## Structure of The Financial Sector ## Source details **Canonical URL:** [Structure of The Financial Sector](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12172.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12172.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12172.pdf.json) --- ### Summary assessment and key findings - Compliance with the Basel Core Principles for Effective Banking Supervision (BCP) has "improved markedly" since the previous assessment. - Remaining deficiencies: - Insufficiency of staff resources for supervision, resulting in: - Too infrequent on-site inspections. - Delayed remedial action for identified weaknesses in banks. - Need for more frequent on-site verification of loan-loss provisioning adequacy and strict classification of nonperforming loans (NPLs), including loans with temporary relief. - CNB supervisory emphasis: - Relies on offsite monitoring (stress tests, peer reviews) and focus on banks’ corporate governance to mitigate risks from limited on-site capacity. - BCP assessors view this as commendable but insufficient without increased on-site supervision. - Credit unions: - Small (about 1 percent of the total amount of bank assets) but rapidly growing and have experienced defaults of several institutions. - Subject to less intense supervision than banks despite applicability of similar regulatory approaches. ### Institutional and macroeconomic setting; market structure - Macroeconomic resilience drivers: - Limited external financing needs. - Flexible exchange rate regime. - Credible monetary policy framework. - Healthy public and private balance sheets without currency mismatches. - Absence of major pre-crisis asset bubbles. - Crisis response and outcomes: - Output decline from peak to trough was about 5 percent. - CNB cut the policy rate by a total of 325 basis points between August 2008 and May 2010. - Recovery mainly driven by external demand (notably Germany); domestic demand lagged. - Growth and outlook: - Growth stalled in early 2011; economic activity effectively flat in Q2 and Q3 2011. - 2012 growth projected at about 0.5 percent, down from an estimated 1.9 percent in 2010; risks mostly to the downside. - Financial contagion from the Euro Area is a principal downside risk. - Sectoral balance-sheet indicators: - Corporate financial liabilities: 46 percent of GDP. - Corporate NPL ratio: about 3 percent in 2007 → about 9 percent in 2009; stabilized and downtrended over 2010–11. - Household assets to liabilities: declined from about 480 percent in 2004 to stabilize around 300 percent since 2008. - Gross household debt to GDP: about 35 percent. - About three-fourths of new household credit between 2002–08 were housing loans. - Property markets: - Property prices declined by about 20 percent from peak. - Apartment prices in Prague rose more than 70 percent between 2004 and 2008, then fell about 25 percent from their peak. - Residential price decline continued as of late 2011 at an annual rate of 1–3 percent. - Mortgage NPLs peaked at about 3 percent. ### Financial sector developments and systemic indicators - Crisis resilience: - No exceptional state measures domestically; no public recapitalizations or exceptional support for banks. - ECB emergency liquidity and home-government support to some parent banks helped Czech subsidiaries. - Credit growth: - Dropped virtually to zero in late 2009. - Later recovered; credit growth is "presently some 6 percent on a yearly basis" (assessment period). - Banking sector indicators: - NPL ratio: 3.2 percent as of end-2008 → 6.4 percent as of end-March 2011. - Capital adequacy ratio: 12.3 percent in 2008 → 15.9 percent in June 2011 (mainly Tier I capital). - Drivers of higher capital ratio: profit retention, slower credit growth, higher share of claims on government, and some capital relief from move to Basel II. - Aggregate liquidity ratios declined in 2008, then recovered and remained broadly stable or improving. - Loan-loss provisioning: - System’s loan loss provision to NPLs ratio is "on the low side" versus regional peers. - Concern that some banks provide relief to borrowers before loans become NPLs to avoid provisioning. - Some banks sell NPLs to other entities, sometimes intra-group; CNB encouraged to use special on-site visits to review classification, provisioning, and market-based loan sales. - Nonbank institutions: - Insurance: profitable with adequate capitalization; Solvency I based solvency ratio 354 percent as at end-2010. - Pension funds: capitalization stabilized at around 5 percent after 2008–09 recapitalization; as at end-June 2010 held CZK 186 billion or 84 percent of assets in debt securities, 68 percent of those in Czech government securities (CZK 150 billion). - Credit unions: fast-growing with weak performance, high NPLs, and very low loan-loss provisioning ratios (provisioning in credit unions approx. 15 percent vs 50 percent in banks). ### CNB structure, mandate, and supervisory organization - CNB is an integrated supervisory authority covering banks and nonbank financial institutions; responsibilities include market conduct and consumer issues. - Supervision organized in three separate departments: supervision, regulation, and enforcement. - Overarching supervisory decisions and appeals taken by the CNB Board. - CNB independence enshrined in the Czech Republic Constitution. - CNB empowered to issue secondary legislation within scope of mandate and extent allowed by primary laws. ### Legal, accounting, and audit framework - Key laws: Act on Banks No. 21/1992 Coll.; Act on Credit Unions No. 87/1995 Coll.; Act No. 6/1993 Coll. on the CNB; Act on the Payment System No. 284/2009; Act No. 563/1991 Coll. on Accounting; Act No. 93/2009 Coll. on auditors. - Czech Accounting Standards harmonized with IFRS; listed companies must comply with IFRS. - A large majority of banks (84 percent of the banking sector’s total balance sheets) apply IFRS. - Statutory auditors must inform CNB of substantial findings and comply with International Standards on Auditing accepted in EU law. ### Payment and settlement system - CNB owns and operates CERTIS, the sole interbank real-time gross settlement system for CZK payments. - Direct CERTIS participants: headquarters of banks, building societies, cooperative savings banks; third parties may initiate payments between direct participants. - CNB may provide intra-day credits against collateral; unpaid intra-day credit converts automatically into overnight credit using same collateral. ### Public safety net, conservatorship, and resolution tools - Preferred solution for nonsystemically important institution failure: regular liquidation or insolvency. - For systemic institution failure: conservatorship, transfer to a bridge bank, and/or open financial support available. - CNB may impose conservatorship where bank shortcomings endanger system stability. - Capital remedial triggers: - If bank capital falls below two-thirds of regulated requirements, obligatory intervention is closest legal trigger. - If capital falls below one-third of regulatory requirements, CNB must withdraw the license unless conservator appointed. - CNB may provide liquidity against collateral to banks, credit unions, branches of foreign banks, or state-owned banks. - Banking Act allows creation of a 100 percent state-owned bridge bank; state may provide open bank assistance with government consent and activation of law. ### Deposit Insurance Fund (DIF) - DIF is a "pay-box only": only used to compensate insured depositors in a failed bank, credit union, or building society. - DIF funded ex ante by a straight quarterly fee of 0.04 percent (0.02 for building societies) on insured deposits. - Deposits up to 10,0000 EUR per person per bank are protected. - Current ratio of collected funds in relation to insured deposits is 0.9 percent. - DIF aims at a pay-out delay maximum of 20 working days from triggering insurance. - If insufficient, DIF may issue securities; if infeasible, the state may provide refundable or nonrefundable aid. ### Audit, statutory audits, and auditor interaction - Statutory audit of financial statements required; CNB may request targeted or internal-governance audits. - Banks/credit unions must report yearly name of audit firm and head of audit team to CNB; CNB may reject appointment within 30 days and has used this right. - Auditors must notify CNB of serious facts indicating regulatory violations (Article 21 Act on Auditors). - CNB can request auditor working papers and has done so. - Recommended: CNB should be provided powers to dismiss unsuitable auditors during the working year; supervisory teams should meet more frequently with external auditors. ### AML/CFT and abuse of financial services — findings and recommendations - Gaps identified in requirements for preventing banks from being used for criminal activity (AML/CFT). - Key findings and recommendations: - Bank compliance programs and reporting should broadly address financial crime as well as AML/CFT. - Compliance officers should be senior bank officials responsible for the institution’s compliance program. - AML/CFT inspections should be more frequent. - Credit institutions should regularly report suspected criminal activity to CNB or FIU, in addition to suspected AML/CFT. - Increase maximum level of fines for inadequate AML/CFT programs under the money laundering act. - Escalation procedures above supervisor level needed for high risk accounts. - KYC requirements/guidelines should be improved for low-risk customers and beneficial owners, particularly bearer share companies. - Politically-exposed persons (PEPs) should be defined to include all relevant politicians (according to FATF definitions). - Assessors note frequency of AML/CFT inspections can lapse up to five years; CNB increased on-site AML/CFT visits from 0 in 2001 to 11 in 2011 and planned 11 in 2012. ### Supervisory methods, staffing, and on-site inspection (CPs 19–21) - Supervisory techniques: off-site and on-site programs; staffing shortfalls created deficiencies in both. - Full-scope and targeted on-site inspections are infrequent (full-scope generally every three to four years; targeted every two years for large banks). - Recommendations: - Increase CNB staffing levels to allow more frequent on-site inspections (including AML), rotation of off-site inspectors. - Rotate off-site inspectors more frequently. - Require inspectors to evaluate capability and participation of supervisory board members; require supervisory boards to approve strategies and policies. - Establish attestation guidelines or rules for regulatory reports and ability to impose penalties for late/inaccurate submissions. - Establish monthly or quarterly peer analysis for comparative analysis and trend monitoring. - Introduce guidelines/rules for signatories on regulatory submissions and the capacity to impose penalties on them individually. ### Corrective and remedial powers; enforcement practice and recommendations (CP 23) - CNB corrective tools include recommendations, formal enforcement actions, conservatorship, license revocation, and ordering remedial measures. - Observed weaknesses: - Timeliness of enforcement actions sometimes affected by requirement to precede enforcement with a new on-site review. - CNB lacks explicit power to dismiss unsuitable bank managers once employed (can block employment before appointment). - Limited legal support to issue monetary penalties to individuals. - Recommended actions: - Introduce structured (staged) early intervention framework based on quantitative and judgmental criteria. - Introduce narrowly targeted on-site visits to ensure timely implementation of remedial requirements. - Broaden CNB powers to apply monetary penalties also on individual persons. - Set a higher capital bar (than two-thirds of capital) for mandatory supervisory intervention; assessors recommend remedial action when capital ratio declines below 8 percent. - Laws/regulations should set a range of remedial actions including license revocation when capital ratio declines below 8 percent. ### Consolidated and cross-border supervision (CPs 24–25) - CNB applies consolidated supervision across banks, insurance, securities firms, and other financial companies. - CNB may conduct on-site visits to regulated entities in a banking group and request information from nonregulated entities through the bank. - Effectiveness could increase if CNB had the general power to directly require information and verify it through visits to nonregulated entities