreign participation
. 11 commercial banks with 100% foreign participation
. 10 foreign bank branches
. 6 building and loan associations with partial foreign participation
. 1 state-owned financial institution (Konsolidacni banka)
2) Developments in the banking sector as a whole are influenced primarily by the activities of major banks (Ceska sporitelna, Komercni banka, Investicni a Postovni banka, Ceskoslovenska obchodni banka and Agrobanka). These banks hold a share of about 80% in most basic indicators and more than 90% in reserves and reserve funds. However, the share of foreign banks and foreign bank branches is increasing because their wider activities are being affected by the positive evaluation of economic development in the Czech Republic.
3) During 1994 to date, certain trends have appeared towards a change in the structure of banks' asset and liability trading. In spite of the fact that credit and deposit activities and inter-bank deposits predominate in bank activities, a certain trend towards investment banking (trading in securities on own account) can be seen, the volume of highly liquid assets is strengthening (T-bills, CNB bills and NPF bills) and banks can also offer operations securing rate risks.
In the area of liability operations, a marked orientation toward strengthening of primary deposit volumes in banks' structure of resources is apparent, especially for small banks, in connection with certain difficulties in obtaining funds on the inter-bank market. In comparison with previous years, the share of refinancing resources from the CNB has decreased considerably as a consequence of principal changes in providing such resources. Gradually, some banks are attempting to acquire additional resources to cover their asset operations by issuing their own bonds.
4) Due to last year's stricter licensing conditions, banks are gradually increasing their basic capital. A significant increase in banks' capital had already occurred during 1993. In the monitored period, underwritten capital and paid-up capital increased by another 19.5% and 17.2% respectively, major banks being quicker in repaying the basic capital. The total share of paid-up capital accounted for 96% of the underwritten capital, which means that in comparison with previous years, the level of paid-up capital increased.
5) Given the relatively low quality of credit portfolios, most banks concentrate on increasing their reserves to cover possible losses. As of 30 September 1994, reserves earmarked to cover losses on credits increased by 36%. The most dynamic growth (more than double) was recorded by small banks; but this increase is from a lower base. The volume of reserve funds dropped by CZK 6.9 bn, primarily due to CSOBīs coverage of some loss items, while for other banks this type of reserves continued to rise.
6) Risky credits are the greatest current problem of commercial banks, especially small ones. Since they have not yet been classified in a standardised fashion, the CNB has adopted a provision to institute principles of credit classification and creation of reserves and provisions for these credits. Under this provision, the extended credits are grouped into five categories according to the degree of depreciation: standard, watched, non-standard, doubtful and loss.
7) In connection with this provision, the volume of classified credits increased more than threefold compared to the year-beginning and reached CZK 289 bn as of the end of September; classified credits thus represented 35.7% of the total amount of granted credits. The possible loss amount reflecting the degree of risk for individual credits was CZK 167 bn (20.7% of the total amount).
About 50% of possible losses are covered by reserves and provisions; when reserve funds are included, the coverage amounts to 80%. This calculation, however, does not take into account possible high-quality securing of receivables which can, to a certain extent, decrease the amount of possible losses. The issue of risky credits applies primarily to small banks, while in foreign banks, risky credits virtually do not occur.
8) Conservatorship has continued in Kreditni a prumyslova banka, imposed in September 1993 due to the fact that this bank was unable to meet its commitments. A bankruptcy petition has been filed, the protection period has expired, but the court has not yet decided on composition.
9) The grounds for placing Banka Bohemia under conservatorship were the issuance by this bank of Prime Bank Guarantees and Bank Guarantees by which it violated the Foreign Exchange Act, the Act on Banks and the Act on Accounting. For that reason, Banka Bohemia's foreign exchange license to carry out international payments was withdrawn and measures ordered to remedy shortcomings detected. The situation did not improve, however, and on 31 March 1994, Banka Bohemia was placed under conservatorship. Clients of this bank were subsequently given the option of transferring their deposits to Ceskoslovenska obchodni banka. An extraordinary general meeting of Banka Bohemia's shareholders held on 28 June 1994 decided to liquidate the bank.
10) On 11 May 1994, the CNB initiated administrative procedures to withdraw AB banka' s license to operate as a bank due to its inability to meet its commitments. At the same time, all its asset and liability transactions were frozen. Clients were given the possibility to transfer all deposits below CZK 100 mil. to Eeska sporitelna and 92% of them took advantage of this offer. An extraordinary general meeting, held on 24 August 1994, decided to decrease AB banka's basic assets and that Eeska sporitelna would subsequently increase these assets thus becoming AB banka's major shareholder. In addition, the bank management was changed, thus creating prerequisites for Stabilisation, and administration procedures were terminated.
11) Despite these problems, the banking system as a whole is not threatened. No loss of confidence in small and medium-sized banks has occurred, on the contrary, deposits with these banks continue to grow. The CNB has substantially tightened the conditions for establishing new banks, emphasizing the quality of management. The CNB also initiated amendments to bank laws which consider new phenomena in the banking sector.
12) These amendments have strengthened the powers of the banking supervision (to change bank management personnel, limit bank activities, impose fines up to CZK 500 mil, etc.). The conservator's powers have also been extended; at present he can assume even the function of a general meeting.
13) Under these amendments, a system has been introduced of flat insurance of natural persons' deposits in name. The deposits are insured through the Deposit Insurance Fund up to 80% of the total amount, the maximum amount payable being CZK 100,000. The Fund provides compensations to owners of insured deposits in the case of a bank's incapacity to meet its commitments. This eliminates the unequal position of banks when the state had only guaranteed deposits with four major financial institutions.