Although the Czech Republic financial system remains stable, the country faces increased risks due to a sharper slowdown in economic growth in Germany and other major trading partners of Czech corporations, the Czech National Bank (ČNB) said Tuesday.
The Czech banking sector is strong thanks mainly to sufficient profitability and capital adequacy and good balance-sheet liquidity, but the economy is exposed to a high degree of uncertainty at a time of fading financial crisis and economic recession, it said: “This is generating numerous risks that could disrupt financial stability over the next two years. These are the main conclusions of the Financial Stability Report 2010/2011 published today by the Czech National Bank.”
Citing the slowdown in Germany and “other major trading partners of Czech corporations,” the central bank said intensity of the risks faced by the domestic financial system has increased compared to 2010 due to adverse fiscal developments in the euro zone and their potential impacts on the Czech economy.‘The situation in the domestic economy does not yet provide sufficient support for claiming that the crisis is coming to an end either.’
“Developments in the global economy will be of key importance for maintaining financial stability over the next two years. It is important to warn against over-optimistic expectations given developments abroad, where the problems of some indebted euro area economies are coming to a head,” ČNB Governor Miroslav Singer said in a statement. “The situation in the domestic economy does not yet provide sufficient support for claiming that the crisis is coming to an end either.”
The central points of the Financial Stability Report 2010/2011 are as follows:
- The starting position of the Czech financial system remains very good for future years
- The intensity of the risks to the financial system has increased, mainly as a result of adverse fiscal developments in the euro area
- Developments in the global environment will be of key importance for maintaining financial stability in the years ahead
- Stress tests show that the banking sector is highly resilient to a wide range of risks
- The banking sector could be threatened only by very extreme shocks such as a long-term decline in GDP or the collapse of the three largest debtors of each bank
- For the stability of the financial system it is vital that financial institutions maintain sufficient capital and liquidity buffers
A strained labor market situation — and measures needed to reduce the structural public budget deficit — will dampen income growth and negatively affect Czech households’ ability to repay loans, the ČNB said.
“For the stability of the financial system it is vital for domestic financial institutions to maintain the capital and liquidity buffers created during the crisis. High dividend payments from retained earnings could be a risk to the banking sector in the near future, as they would reduce the capital buffer,” Singer said.
The resilience of the domestic financial system was assessed by means of stress tests on banks, insurance companies and pension funds using three future economic scenarios titled, “Baseline Scenario, Asymmetric Developments and Renewed Recession.” The Baseline Scenario is considered by the ČNB to be the most probable. The other two alternative scenarios are characterized by a sizeable contraction in economic activity and adverse financial market developments.