relevant to safety and soundness. - CNB participates in supervisory colleges and maintains MOUs; recommendation to seek arrangement with Russia to ensure information sharing and confidentiality. - Assessors recommend capping exposures to parent/sister banks or investment firms at 25 percent of bank capital (currently exemptions allow up to 100 percent in some intra-EU cases; CNB preparing amendment to tighten to 50 percent of capital). ### Key Basel Core Principles — select numeric thresholds and findings preserved - Capital intervention threshold: remedial action currently triggered when bank capital declines below two-thirds of capital requirement; assessors recommend remedial action when capital ratio declines below 8 percent. - Past due schedule: 360 days past-due threshold considered excessive; assessors recommend shortening. - Large exposures: - Banking book large exposure limit: 25 percent of a bank’s capital. - Trading book exposures currently excluded from large exposure definition and are limited at 600 percent of a bank’s capital. - Temporary excesses over 25 percent should be fully offset by additional bank capital. - Exposures to parent banks abroad, sister banks, or investment firms currently subject to a 100 percent of capital limit — assessors find this too high and recommend capping at 25 percent. - Related-party exposures: assessors recommend aggregated exposures to related parties (excluding group credit institutions and investment firms under consolidated supervision) should not exceed 25 percent of bank capital. ### Principle-by-Principle assessment highlights (selected compliance outcomes) - CP 1 (Objectives, autonomy, powers, and resources): Largely Compliant; staffing and on-site frequency concerns flagged. - CPs assessed Compliant (select): Principle 2, Principle 3, Principle 8, Principle 9, Principle 12, Principle 13, Principle 14, Principle 15, Principle 16, Principle 17, Principle 19, Principle 21, Principle 22, Principle 24, Principle 25. - CPs assessed Largely Compliant (select): Principle 6, Principle 7, Principle 10, Principle 23. - CPs assessed Materially Noncompliant (select): Principle 5, Principle 11, Principle 18, Principle 20. - Key numeric/frequency facts: - Building societies ≈ 10 percent of industry assets; credit unions ≈ 1 percent. - Term of office for Bank Board members: six years (renewable once). - Staff turnover: around 8 percent. - Minimum capital requirements: CZK 500 million for banks; CZK 35 million for credit unions. - Penalty for urgent sanctions: up to CZK 50 million. - Fines against managers for failure to cooperate with conservator: up to CZK 1 million (can be imposed repeatedly). - Registered capital thresholds constituting a deficiency: bank below CZK 500 million; credit union below CZK 35 million. ### CNB reaction and contested recommendations - CNB welcomes the assessment and acknowledges resilience of Czech financial system and marked improvement in BCP compliance. - CNB accepts some recommendations and plans actions: - Grant CNB power to require divestment of a qualifying holding (Principle 4). - Widen remedial action framework (Principle 23) in light of EU Crisis Management Framework. - Tighten intra-group exposure limits (amend Prudential Rules Decree to tighten exposures to foreign parent and affiliate institutions from 100% to 50% of capital). - Consider broadening PEP definition in line with EU AML rules review. - Consider setting a higher capital bar for mandatory supervisory intervention. - CNB disagrees with or contests other recommendations: - Increasing supervisory staff: CNB favors risk-based supervision and considers current resources adequate relative to sector structure. - Monetary fines on bank managers: CNB views additional individual monetary penalties as unnecessary administrative burden. - Direct supervision of nonregulated entities within groups: CNB notes EU directive limitations and considers existing powers adequate. - Formal MOU with Russia: CNB states Russian secrecy rules impede an MoU consistent with EU standards and does not intend legal changes. *IMF FSAP assessment: Czech Republic—BCP compliance and financial sector structure (assessment completed during October–December 2011).* ### 1. Structure of The Financial Sector ................................................................................... ### 1. Structure of The Financial Sector ### Summary assessment and key findings - Compliance with the Basel Core Principles for Effective Banking Supervision (BCP) has "improved markedly" since the previous assessment (~ten years earlier), with many earlier weaknesses addressed via domestic measures and EU-wide rules and regulations. - Remaining deficiencies: - Insufficiency of staff resources for supervision, resulting in: - Too infrequent on-site inspections. - Delayed remedial action for identified weaknesses in banks. - Need for more frequent on-site verification of loan-loss provisioning adequacy and strict classification of nonperforming loans (NPLs), including loans with temporary relief. - CNB supervisory emphasis: - Relies on offsite monitoring (stress tests, peer reviews) and focus on banks’ corporate governance to mitigate risks from limited on-site capacity. - BCP assessors view this as commendable but insufficient without increased on-site supervision. - Credit unions: - Small (about 1 percent of the total amount of bank assets) but rapidly growing and have experienced defaults of several institutions. - Subject to less intense supervision than banks despite applicability of similar regulatory approaches. ### Assessment context, scope, and methodology - Assessment conducted as part of an IMF Financial Sector Assessment Program (FSAP) during October–December 2011 and reflects the regulatory and supervisory framework in place as of the date of completion of the assessment. - Authorities agreed to be assessed against the CP Methodology issued by the Basel Committee in October 2006. - Compliance grading: compliant, largely compliant, materially noncompliant, and noncompliant. - Methodology distinguishes Essential Criteria (EC) — required for full compliance — and Additional Criteria (AC) — suggested best practices; ACs are commented on but not graded. - Assessment focused on major banks and banking groups; team reviewed laws, rules, guidance, and CNB supervisory practices and consulted MOF, industry participants (including credit unions and building societies), an audit firm, and the industry association representing banks. - Assessment team: Susan Quill, Senior International Advisor, U.S. Office of the Comptroller of the Currency; and Göran Lind, Advisor to the Board of the Sveriges Riksbank. ### Institutional and macroeconomic setting; market structure - Macroeconomic resilience drivers cited: - Limited external financing needs. - Flexible exchange rate regime. - Credible monetary policy framework. - Healthy public and private balance sheets without currency mismatches. - Absence of major pre-crisis asset bubbles. - Crisis response and outcomes: - Output decline from peak to trough was about 5 percent. - CNB cut the policy rate by a total of 325 basis points between August 2008 and May 2010. - Recovery mainly driven by external demand (notably Germany); domestic demand lagged. - Growth and outlook (as described in text): - Growth stalled in early 2011; economic activity was effectively flat in Q2 and Q3 2011. - 2012 growth projected at about 0.5 percent, down from an estimated 1.9 percent in 2010; risks are mostly to the downside. - Financial contagion from the Euro Area is a principal downside risk. - Corporate sector: - Financial liabilities at 46 percent of GDP. - NPL ratio for corporates rose from about 3 percent in 2007 to about 9 percent in 2009; stabilized and entered a moderate downtrend over 2010–11. - Loans to the real estate sector pose significant risk; unsold properties reportedly remain at an elevated level. - Household sector: - Assets to liabilities ratio declined from about 480 percent in 2004 to stabilize around 300 percent since 2008. - Gross household debt to GDP currently at about 35 percent. - About three-fourths of new household credit between 2002–08 took the form of housing loans. - Property markets: - Property prices declined by about 20 percent from peak. - Apartment prices in Prague rose more than 70 percent between 2004 and 2008, then fell about 25 percent from their peak. - Residential price decline continued as of late 2011 but at a subdued annual rate of 1–3 percent. - Mortgage NPLs peaked at about 3 percent. - Commercial property market saw partial recovery starting 2010, especially in the industrial sector, but remains exposed to price decline risk. ### Financial sector developments and systemic indicators - Resilience during the global financial crisis: - No exceptional state measures were needed for the Czech banking sector; no public recapitalizations or exceptional support for banks domestically. - ECB emergency liquidity and home-government support to some parent banks helped shield Czech subsidiaries. - Credit growth: - Dropped virtually to zero in late 2009. - Later recovered; credit growth is "presently some 6 percent on a yearly basis" (as of assessment period). - Banking sector performance (selected indicators): - NPL ratio rose to 6.4 percent as of end-March 2011 (from 3.2 percent as of end-2008). - Capital adequacy ratio increased from 12.3 percent in 2008 to 15.9 percent in June 2011 (mainly Tier I capital). - Drivers of higher capital ratio: profit retention, slower credit growth, higher share of claims on government, and some capital relief from move to Basel II (especially on mortgage loans). - Aggregate liquidity ratios declined in 2008, then recovered and remained broadly stable or improving. - Loan-loss provisioning: - System’s loan loss provision to NPLs ratio is "on the low side" versus regional peers. - Concerns that some banks provide relief to borrowers before loans become NPLs to avoid provisioning. - Some banks sell NPLs to other entities, sometimes within the same group; CNB encouraged to use special on-site visits to review classification, provisioning, and market-based loan sales. - Nonbank financial institutions: - Insurance: profitable with adequate capitalization; implementation of EU Solvency II will enable more risk-based solvency assessment and supervision. - Pension funds: suffered during 2008–09 from redemptions and market falls; needed recapitalization by shareholders; capitalization subsequently stabilized at around 5 percent. - Credit unions: small but fast-growing with weak performance, high share of NPLs, and very low loan-loss provisioning ratios. - Financial sector linkages: - Cross-sectoral loans, deposits, and mutual ownership connect banks and nonbank institutions. - Large banks typically own various nonbank financial institutions, including abroad. - CNB designated by the European Banking Authority (EBA) as coordinator for the PPF Group financial conglomerate—group assets approximately €12.4 billion as at end-2010. ### Policy implications and recommendations (as stated or implied) - Strengthen supervisory staffing to enable: - More frequent on-site inspections. - Timelier remedial actions when weaknesses are identified. - Use on-site inspections to: - Verify adequacy of loan-loss provisioning, especially for non-IRB banks. - Ensure strict classification of NPLs, including loans with temporary relief. - Review compliance and market terms when banks sell NPLs, including intra-group transactions. - Apply similar regulatory and supervisory rigor to credit unions as to banks, given rapid growth and recent defaults. - Implement changes to building society subsidy schemes carefully to avoid endangering sector stability given the fiscal consolidation measures affecting government contributions. *IMF FSAP assessment: Czech Republic—BCP compliance and financial sector structure (assessment completed during October–December 2011).