Bank resolution framework in the Czech Republic Czech National Bank New Bank Crisis Resolution Frameworks (Warsaw, 11 October 2011)

2 Specifics of the Czech banking market (1) Commercial banking since EU member since 2004 (single passport for EU bank branches). Relatively small market dominated by subsidiaries of EU banks – KBC (BE), Societe Generale (FR), Erste (AT), UniCredit (IT), … Credit institutions: banks (23), credit unions (14), branches of foreign banks (21) + cross-border services. Single bank supervision and resolution body: Czech National Bank (integrated financial market supervisor since 2006).

3 Specifics of the Czech banking market (2) The global financial crisis reached the Czech financial system in a good initial situation: Excess liquidity (CNB withdraws liquidity from banks); Enough funds from primary deposits; Traditional banking model; Low non-performing loans ratio; Low level of foreign currency loans; Low level of toxic assets; Good capitalization and profitability.

General overview (1) When dealing with a distressed bank, the CNB can use various tools and powers. Choice always takes into account expected systemic consequences of the potential failure. CNB can request the bank to: Restrict some of the permitted activities, cease non-permitted activities or not execute certain transactions, money transfers or other operations; Restrict distribution network of the credit institution, including reducing the number of business units; Replace persons in the management of the credit institution; Replace members of the institutions supervisory board; Adopt stricter rules for creating provisions for the institutions assets and reserves or for determining capital requirements; Create adequate provisions and reserves; etc. 4

5 General overview (2) More severe measures include: Changing the banks licence by excluding or restricting some of the activities listed therein; Imposing a fine of up to CZK 50 mln (EUR 2 mln); Requiring an increase in capital; Requiring an increase in the liquid funds of the bank; etc.

6 General overview (3) The most severe measures available to the CNB include: Licence withdrawal; Imposing conservatorship. Additionally: Procedure for increase in capital simplified if capital adequacy is breached [2009]. Should the banks shareholder act to the detriment of the sound and prudent management of the bank, the CNB can suspend his/her shareholder rights.

7 Conservatorship (1) Can be imposed only On banks and branches of foreign banks (not credit unions); If shortcomings in a banks activities threaten the stability of the banking or financial system. The conservator Is appointed by the CNB; Acts in the capacity of the banks (branchs) statutory body; Can also sell individual assets or the whole banks enterprise (private buyer, bridge bank; independent valuer app. by CNB).

8 Conservatorship (2) During conservatorship: The General Meeting of the bank does not take place; The conservator decides on matters falling within the powers of the General Meeting; If the conservator decides to increase the banks capital, he/she may in some cases exclude the shareholders preferential right to subscribe for new shares.

9 Bridge Bank A special state owned bank to acquire an enterprise of a distressed bank [2009]. Cannot be used for credit unions. Needs to have the minimum capital as required by the Act on Banks (CZK 500M = EUR 20 mln), other aspects of licensing are significantly simplified/sped-up. The contract on the enterprise transfer would be signed by the management + consent of General Meeting. If conservatorship was introduced, the contract would be signed only by the conservator.

10 Open bank assistance CNB can buy certain securities from credit institutions and provide them with credit facilities (against collateral). If conservatorship imposed, the CNB may render financial assistance to the bank to overcome temporary shortage of liquidity. Conditions for provision of public support need to be met (i.a. the EU state aid rules). CNB not allowed to provide guarantees. State guarantees may be provided if a specific law is passed. The state can become a shareholder in a private bank. To put in new capital in that bank (recapitalization), consent of the government is needed.

11 Extraordinary measures in case of instability of the financial system CNB may issue a measure of a general nature addressed to banks and/or branches of foreign bank s [2009]. Stipulate a temporary exemption from the obligations related to Licensing requirements; Capital and other prudential requirements; Qualified holdings requirements and some other requirements; Temporarily prohibit or restrict some licensed activities or the execution of some transactions, money transfers or other operations.

12 Main regulatory challenge The oncoming EU crisis management framework

13 Problem issues (1) Note: No formal legislative proposal yet. Scope (all credit institutions + investment firms and holding companies vs. SIFIs); Group interest (group financial support); Curtailing host state powers (mismatch of powers and responsibilities); EBA binding mediation;

Problem issues (2) EBA binding technical standards; Multiple coordination bodies with overlapping mandates; Financing (mandatory bank tax); Limiting applicability or efficiency of existing tools; Reducing flexibility for supervisors.

15 Thank you for your attention.