* ### 21. Insurance companies continue to report profitable results and adequate ### 21. Insurance companies continue to report profitable results and adequate ### Insurance sector performance and capitalization - Solvency ratio for the insurance sector was 354 percent as at end-2010, based on Solvency I computation. - Insurers held 66 percent of their investments in debt securities as at end-2010. - Recovery of the bond market in 2010 stabilized insurers’ operating results. - CNB amended accounting rules in 2009 allowing insurers to value held-to-maturity bond holdings at amortized costs if the bonds are rated equal to or higher than the sovereign rating of the Czech Republic. - CNB’s current methodology for computing technical provisions (TP) resulted in 24 percent higher TP compared to the Solvency II basis, according to the Quantitative Impact Study 5. - CNB conducted a pilot round of stress test of selected insurers in 2010 which indicated “the sector as a whole has sufficient capital to withstand relatively significant changes in selected risk factors.” ### Pension funds - Pension funds were hit in 2008–09 due to redemptions and bond market falls and needed recapitalization by shareholders. - Capitalization of pension funds subsequently stabilized at around 5 percent. - As at end-June 2010, pension funds held CZK 186 billion or 84 percent of their assets in debt securities. - Of those debt securities, 68 percent were invested in Czech government securities (CZK 150 billion). - Pension funds have not separated shareholders’ assets from planholders’ assets. - New pension legislation, effective in 2013, will mandate segregation of planholders’ assets and introduce more robust prudential requirements. ### CNB structure, mandate, and supervision - The CNB is an integrated supervisory authority with responsibility for banks and nonbank financial institutions, and is also responsible for market conduct and consumer issues. - For supervision, the CNB is organized in three separate departments: supervision, regulation, and enforcement. - Overarching decisions on supervisory matters and appeals on supervisory decisions are taken by the CNB Board. - As an EU-central bank, the CNB’s independence is enshrined in the Czech Republic Constitution. - The CNB has the power to issue secondary legislation within the scope of its mandate and to the extent allowed by the respective primary laws. ### Macroeconomic and cross-border risks - High dependency on exports implies exposure to external demand shocks. - Many banks are parts of large foreign-domiciled groups, creating risk of spillovers from weaknesses in parent banks to Czech subsidiaries and branches. ### Legal, accounting, and audit framework - Relevant laws for banking regulation and supervision include: Act on Banks No. 21/1992 Coll., Act on Credit Unions No. 87/1995 Coll., Act No. 6/1993 Coll. on the CNB, and the Commercial Code and Act on the Payment System No. 284/2009. - Act No. 563/1991 Coll. on Accounting (“The Accounting Act”) sets basic accounting rules; detailed decrees of the MOF provide rules for categories of firms. - Czech Accounting Standards are in substance harmonized with IFRS; listed companies must comply with IFRS. - A large majority of banks (84 percent of the banking sector’s total balance sheets) apply IFRS. - Auditing is governed by Act No. 93/2009 Coll. on auditors (“Act on Auditors”), transposing EU directives on auditing; a public oversight body (The Council for Public Audit Oversight) and professional organizations (Chamber of Auditors of the Czech Republic) exist. - Statutory auditors must inform the CNB about any substantial findings in a financial institution and comply with International Standards on Auditing accepted in EU law. ### Payment and settlement system - Legislation covering payments: Act No. 284/2009 Coll. on Payment Systems, later amended by Act No. 139/2011; additional clauses in the Banking Act, CNB Act, and Commercial Code. - CNB owns and operates CERTIS, a real-time gross interbank clearing and settlement system; CERTIS is the only interbank payment system in the Czech Republic and conducts all types of interbank payments in CZK. - Direct participants in CERTIS are headquarters of banks, building societies, and cooperative savings banks; third parties (Central Securities Depository, card service providers) may initiate payments between direct participants. - CNB may provide intra-day credits against collateral; unpaid intra-day credit is converted automatically into overnight credit using the same collateral. ### Public safety net, conservatorship, and resolution tools - For nonsystemically important institutions, preferred solution is regular liquidation or insolvency proceedings. - For failure of a systemic institution, tools include conservatorship, transfer to a bridge bank, and/or open financial support. - CNB may impose conservatorship where shortcomings in a bank endanger stability of banking or financial system. - Law does not prescribe hard triggers for conservatorship; closest is obligatory intervention if bank’s capital adequacy falls below two-thirds of its regulated requirements. - If capital adequacy drops below one-third of regulatory requirements, CNB must withdraw the license unless a conservator has already been appointed. - CNB may provide liquidity against collateral to a bank, a credit union, a branch of a foreign bank, or a state-owned bank (e.g., a bridge bank). - Under conservatorship, CNB may render financial assistance to overcome temporary liquidity shortages. - Sale of assets and assumption of liabilities of a failed bank, or sale of the whole bank, may occur during conservatorship; conservator acts as the bank’s statutory body. - Banking Act (BA) allows creation of a 100 percent state-owned bridge bank; transfer decision must be taken by shareholders’ general meeting or by the conservator. - State may provide open bank assistance (buy securities, provide liquidity, state guarantees, or infuse capital with government consent and activation of law). ### Deposit Insurance Fund (DIF) - DIF is a “pay-box only”: can only be used to compensate insured depositors in a failed bank, credit union, or building society. - DIF is ex ante funded by a straight quarterly fee of 0.04 percent (0.02 for building societies) on insured deposits. - Deposits up to 10,0000 EUR per person per bank are protected. - Current ratio of collected funds in relation to insured deposits is 0.9 percent. - If fund proves insufficient, DIF may raise funds by issuing securities in the market; if infeasible on reasonable terms, the state may provide refundable or nonrefundable state aid. - DIF aims at a pay-out delay from the date of triggering the insurance of a maximum 20 working days. ### Main findings and supervisory assessments - Supervisory authority independence, objectives, powers and resources (CP 1): - CNB is central bank and integrated supervisory authority covering banks, building societies, credit unions, insurance companies, and investment firms. - Comprehensive laws and secondary legislation exist for banking sector regulation. - CNB independence is enshrined in the Constitution; BCP assessors found no interference from external parties. - Assessors found a shortage of staff resources for regulation and supervision, reducing effectiveness in early-stage problem identification and addressing bank problems. - No explicit legal protection for supervisory staff against lawsuits, but in practice staff are shielded as formal supervisory decisions are taken by the CNB as an institution. - CNB has entered into several Memorandums of Understanding (MOUs) with the MOF and host-country supervisory authorities; assessors recommend activating domestic MOUs with the MOF as a transparent channel of communication. - Licensing and structure (CPs 2-5): - CNB is sole authority for issuing and revoking licenses for banks (including credit unions and building societies). - License applications are tested against comprehensive requirements; CNB checks organization, management, business strategy, financial plan, and fit-and-proper status of owners and managers. - Assessors recommend that key persons such as chief risk officer (CRO)/chief financial officer (CFO)/Compliance officer be formally subject to fit-and-proper tests. - Where EU passport applies, CNB liaises with home-country authority and ensures home authority practices consolidated supervision for the banking group on a global basis. - If a person holding a qualifying interest is found unsuitable or consent was based on false information, CNB may prohibit voting of his shares or prohibit him from calling shareholders’ meetings; CNB does not have power to require divestment of shares. - Investment and concentration limits: - For certain investments in other financial institutions, prior consent from CNB is required. - Banks may not invest in nonfinancial assets generally, except transitory holdings (e.g., foreclosed assets). - No requirement for prior notice to CNB of intended investments; investments in nonfinancial entities may be up to 15 percent of bank’s capital in each entity up to an aggregate limit of 60 percent of capital. - CNB policy is to review appropriateness of investments at next onsite visit rather than pre-approve. - CNB generally applies a limit of 25 percent of a bank’s capital for large exposures to single or connected parties in the banking book. - Exemptions: exposures to parent companies and affiliates within Czech Republic subject to CNB consolidated supervision are exempt from the limit; exposures to parent companies, sister institutions, or investment firms within the EU have a limit of 100 percent of bank capital. - Exposures on a bank’s trading book are excluded from the large exposure limit and are subject to a 600 per cent limit of bank capital. - Assessors recommend applying the globally agreed BCP standard for a more stringent approach to concentration risks. - Risk management, provisioning, and related-party lending: - Expectations for bank risk management systems are clear and comprehensive; assessors call for more emphasis on role and power of supervisory boards. - CNB should formally evaluate capability and participation of supervisory board members via regular meetings and evaluation of minutes and board packages; supervisory boards should formally approve and monitor bank strategies and policies to a greater extent. - Trends in credit risk, problem assets, market, liquidity, interest rate, and operational risks are monitored ongoingly. - With a weakening economy, CNB is evaluating bank compliance with restructuring rules and setting higher loss ratios in stress tests than warranted by experience. - Ratio of provisions to NPLs is somewhat below the average of countries in the region; assessors recommend targeted onsite visits to ensure provisioning and loan classification follow CNB guidelines and that guidelines may need strengthening. - Market risk exposure is minimal; liquidity levels are strong; interest rate risk is monitored through quarterly stress tests; operational risk reports are monitored quarterly. - Czech legislation defines a broad range of “related parties” and requires related-party transactions to be on market terms and arm’s-length. - No specific CNB regulations require banks to apply dedicated processes and policies for related-party lending; general conflict-of-interest rules apply instead of more restrictive measures. - Exposures to related parties are reported to the bank’s Board and to CNB only if they meet “large exposure” threshold (at least 10 percent of bank’s capital). - No dedicated process exists for dealing with delays in payments from related parties. - Assessors recommend that CNB introduce rules and guidelines specifically for banks’ policies and processes on related-party lending to provide better protection against abuse. - Internal controls and internal audit: - CNB inspectors evaluate reliability of internal controls and internal audit; if reliable, inspectors may leverage internal audit and adjust scope of inspection. - All credit institution activities, including outsourced activities, are subject to internal audit. *IMF staff report content unit _cr12172 - 21. Insurance companies continue to report profitable results and adequate* ### 51. There are gaps in the requirements for preventing banks from being used for ### _cr12172 - 51. There are gaps in the requirements for preventing banks from being used for ### AML/CFT and abuse of financial services — findings - There are gaps in requirements for preventing banks from being used for criminal activity, including anti-money laundering and combating the financing of terrorism (AML/CFT). - Bank compliance programs and reporting requirements should broadly address financial crime as well as AML/CFT. - Compliance officers should be senior bank officials with responsibility for the institution’s compliance program. - AML/CFT inspections should be more frequent. - Specific assessor observations: - Credit institutions should regularly report to the CNB or the Financial Intelligence Unit (FIU) suspected criminal activity, in addition to suspected AML/CFT activity. - The Czech Republic should increase the maximum level of fines for inadequate AML/CFT programs under the money laundering act. - Escalation procedures above the supervisor level are needed for high risk accounts. - KYC requirements or guidelines should be improved for low-risk customers and beneficial owners, and in particular address bearer share companies. - Politically-exposed persons (PEPs) should be defined to include all relevant politicians (according to FATF definitions). ### Supervisory methods, staffing, and on-site inspection (CPs 19–21) - Supervisory techniques applied by the CNB include off-site and on-site programs; staffing shortfalls have created deficiencies in both programs. - Full-scope and targeted on-site inspections are infrequent. - Concerns noted: - Need to verify that reported high capital ratio levels are backed by a conservative approach to the identification of NPLs and need for provisioning. - The CNB does not meet with audit committees and supervisory boards, unless there are exigent circumstances. - The CNB should increase its interaction with audit committees and supervisory boards, particularly in large banks. - Recommendations: - Increase CNB staffing levels to allow for more frequent on-site inspections, including for AML and for new and problem banks, and to allow for the rotation of off-site inspectors. - Rotate off-site inspectors more frequently. - Require inspectors to evaluate capability and participation of supervisory board members, and require supervisory boards approve strategies and policies. ### Reporting, attestation, and peer analysis (CP 21) - Banks submit monthly and quarterly reports; weekly liquidity reports are submitted by large banks. - There are no signatory requirements on regulatory reports. - Recommended actions: - Establish attestation guidelines or rules, along with the possibility of imposing penalties for late or inaccurate submissions. - Establish monthly or quarterly peer analysis to facilitate more frequent comparative analysis. - Establish guidelines or rules for signatories on financial statement and other submissions and the capacity to impose penalties on them on an individual basis. ### Accounting and disclosure (CP 22) - The large majority of Czech banks report in accordance with the IFRS. - The local accounting standard does not differ significantly from the IFRS. ### Corrective and remedial powers of supervisors (CP 23) - The CNB identifies problems that require remedial action but could better match follow-up to the seriousness of issues. - The supervisory approach should move further from reactive to proactive. - The CNB would benefit from introducing a structured (staged) early intervention framework based on both quantitative and judgmental criteria. - The CNB has tools for corrective and remedial actions, including: - Recommendations voluntarily agreed by the bank in a document presented to the CNB. - Formal enforcement actions for more serious deficiencies or in cases of management inaction. - Observed weakness: timeliness of CNB enforcement actions is sometimes affected by an internally-imposed requirement to precede enforcement with a new on-site review. - Legal/powers gaps: - The CNB lacks the explicit power to dismiss unsuitable bank managers once employed (it can block employment before appointment). - There is scant legal support to issue monetary penalties to individuals. - Recommended actions: - Introduce a structured framework for intervention in banks. - Introduce procedures implying narrowly targeted on-site visits to ensure timely implementation of remedial requirements. - Broaden the powers of the CNB to apply monetary penalties also on individual persons. - Set a higher capital bar (than two-thirds of capital) for mandatory supervisory intervention. - Laws or regulations should set out a range of remedial actions to be considered, including revocation of the license, when a bank’s capital ratio declines below 8 percent. ### Consolidated and cross-border supervision (CPs 24–25) - The CNB applies consolidated supervision and is an integrated supervisory authority covering banks, insurance companies, securities firms, and other financial companies. - The CNB may conduct on-site visits to all regulated entities in a banking group and may, through the bank, request information it needs also from nonregulated entities. - Effectiveness would increase if the CNB had the general power to directly require information and verify it through visits to nonregulated entities that have relevance for the safety and soundness of regulated entities. - Given dominance of large groups with parent institutions domiciled outside the Czech Republic, CNB insight into the consolidated group is important. - The CNB maintains bilateral MOUs and informal arrangements with other home and host supervisors and participates in multilateral fora such as the EBA. - Recommended action: - Give the CNB the powers to inspect entities outside the consolidated banking group. - Conclude an arrangement with Russia to ensure information sharing and supervisory cooperation, and protect confidential information. ### Key Basel Core Principles (select findings and numeric thresholds preserved) - Capital intervention threshold: trigger for mandatory supervisory remedial action is released when bank capital declines below two-thirds of the capital requirement — assessed as too late; recommend remedial action when capital ratio declines below 8 percent. - Past due schedule: 360 days past-due threshold should be shortened as it applies to unsecured as well as secured loans and appears excessive. - Large exposures: - Trading book exposures are not included in large exposure definition; trading book exposures are limited at 600 percent of a bank’s capital. - Temporary excesses over the 25 percent limit for large exposures should be fully offset by additional bank capital. - Exposures to parent banks abroad, sister banks, or investment firms are exempted from the 25 percent limit and are subject to a limit of 100 percent of bank capital — assessors find this too high. - Recommendation: Exposures to parent banks abroad and to sister banks or investment firms should be capped at 25 percent of the bank’s capital. - Related-party exposures: aggregated exposures to related parties (excluding group credit institutions and investment firms under consolidated supervision) should have a limit not to exceed 25 percent of the bank’s capital. ### Recommended action plan (selected prioritized items as listed) - CP 20: Increase CNB staffing levels for more frequent on-site inspections (including AML), rotation of off-site inspectors; increase interaction with audit committees and supervisory boards. - CP 23 (and partly CP 6, CP 20): - Introduce a structured framework for intervention in banks. - Introduce narrowly targeted on-site procedures for timely implementation of remedial requirements. - Broaden CNB powers to apply monetary penalties on individual persons. - Set a higher capital bar than two-thirds of capital for mandatory supervisory intervention. - CP 11: Require banks to have policies for related party transactions; define application of conflict-of-interest rules; require immediate board reporting of payment delays in significant related-party exposures; separate reporting of related-party exposures; limit aggregated related-party exposures to 25 percent of bank capital. - CP 5: Require prior CNB consent for significant nonfinancial acquisitions or investments; assess quality of foreign supervisors (not just that they practice consolidated supervision). - CP 18: Require regular reporting on significant criminal activity, increase maximum fines for inadequate AML/CFT programs, require escalation procedures for high risk accounts, improve KYC for low-risk customers and beneficial owners (especially bearer share companies), define PEPs per FATF, require senior compliance officers, increase frequency of inspections. - CP 10: Include trading-book exposures in “large exposures” subject to 25 percent overall limit; temporary excesses over 25 percent must be fully offset by adequate collateral or bank capital; cap exposures to parent/sister banks or investment firms at 25 percent of bank capital. - CP 1.2: Increase number of supervisory staff to enable intensified supervision and participation in international negotiations. - CP 24: Grant CNB powers to inspect entities outside the consolidated banking group. - CP 25: Conclude cooperative arrangement with Russia to ensure information sharing and confidentiality. - CP 6: Set remedial actions including license revocation when capital ratio declines below 8 percent. - CP 4: Give CNB powers to require divestment of a qualified holding if owner is unsuitable. - CP 1.6: Activate existing MOUs between the MOF and the CNB on cooperation and information sharing relating to financial stability and crisis management. *Source: _cr12172 - 51. There are gaps in the requirements for preventing banks from being used for* ### 63. The Czech National Bank (CNB) welcomes the assessment of the Czech ### The Czech National Bank (CNB) welcomes the assessment of the Czech ### Overall reaction and procedural concerns - CNB welcomes the assessment of the Czech regulatory and supervisory framework and acknowledges extensive work by the assessment team. - CNB appreciates recognition of the resilience and stability of the Czech financial system and that compliance with the Basel Core Principles for Effective Banking Supervision has improved markedly since the previous assessment. - CNB expresses concerns about: - Objectivity of the assessment team and willingness to apply a country-specific approach. - Procedural aspects: repeated change of the head of the FSAP mission and the downward revision of the grade for core principle 1(2) during the written procedure without informing authorities. - CNB considers these issues likely reduced the potential value added of the FSAP exercise. ### Recommendations CNB accepts (substance and planned actions) - Grant CNB power to require divestment of a qualifying holding (Principle 4). - CNB considers existing measures adequate but supports extending rights to require divestment where a person not trustworthy acquired a qualifying holding without prior consent. - Widen framework of remedial actions (Principle 23). - CNB believes it currently has necessary tools and powers; adjustments expected following adoption of the EU Crisis Management Framework (may introduce bail-ins). - Set limits relating to exposures and further restrictions concerning intra-group exposures (Principle 10). - CNB follows relevant EU directive; most banks apply internal aggregated limits. - CNB accepts recommendation to reduce exposures to members of the same group. - CNB is preparing an amendment of the Prudential Rules Decree to tighten exposures to foreign parent and affiliate institutions from the current 100% to 50% of the capital. - Broaden definition of Politically Exposed Persons (Principle 18). - CNB notes current definition aligns with EU legislation but will consider the recommendation; issue likely to be discussed in review of EU AML rules this year. - CNB is also considering incorporating the recommendation to set a higher capital bar for mandatory supervisory intervention (Principle 23). ### Recommendations CNB does not share (disagreements and rationale) - CNB contends many IMF recommendations go beyond European standards/regulations and conflict with full harmonization; CNB philosophy emphasizes avoiding micromanagement and preserving managerial responsibility. - Specific areas where CNB objects or disagrees: - Increase number of supervisory staff (Principle 1(2), 20). - CNB rationale: - Uses risk-based supervision focusing on systemically relevant entities and high-risk profiles. - Czech banking sector is smaller relative to GDP than some Western European peers. - Czech banks follow traditional banking model with few structured products; funding primarily local deposits. - Monetary fines on bank managers (Principle 23). - CNB believes national provisions are equivalent; monetary penalties would add administrative burden without corresponding supervisory benefit. - Additional supervision of non-regulated entities within a group (Principle 24). - CNB has power to supervise non-regulated entities where necessary for supplementary supervision; EU directive limits supervisor role over unregulated entities on a stand-alone basis. - Arrangements with Russia (Principle 25). - Formal agreement (MoU) not possible due to Russian secrecy rules incompatible with EU standards; existing cooperation adequate; CNB does not intend legal changes. ### Principles CNB contests as overstated or downgraded - CNB objects to several principles assessed as “Materially noncompliant,” arguing deficiencies are minor and merit “Largely compliant” per Basel Core Principles Methodology. - Specific principles and CNB positions: - Principle 5 (Major acquisitions). - CNB prefers general rules over prior approvals for each acquisition, believing Act on Banks and Prudential Rules Decree sufficiently mitigate risks; does not intend legal changes. - Principle 11 (Exposure to related party). - CNB argues Czech regulation achieves objectives by different means tailored to Czech market; progress since IMF 2001 assessment. - CNB opposes explicit power to require collateralization of related-party exposures; Prudential Rules Decree already allows credit risk mitigation techniques such as collateralization. - CNB considers aggregation of exposures to all related parties likely non-material; exposures to Board/Supervisory Board/senior management not significant and publication on banks’ websites is adequate. - CNB believes current reporting on large exposures suffices; no need for additional separate reporting. - Principle 18 (Abuse of financial services / AML/CFT). - CNB asserts vast majority of required regulation is in place and supervised; EU legislative framework fully implemented. - MONEYVAL evaluation did not find Czech system non-compliant with evaluated FATF criteria. - Compliance programs and officers: - Banks required to have effective management and control systems; specific AML/CFT programs required by AML-CFT Act. - Yearly internal reviews of AML/CFT programs required by CNB’s AML-CFT Decree. - Compliance officers typically hold senior positions; Prudential Rules Decree places compliance on highest management agenda. - CNB does not find additional regulation on compliance programs substantiated. - Frequency of targeted AML/CFT inspections: - Number of on-site AML/CFT visits increased from 0 in 2001 to 11 in 2011. - CNB plans to conduct 11 on-site AML/CFT visits again in 2012. - Maximum level of fines: - Act on Criminal Liability of Legal Persons effective since January 1, 2012 introduced severe penalties, e.g. a daily penalty of up to CZK 2 million (approx. EUR 80,400), confiscation of all the legal person’s property, and dissolution of the legal entity. - Bearer shares: - Government coalition agreement commits to propose legislation to restrict anonymous ownership of business corporations. - Ministry of Justice prepared a legislative proposal under discussion and supposed to become effective later this year. - Principle 20 (Supervisory techniques). - CNB follows risk-based supervision focusing on systemically relevant entities; on-site inspections are comprehensive and thorough. - CNB disagrees with recommendation for at least annual on-site inspections for large/new banks due to length of inspection process and need for time to implement corrective measures. - CNB notes principle was rated “largely compliant” in previous IMF assessment (2001) and that many qualitative and quantitative steps have since been taken. ### CNB conclusion on independence and resources - CNB reiterates it considers itself compliant with Principle 1(2) regarding operational independence, transparent processes, and sound governance. - CNB asserts it has adequate resources to discharge duties accountably. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 68. The assessment of compliance of each principle should be made based on the ### 68. The assessment of compliance of each principle should be made based on the ### Four-grade compliance scale - The assessment of compliance of each Principle should be made based on the following four-grade scale: compliant, largely compliant, materially noncompliant, and noncompliant. A “not applicable” grading can be used under certain circumstances. - Compliant - A country will be considered compliant with a Principle when all essential criteria applicable for this country are met without any significant deficiencies. - There may be instances, of course, where a country can demonstrate that the Principle has been achieved by other means. - Conversely, due to the specific conditions in individual countries, the essential criteria may not always be sufficient to achieve the objective of the Principle, and therefore other measures may also be needed in order for the aspect of banking supervision addressed by the Principle to be considered effective. - Largely compliant - A country will be considered largely compliant with a Principle whenever only minor shortcomings are observed which do not raise any concerns about the authority’s ability and clear intent to achieve full compliance with the Principle within a prescribed period of time. - The assessment “largely compliant” can be used when the system does not meet all essential criteria, but the overall effectiveness is sufficiently good, and no material risks are left unaddressed. - Materially noncompliant - A country will be considered materially noncompliant with a Principle whenever there are severe shortcomings, despite the existence of formal rules, regulations and procedures, and there is evidence that supervision has clearly not been effective, that practical implementation is weak, or that the shortcomings are sufficient to raise doubts about the authority’s ability to achieve compliance. - It is acknowledged that the “gap” between “largely compliant” and “materially noncompliant” is wide, and that the choice may be difficult. On the other hand, the intention has been to force the assessors to make a clear statement. - Noncompliant - A country will be considered noncompliant with a Principle whenever there has been no substantive implementation of the Principle, several essential criteria are not complied with or supervision is manifestly ineffective. ### Not applicable grading - In addition, a Principle will be considered not applicable when, in the view of the assessor, the Principle does not apply given the structural, legal, and institutional features of a country. *Source: _cr12172 - 68.* ### 70. The detailed Principle-by-Principle assessment should provide a “description” of ### _cr12172 - 70. The detailed Principle-by-Principle assessment should provide a “description” of ### Assessment template and methodology - The detailed Principle-by-Principle assessment template comprises three parts for each Principle: a “description” of observed practice (including citation of relevant laws and regulations and documentation of information requests), an “assessment” line with one of: “compliant,” “largely compliant,” “materially noncompliant,” “noncompliant,” or “not applicable,” and a “comments” section explaining the grading and, if less than “compliant,” measures needed to achieve full compliance. - Description structure guidance (where relevant): (a) banking laws and supporting regulations; (b) prudential regulations, including prudential reports and public disclosure; (c) supervisory tools and instruments; (d) institutional capacity of the supervisory authority; (e) evidence of implementation/enforcement or lack thereof. - The description should document when compliance could not be assessed (missing information or unavailable key individuals) and record attempts to obtain such information. ### Principle 1 — Objectives, autonomy, powers, and resources (Summary of findings and recommendations) - Role and institutional setup: - CNB is the only authority for banking supervision; it is an integrated supervisor covering securities markets and insurance. - Banking supervision tasks include facilitation of sound financial market operation, solo and consolidated supervision, and use of policies, processes, instruments, and methods. - Legal and regulatory framework: - Laws cited: CNB Act; Act No. 21/1992 Coll., on banks (BA); Act No. 87/1995 Coll., on Credit Unions (CUA); Act No. 284/2009 Coll., Payment System Act. - Transparency and reporting: - CNB publishes quarterly sectoral data and selected prudential indicators on its website. - Risk-based supervision and tools: - Resource allocation depends on risks; on-site inspection intervals set by institution Risk Profile Assessment System (RAS). - Key numeric and institutional facts: - Building societies ≈ 10 percent of industry assets; credit unions ≈ 1 percent. - Term of office for Bank Board members: six years (renewable once) (Art. 6 CNB Act). - Staff turnover: around 8 percent. - Assessment: Largely Compliant (for CP 1 overall; specific sub-items vary as noted below). - Selected comments and recommendations: - Introduce an explicit overarching CNB mandate for prudential financial supervision (CNB Act presently emphasizes monetary stability as primary objective). - Consider lengthening the quarantine (cooling-off) period for CNB staff moving to the private financial sector (international practice commonly about one year). - Staffing: number of supervisory staff is low relative to market size; recent staffing cuts of slightly less than ten percent of total CNB staff reduced supervisory intensity and onsite frequency (example: large banks should receive onsite visits yearly — see CP 19–20). ### Licensing, permissible activities, ownership, and acquisitions (Principles 2–5) - Principle 2 (Permissible activities) - Definition of bank and credit union activities in BA and CUA; only banks and credit unions may accept deposits (Art. 2(1) BA; Arts 1(2) and 3(1) CUA). - Use of the word “bank” controlled (Art. 3 BA); sanctions: fines up to CZK 50 million for banks, CZK 20 million for credit unions. - Assessment: Compliant. - Comment: Require similar CNB listing of credit unions as is done for banks given their growing market share. - Principle 3 (Licensing criteria) - CNB is sole licensing authority (Article 44(2) CNB Act); prerequisites governed by Decree No. 233/2009 Coll. - Minimum capital requirements: CZK 500 million for banks; CZK 35 million for credit unions (Article 4 BA; Article 2 CUA). - Fitness and propriety procedures for managers and qualifying holders are specified; applicants must submit a three-year strategic business plan. - Assessment: Compliant. - Comments: CNB should perform onsite visits to new start-ups within the first year of operation; supervisory boards globally typically have more than one independent member. - Principle 4 (Transfer of significant ownership) - Qualifying holding defined as at least 10 percent (Article 17a BA); CNB prior consent required for acquisitions reaching 20, 30, or 50 percent thresholds (Article 20 para 3 BA). - CNB can suspend shareholder rights if qualifying holding acquired without consent; CNB lacks explicit power to require divestment. - Assessment: Compliant. - Comment: Recommend granting CNB power to require divestment when necessary. - Principle 5 (Major acquisitions) - Banks restricted by quantitative investment limits: not more than 15 percent of own funds in one legal entity and no more than 60 percent in aggregate acquisitions. - CNB requires notification of plans to establish entities abroad but there is no requirement for prior consent for substantive acquisitions (no systemic pre-acquisition supervisory assessment of foreign supervisory quality). - Assessment: Materially noncompliant. - Rationale/recommendation: BCP requires supervisor to take an active pre-acquisition role for substantive investments; CNB policy of ex post assessment leads assessors to rate Materially noncompliant. A higher rating would require prior consent for substantive investments/acquisitions and assessment of foreign supervisory quality before allowing major acquisitions abroad. ### Capital adequacy and risk-sensitive frameworks (Principles 6–7) - Principle 6 (Capital adequacy) - Solo and consolidated capital requirements and definitions are set in PRD; 8 percent capital adequacy ratio required (Articles 37–43 PRD). - CNB can require higher capital under Pillar 2; BA requires registered capital at CZK 500 million minimum. - Use of Basel II approaches: five bank groups (80 percent of sector aggregate balance sheets) apply IRB for some portfolios; two banks use advanced measurement for operational risk. - Assessment: Largely compliant. - Comments: CNB lacks explicit power to withdraw consent for advanced approaches (CRD IV expected to address this). Assessors suggest explicit remedial action triggers when capital declines below 8 percent. - Principle 7 (Risk management process) - Laws and decrees require comprehensive governance and risk management covering credit, market, operational, liquidity, concentration, reputation, and strategic risks; ICAAP and stress testing required. - Onsite reviews include transaction testing (example: 100 commercial loan files and 100 retail loan files) and interviews; onsite exams for a large bank can last two months with up to 30 inspectors. - Assessment: Largely compliant. - Recommendation: Increase focus on supervisory boards (formal approval of strategies and more direct supervisory engagement and evaluation). ### Credit, problem assets, provisioning, and concentration risk (Principles 8–11) - Principle 8 (Credit risk) - Credit risk management systems required; CNB onsite verifications and transaction testing performed as described above. - Access to Central Credit Register available to supervisors. - Assessment: Compliant. - Principle 9 (Problem assets, provisions and reserves) - Loan classification: not in default (standard, watch) and in default (substandard, doubtful, loss). Default defined as unlikely to repay or 90 days delinquency (unless amount insignificant). - Provisioning methods: coefficient method (1 percent watch, 20 percent substandard, 50 percent doubtful, 100 percent loss), discounted cash flows, or statistical models. - Reporting: monthly reports to CNB on classified loans, past due loans, large classified credits, reconciliations. - Assessment: Compliant. - Comments and recommendations: - Consider shortening the 360 days past-due threshold for loss classification. - Targeted thematic onsite visits to credit unions recommended given lower provisioning rates for NPLs (approx. 15 percent in credit unions versus 50 percent in banks) and higher default frequency. - Principle 10 (Large exposure limits) - Definition of connected counterparties in PRD; large exposure threshold in investment portfolio: exposures ≥ 10 percent of capital funds (Article 189 PRD). - Regulatory large exposure limit in banking book: 25 percent of capital funds; trading book limit: 600 percent of capital (PRD). - Reporting: monthly solo reporting and quarterly consolidated reporting of all exposures exceeding 10 percent of capital. - Assessment: Largely compliant. - Comments and recommendations: - Trading book exposures are not fully aggregated against the large exposure limit and not fully offset by capital; assessors find this misaligned with international practice. - Recommend narrower interpretation of exemptions (intra-group exposures), additional guidance on “connectedness,” and consideration of stricter national limits (global practice often 25 percent cap for intra-group exposures). - Principle 11 (Exposures to related parties) - Related parties defined broadly (Article 129 BA); transactions with related parties must be on market terms (Article 18 BA); boards expected to approve such transactions. - Reporting on related-party exposures is not separately required—only via large exposure reporting. - Assessment: Materially noncompliant. - Key deficiencies and recommendations: - CP 11 requires dedicated rules for related-party transactions (prohibiting conflicted persons from participation, escalation to supervisory board for significant transactions, audit and reporting processes, aggregated limit not exceeding 25 percent of capital). - CNB should be empowered to require collateralization of related-party exposures when large or risky. - Reporting on related-party exposures should be separate and on an individual basis (except insignificant transactions). - Immediate reporting to board level of delays in related-party payments should be required. ### Foreign, market, liquidity, operational, and interest rate risks (Principles 12–16) - Principle 12 (Country and transfer risks) - Country and transfer risk requirements are included within credit risk PRD rules; banks must report quarterly exposures to individual countries. - Assessment: Compliant. - Principle 13 (Market risk) - Market risk management strategies, limits, independent valuation, and stress testing required. Banks must calculate market risk when it exceeds 3 percent of capital. - Assessment: Compliant. - Note: Large Czech banks estimated market risk under 3 percent of capital. - Principle 14 (Liquidity risk) - CNB uses qualitative liquidity standards; banks must have liquidity strategies, contingency plans, and perform stress tests (idiosyncratic, market-driven, combined scenarios). - Czech banks hold large liquidity surpluses (deposit-to-loan ratios of 130–140 percent); reverse repos with CNB cover liquidity needs per authorities. - Assessment: Compliant. - Note: Authorities plan to introduce quantitative liquidity rules with EU implementation of Basel III. - Principle 15 (Operational risk) - Operational risk strategies, contingency and business resumption plans, IT and outsourcing oversight required; CNB has dedicated inspection staff (15 on credit and operational risk onsite team). - Quarterly public reporting requirements on operational risk measurement and the three greatest operational risk losses in categories (electronic banking, information systems, other). - Assessment: Compliant. - Principle 16 (Interest rate risk in the banking book) - Boards must approve IRR strategies; CNB requires quarterly stress tests (parallel 200 bp shift for one year or 99 percent confidence level approach). - A 20 percent drop in economic value of capital from IRR stress tests requires notice to CNB and remedial action. - Assessment: Compliant. ### Internal control, AML/CFT, and supervisory approach (Principles 17–20) - Principle 17 (Internal control and audit) - Management board responsibility for governance and internal controls; internal audit required to be permanent and independent; head auditor may attend board/audit committee meetings. - Audit committees required for most banks; one independent member minimum. - Assessment: Compliant. - Recommendation: Encourage increased use of independent supervisory board members, particularly in subsidiaries of large groups. - Principle 18 (Abuse of financial services / AML/CFT) - CNB and MOF share AML/CFT responsibilities; institutions must report suspicious activity to FIU (Czech Financial Analytical Unit); CNB inspectors test AML/CFT programs. - Identified deficiencies (including Moneyval findings) and recommended actions: - Customer due diligence needs guidance including beneficial ownership verification; bearer shares present control challenges. - Definition of PEPs limited; escalation procedures for PEPs and private banking require improvement. - Frequency of AML/CFT inspections can lapse up to five years — considered inadequate. - Maximum fine under money laundering act: up to CZK 1 million for failure to prepare/deliver an AML program. - Assessment: Materially noncompliant. - Specific recommendations: - Require compliance programs with audit, training, and designated compliance officers at management level addressing AML/CFT and wider financial crime. - Require reporting of suspected criminal activity (not only AML/CFT) to FIU or CNB. - Increase frequency of AML/CFT inspections and increase maximum fines under the money laundering act. - Improve KYC guidelines (including bearer share companies) and adopt FATF-consistent PEP definitions. - Principle 19 (Supervisory approach) - CNB uses quarterly quantitative and qualitative analyses and the RAS for supervisory planning; ratings not shared with banks but used internally and provided to CNB Board semiannually. - On-site teams: three specialty teams; on-site exam department staffing: 32 staff (market & liquidity risk 9; credit and operational risk 15; model validation 4). - Stress testing: top-down quarterly and bottom-up semiannual for major banks. - Assessment: Compliant. - Principle 20 (Supervisory techniques) - Off-site and on-site approaches combined; off-site portfolio managers (eight) act as points of contact; no rotation policy for off-site inspectors. - Full-scope on-site inspections generally every three to four years; targeted inspections every two years for large banks; no requirement for early post-startup inspection. - Assessment: Materially noncompliant. - Recommendations: - Increase staffing for more frequent on-site inspections (aim for at least annual onsite inspections for largest institutions). - Institute rotation of off-site inspectors to reduce regulatory capture. - Require timely on-site review of new banks (within months to one year) and greater CNB engagement with audit committees and supervisory boards, including annual meetings by head of supervision. ### Reporting, accounting, and disclosure (Principles 21–22) - Principle 21 (Supervisory reporting) - Reporting cadence and scope: - Monthly solo and quarterly consolidated reporting on profits, provisions, capital, loans, mortgages, investments, derivatives, repos, commitments, maturity schedules, interest rates, IRR, large exposures and concentrations, electronic banking, organization. - Weekly liquidity reports from large banks. - Reports prepared on FINREP / IFRS-comparable bases. - CNB has authority to obtain any and all information from credit institutions; penalties apply to institutions failing timely/accurate submission (no recent fines noted). - Automated systems perform data tests and generate exception notices; CNB can require external risk management audits in specified circumstances and may reject external auditor appointments. - Assessment: Compliant. - Recommendations: Establish monthly or quarterly peer reports and rules/guidelines for signatories on submissions; ability to impose penalties on individual signatories. - Principle 22 (Accounting and disclosure) - Legal liability for management for reliable accounting; auditors verify financial statements and, on CNB request, governance and disclosure items. - Statutory audit governed by Act on Auditors No. 93/2009 Coll.; FINREP/IFRS frameworks applied. - CNB publishes expectations and benchmarks in CNB Bulletin. - Assessment: Compliant. *Source: IMF staff assessment text as provided in the content unit.* ### 1. The statutory audit of the financial statements. ### 1. The statutory audit of the financial statements. ### Audit requirements and practices - 1. The statutory audit of the financial statements. - 2. Targeted audits if required by the CNB (when there are shortcomings). In practice, these are rarely requested. - 3. Audits of institutions’ internal governance and control systems,– to be requested by the CNB. *Source: _cr12172 - 1. The statutory audit of the financial statements.* ### 4. A yearly note by an auditor based on testing of some items, that a bank ### _cr12172 - 4. A yearly note by an auditor based on testing of some items, that a bank ### Auditor coverage, standards, and CNB oversight - Local audit standards are close to international standards and require auditors to cover: the loan portfolio, loan loss reserves, nonperforming assets, asset valuation, trading and other securities activities, derivatives, asset securitizations, and the adequacy of internal controls over financial reporting. - According to Articles 22 BA and 8b CUA: - The bank or credit union must report yearly the name of the chosen audit firm and the head of the intended audit team to the CNB. - The CNB may reject the appointment within 30 days from notification and has used this right in practice. - Auditors cannot be entities with a special relation to the audited institution. - The CNB compares statutory audits with its own off-site and on-site findings, including quality of assets, volume of provisions, and verification of the risk management system; significant discrepancies are discussed with auditors. - The CNB does not have explicit power to terminate an auditor’s ongoing appointment during the working year; in practice it uses other methods (e.g., informing the Chamber of Auditors) and has seen auditors subsequently relieved from duties. ### Accounting, audit verification, and disclosure requirements - Commercial companies and issuers of securities registered in EU member states must apply IFRS for solo and consolidated financial statements; other financial organizations follow MOF decrees comparable to IFRS (deviations: financial leasing; Czech requirement that goodwill positions must be amortized). - Article 22 BA and Article 8b CUA require financial statements to be verified by a certified auditor using internationally acknowledged auditing standards and procedures. - Article 11a BA, Article 7b CUA, and PRD (Articles 206–213) require institutions to publish information on: - Themselves, shareholder/member structure, consolidated group structure, activities, financial standing, fulfillment of prudential rules, and risk management (on an individual entity basis unless published consolidated). - Content, periodicity, deadlines, manner, and structure of data to be verified by an auditor; information must be on time, accessible, adequate and balanced. - Publication timing and frequency: - Annual, audited financial statements are published within four months of year-end. - Banks publish quarterly financial information. - Information published by financial institutions, at latest by April 30, must reflect size, management method, number of employees, nature, scope, and complexity of activities. A detailed list of quantitative and qualitative information is defined in the PRD (annexes 24 to 28). - Every quarter the CNB publishes aggregate information about the banking and credit union sector; additional information appears in the CNB annual report and via links to institutions publishing PRD information. ### Auditor and supervisory interaction; auditor independence and rotation - The CNB meets periodically with auditors (e.g., through the Chamber of Auditors) and convenes meetings to inform auditors about auditing trends and bad practices. - Article 21 Act on Auditors: auditors must inform the CNB in writing of serious facts indicating regulatory violations or other serious facts with fundamental negative impact on management, sustainability, or that may lead to rejection/negative/qualified auditor’s statements. - No explicit legal requirement to change auditor exists; CNB may in theory refuse appointment due to loss of impartiality (never tested). Recommended practices: - Banks/credit unions expected to have appointment policies with a recommended rotation period of five to seven years. - Audit firms typically rotate partners responsible for bank audits every five years. - The CNB can request auditor working papers and has done so on several occasions; auditors are obliged to provide information and explanations on request. ### Assessment, recommendations on audit oversight - Assessment: Compliant. - Comments and recommendations from BCP assessors: - EC 4 is fulfilled because CNB may and does ask for different targeted or special audits (CNB sets content). - The rule requiring CNB decision before an auditor appointment is commendable; CNB has used refusal in practice. - Recommendation: CNB should be provided powers to dismiss unsuitable auditors during the working year, to avoid relying on external parties such as the Chamber of Auditors. - Recommendation: Supervisory teams of specific banks should meet more frequently with the bank’s external auditors to increase understanding of the bank and audit work; meeting composition (including bank management or not) should depend on meeting character. ### Corrective and remedial powers of supervisors (CP 23) - Legal framework and practices: - CNB identifies and reacts to negative tendencies early; chooses instruments corresponding to gravity and character of situation; generally warns, demands explanations, may set deadlines for remedial measures and require reporting on progress. - CNB may prescribe direct discussion with top management, require remedial measures, and evaluate implementation during on-site inspections. - Possible measures (BA Article 26 and other provisions) include requiring remedy within a deadline, restricting/prohibiting certain activities, limiting distribution networks, replacing managers or board members, aligning organization/strategy/procedures with BA, adopting stricter rules for liquidity/provisioning/capital, increasing provisions and reserves, maintaining capital above regulatory minimum, reducing registered capital, using nondistributed profits to supplement reserve funds or increase registered capital, and limiting risks from shares in other entities. - Urgent and necessary sanctions may include: changing the license by eliminating activities; ordering an extraordinary audit; imposing receivership; imposing a penalty of up to CZK 50 million; reducing bank’s capital to pay losses; restricting transactions with closely related entities; requiring a capital increase above regulatory minimum; and requiring an increase in liquid resources. - Capital threshold remedial rules: - If a bank’s capital falls below two-thirds of its capital requirements, CNB is obliged to apply one or more remedial actions (examples: require higher capital; prohibit acquisitions of assets with a risk weight of 100 percent or more; prohibit acquisition of shares in other institutions; prohibit loans to closely related entities; prohibit interest rates on deposits above the current standard interest rate). - CNB may revoke the license (BA Article 34) if serious deficiencies persist; obliged to revoke license if bank’s capital on a solo basis falls below one third of its capital requirements. - Corresponding rules for credit unions in CUA (Article 28, Paragraph 4). - Additional powers and cooperation: - CNB may impose conservatorship or revoke license/permit; may assist in finding merger partners; CNB and MOF cooperate on crisis matters and government solvency support (see CP 1(6)). - Monetary and personal sanctions: - CNB may apply monetary penalties in narrowly defined situations against individuals: fines up to CZK 1 million (can be imposed repeatedly) on a bank’s manager (and on a former manager who held managerial function anytime within 2 years prior to introduction of conservatorship) for failure to cooperate with a conservator (Art 28(3) Act on Banks). - Nonmonetary sanction: CNB may require removal of a bank’s manager or board member; similar powers for credit unions (Art. 28 par 1(a) CUA). - Personal penalties require proof of a causal nexus between deficiency and personal responsibility; functional liability cannot be applied in these cases. ### Timeliness, enforcement practice, and recommended improvements - AC1: Corrective actions are imposed according to law and within the shortest possible term after CNB determines deficiencies. Statute of limitations for fines and remedial measures: administrative proceedings must be initiated within 1 year of discovery of violation but no later than 10 years after occurrence. - Observed practical issues: - Enforcement actions to date focused on consumer issues (e.g., misleading advertising). - In practice, delays and restrictions have occurred due to legal uncertainty and low frequency of on-site visits. - Example: CNB repeatedly requested remedial measures but institution failed to react adequately; administrative orders were sometimes issued only after major delay because of infrequent on-site visits and review procedures. - Cases where enforcement action was mistakenly dropped based on management assertions of new internal rules, without CNB verification via on-site visit. - BCP assessors’ recommendations: - Adopt policies to ensure failure to adequately and timely address CNB requests leads to enforcement actions with less delay. - Conduct quick, narrowly targeted on-site visits to verify implementation of significant supervisory measures when off-site verification is inadequate. - Obtain ability or legal certainty to take formal action based on current facts irrespective of management assertions; enforcement action should not be abrogated until CNB has verified intended actions have been effectively implemented. - Consider possibility to sanction individuals in defined situations to improve discipline (e.g., managers repeatedly failing to send complete or timely reports). - Create a more formalized “ladder” of actions to demand progressively stronger remedial action as an institution’s situation becomes more precarious; a ladder would help resist pressure from special interest groups and promote consistency. ### Consolidated supervision (CP 24) - Legal and operational framework: - Articles 26f BA, 25f CUA, and PRD: CNB obtains comprehensive information on controlled entities, affiliates, and group relationships (including graphical group structure); CNB may obtain information on nonfinancial/nonregulated entities but may not supervise them. - Article 25 BA: activities of Czech banks (including branches abroad) are subject to CNB supervision; consolidated groups containing a bank are subject to CNB consolidated supervision unless law provides otherwise (Article 26e BA specifies exceptions). - CNB has an internal manual on consolidated supervision and evaluates financial situation and prudential compliance quarterly on solo and consolidated basis. - Scope and limits: - BA and CUA place limitations on risks from nonbanking activities; CNB obtains information on intra-group transactions and may limit transactions/exposures within group affecting the supervised bank (PRD further specifies). - Holding companies of banks are nonregulated; CNB cannot place limits on nonregulated holding companies but obtains and monitors information and can limit intra-group exposures in line with EU requirements. - Cross-border cooperation: - CNB participates in seven colleges of supervisors and has signed multilateral cooperation agreements for cross-border banking group supervision, including information exchange and on-site examinations according to agreed terms. - Internal controls and foreign activities: - Management board has ultimate responsibility (Commercial Code); PRD requires formalized procedures and effective internal controls covering foreign activities; reports to CNB must include foreign activities. - On-site examinations evaluate internal control effectiveness, including foreign branch transactions. - If foreign branch activities endanger parent bank or reporting is inadequate, CNB may demand remedies, impose penalties, restrict activities, or, if host supervision inadequate, informally take over full supervisory responsibilities (this has happened in practice). - Assessment: Compliant. - Comment: CNB may ask for information from nonregulated entities, but supervisory certainty would be enhanced if CNB could, when warranted, physically examine nonfinancial bank holding companies and other non-regulated group entities to ensure report accuracy. ### Home-host relationships (CP 25) - Legal provisions and cooperation: - Article 38c BA and Article 22 CUA require CNB consultation and information duties vis-à-vis other states’ supervisory authorities; main information and consultation obligations are specified. - Multilateral cooperation agreements and supervisory colleges have strengthened information exchange; secure websites facilitate exchange; intensity and depth of cooperation have increased recently (in some cases weekly information sharing). - CNB has signed nine cooperation agreements with Germany, France, Slovakia, Austria, the USA, Belgium, the Netherlands, Italy, and China (publication contingent on counterparty consent); an MOU with Russia has not yet been concluded. - Article 25a BA and Article 22a CUA define confidentiality and usage limits of information obtained from foreign authorities (use solely for purposes provided and not disclosed without provider consent). - Information exchange obligations: - Article 38h BA and Article 22a CUA: CNB shall supply other authorities, on request, with information on ownership holdings, management, capital, capital adequacy, financial holding entities, liquidity, solvency, deposit insurance, consolidated supervision, accounting, internal controls, and risk management of open positions. - CNB shall, on request or own initiative, provide ex ante information materially influencing assessment of a bank (including major sanctions and remedial measures). MOUs provide for prior consultation before measures like requiring capital increases or revoking a license, with an exemption for urgent action. - Article 38i BA requires prior consultation with home supervisors in significant cases (e.g., disposal agreements, GM decisions to wind up/merge/transfer assets, capital reductions, acquisitions of qualifying holdings, imposing exceptional remedial measures such as requiring capital increase, refusal of advanced approaches approvals). Prior consultation not required in urgent situations. - Article 5k BA: if a bank under an EU single license violates host country powers and fails to rectify, CNB may contact home supervisor and may take further measures, including revoking license. - CNB provides home supervisors and supervisory colleges with summaries of major on-site inspection findings. - Licensing and on-site examination cooperation: - Requirements for domestic and foreign applicants are the same; Article 11 BA defines operational requirements; Article 41 CNB Act sets rules for submitting reports for banking and monetary statistics, liquidity, and Central Register of Credits. - Article 4 BA and Article 2j CUA require prior consent of home supervisory authority before granting a license; home authority opinion must confirm eligibility of qualifying holders and competence/trustworthiness/experience of nominated managerial persons. - For third-country banks establishing branches, CNB requires an opinion from home supervisors including declaration that branch will be subject to consolidated supervision. - Article 25 BA allows on-site examinations in the Czech Republic by home supervisors based on request and reciprocity; agreements set terms for on-site examinations in host country. For EU single license banks, CNB may carry out on-site exams if requested by home authority or allow home supervisor, after informing CNB, to carry out on-site inspections in Czech territory. - Assessment: Compliant. - Comment: Recent Russian acquisitions in Czech banking and credit unions underscore need for bilateral cooperation and information-sharing with Russian authorities while ensuring adequate secrecy protections. ### Final assessments and key numeric/frequency facts - Publication deadlines and timing: - Annual audited financial statements published within four months of year-end. - Quarterly financial information published by banks. - Institution-published information must be available at latest by April 30. - Auditor and supervisory timeframes and rotation: - CNB may reject auditor appointment within 30 days from notification. - Recommended auditor rotation period for banks: five to seven years; audit firms typically rotate partners every five years. - Monetary limits and capital thresholds: - Penalty for urgent sanctions: up to CZK 50 million. - Fines against managers for failure to cooperate with conservator: up to CZK 1 million (can be imposed repeatedly). - Capital thresholds triggering remedial actions: - Decline below two-thirds of capital requirements: remedial actions required. - Decline below one-third of capital requirements: CNB obliged to revoke license. - Specific registered capital thresholds: - Bank registered capital falling below CZK 500 million constitutes a deficiency (Article 26a BA). - Credit union capital falling below CZK 35 million constitutes a deficiency. - Reporting frequency and supervisory data: - Balance Sheet, Income Statement, and Large Exposures reported quarterly for consolidated groups. - CNB performs quarterly analyses on solo and consolidated bases. *Source: IMF staff—country report content unit _cr12172 (excerpt).* ### 1. Objectives, independence, powers, ### 1. Objectives, independence, powers, transparency, and cooperation ### 1.1 Responsibilities and objectives - Finding: The number of supervisory staff is inadequate, resulting in too infrequent onsite inspections. - Finding: Intensive offsite monitoring and follow-up of requirements for remedial action also require more staff. - Finding: Increased international activity in rule-making calls for more staff to ensure the role of the Czech authorities in international negotiations. - Note: The number of staff is decided by an internal CNB decision and the CNB is not dependent on outside sources for financing; staffing levels are not considered in the compliance rating of CP 1.2 (independence) but are discussed under CP 20. ### 1.2 Independence, accountability and transparency - Finding: The minister of finance may take part as an observer in CNB Board meetings, but not in meetings on operational supervisory issues. - Recommendation (by BCP assessors): Close contacts between the MOF and the CNB on regulatory and supervisory issues are recommended but should take place through other more transparent channels. ### 1.3 Legal framework - Compliance: C ### 1.4 Legal powers - Compliance: C ### 1.5 Legal protection - Finding: Supervisory managers and staff are protected by collegial decision-making in supervisory matters, implying that the complainant primarily must sue the CNB as a legal person rather than the staff member. - Assessment: The BCP assessors deem the CNB as “Compliant” since the present processes protect staff adequately for supervisory actions unless taken with bad intent. - Compliance: C ### 1.6 Cooperation - Finding: Fora for cooperation between the relevant authorities in financial stability and supervisory matters have been established but have not yet been activated. - Compliance: C ### 2. Permissible activities - Finding: There is no formal requirement in the CUA that all credit unions should be listed on the CNB website. (It is now done informally) - Compliance: C ### 3. Licensing criteria - Finding: CRO/CFO/Compliance officers are not formally required to be included in the fit-and-proper test. - Finding: There is no requirement for the supervisory board to include independent members, except for one member in the Audit Committee. - Finding: Although start-ups will be monitored offsite there is no rule for the CNB to visit them at an early stage. - Compliance: C ### 4. Transfer of significant ownership - Finding: The CNB has the power to block the voting rights and other rights of owners of qualified holdings, e.g. if the owner is unsuitable. - Limitation: The CNB has no right to require the owner to divest her holdings. - Compliance: C ### 5. Major acquisitions - Finding: Except for certain cases, there are no requirements for banks to request prior consent from the CNB for significant acquisitions or investments. - Finding: For investment by a Czech bank in a foreign financial institution the CNB determines that the foreign supervisor practices consolidated supervision, but it does not explicitly assess the quality of such supervision. - Compliance: MNC ### 6. Capital adequacy - Recommendation: Refer to CP 23 on introducing a trigger for mandatory supervisory action at an earlier stage of a decline in a bank’s capital ratio. - Recommendation: The CNB must be provided the formal power to require banks to abrogate or amend flawed internal models for calculation of risk-weighted capital. - Compliance: LC ### 7. Risk management process - Finding: The CNB provides clear expectations and guidelines regarding risk management systems. - Recommendation: More emphasis and focus should be placed on supervisory boards; the CNB should more formally evaluate capability and participation of supervisory board members through regular meetings and evaluation of minutes and board packages. - Recommendation: Supervisory boards should formally approve strategies and policies. - Compliance: LC ### 8. Credit risk - Compliance: C ### 9. Problem assets, provisions, and reserves - Finding: The past due schedule of 360 days should be shortened as it applies to unsecured as well as secured loans and appears excessive to the assessors. - Compliance: C ### 10. Large exposure limits - Finding: The definition of large exposures only encompasses exposures in the banking book; exposures in the trading book are not subject to the large exposure limitations and may reach 600 percent of a bank’s capital. - Finding: Temporary excesses over the 25 percent limit for large exposures are to be partly, but not wholly, offset by additional bank capital. - Finding: Exposures to parent banks abroad, to sister banks or to investment firms are exempted from the 25 percent limit and are subject to a limit of 100 percent of bank capital; this is too high and constitutes a risk to the bank. - Compliance: LC ### 11. Exposure to related parties - Finding: There is no rule that all banks must have a separate set of policies for related party transactions. - Recommendation: CNB guidelines should define in more detail how “conflict of interest-rules” should be applied for related party transactions. - Recommendation: Banks should have rules for immediate reporting to their Boards of payment delays in significant related party exposures. - Recommendation: Reporting (also to the CNB) of related party exposures should be separate from reporting on large exposures in general and should be on an individual basis, except for insignificant transactions. - Recommendation: Aggregated exposures to all related parties, excluding exposures to group credit institutions and investment firms under consolidated supervision, should have a limit which should not exceed 25 percent of the bank’s capital. - Compliance: MNC ### 12. Country and transfer risks - Compliance: C ### 13. Market risks - Compliance: C ### 14. Liquidity risk - Compliance: C ### 15. Operational risk - Compliance: C ### 16. Interest rate risk in the banking book - Compliance: C ### 17. Internal control and audit - Compliance: C ### 18. Abuse of financial services - Recommendation: Required compliance programs that address AML/CFT and financial crime should include components for audit, training, and a designated compliance officer at the management level. - Recommendation: Credit institutions should regularly report to the CNB or the FIU suspected criminal activity, in addition to suspected AML/CFT activity. - Recommendation: The frequency of inspections should increase. - Recommendation: The Czech Republic should increase the maximum level of fines for inadequate AML/CFT programs under the money laundering act. - Recommendation: Escalation procedures above the supervisor level are needed for high risk accounts. - Recommendation: KYC requirements or guidelines should be improved for low-risk customers and beneficial owners, and in particular address bearer share companies. - Recommendation: PEPs should be defined to include all relevant politicians (according to FATF definitions). - Compliance: MNC ### 19. Supervisory approach - Compliance: C ### 20. Supervisory techniques - Finding: Full-scope and targeted onsite inspections are infrequent, and the CNB does not meet with audit committees and supervisory boards, unless there are exigent circumstances. - Recommendation: Increased staffing levels are recommended to allow for more frequent onsite inspections, including for AML and for new and problem banks, and to allow for the rotation of off-site inspectors. - Recommendation: The CNB should increase its interaction with audit committees and supervisory boards, particularly in large banks. - Compliance: MNC ### 21. Supervisory reporting - Recommendation: The CNB should establish monthly or quarterly peer reports to facilitate more frequent comparative and trend analyses. - Recommendation: The CNB should establish guidelines or rules for signatories on financial statement and other submissions and the capacity to impose penalties on them on an individual basis. - Compliance: C ### 22. Accounting and disclosure - Compliance: C ### 23. Corrective and remedial powers of supervisors - Recommendation: Introduce a structured framework for intervention in banks. - Finding: The trigger for mandatory supervisory remedial action is released when bank capital declines below two-thirds of the capital requirement; this is too late, since problems may then be ingrained. - Recommendation: Introduce a system which in relevant cases would imply narrowly targeted on-site visits to banks, to ensure timely follow-up of remedial requirements. - Recommendation: Provide the CNB with the explicit power to displace unsuitable bank managers. - Recommendation: Broaden the powers of the CNB to issue monetary sanctions to individual persons. - Compliance: LC ### 24. Consolidated supervision - Finding: The CNB lacks the power to physically inspect entities outside the consolidated banking group. - Compliance: C ### 25. Home-host relationships - Finding: Although there is now Russian ownership in the Czech banking sector, there is no MOU with Russia, partly due to problems of ensuring the confidentiality of information. - Recommendation: The authorities are recommended to seek an alternative arrangement, ensuring such confidentiality. - Compliance: C - Aggregate compliance categories listed in source: Compliant (C)—#, Largely compliant (LC)—#, Materially noncompliant (MNC)—#, Noncompliant (NC)—#, Not applicable (N/A)—# *Source: _cr12172 - 1. Objectives, independence, powers,* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12172.pdf_