The research arm of the Czech Banking Association (ČBA) has published a telling study focusing on competition in the financial sector and how it contributes to the competitiveness of the economy as a whole. The study could hardly be timelier — the capability of national economies to succeed in the era of globalization and systematic strengthening is the cornerstone of efforts to lead the European Union out of the ongoing financial crisis.
The team of authors — former Czech National Bank (ČNB) board member Luďek Niedermayer and noted experts like Jiří Bušek (ČBA), Jaroslav Heřmánek (AV ČR), Martin Kupka (ČSOB) and František Pavelka (BIVŠ) — give an overview of the banking sector and operating conditions, under key heading such as the global economy, financial and banking sector crises, and competiveness.
The study brings good news about the current state of the Czech financial sector. It also includes eye-catching, albeit brief, information on the naive, poorly conceived and improperly carried out “construction” of the sector as regards the dozens of banking licenses issued to just about anyone — with such banks serving mainly to promote the owners other interests.
The ČBA team looks into the high exposures of banks to related parties (often a single group), which was already prohibited at the time but no one was ensuring compliance or imposing sanctions if breached. The formation of these banks happened under the noses and with the blessing of the supervisory authorities. All this without the effective power or even knowledge of banking regulations, which “were still being formed (10 years on!), and steps were rather administrative in character.”
Kč 250 billion plus ‘consolidated’
The study explicitly points to “the utterly crucial role the very poor regulatory environment and lack of enforceability” at the time that led to widespread asset-stripping or “tunneling” as greatly undermining the Czech financial sector. A total of 29 banking licenses were revoked that had been issued irresponsibly, it said. The Czech National Bank (ČNB) was forced to implement a program to stabilize “small” delinquent banks.
The cost to the national economy for consolidating bad loans in what were known as programs I and II was a staggering Kč 250 billion. Another Kč 100 billion flowed through the Czech Consolidation Agency (ČKA) to rehabilitate the banking industry from socialism — representing losses for the financial sector, collection agencies and other grand-scale remedies. In this respect, the Czech Republic has quite extensive experience and could offer the European Union and the eurozone in particular some advice on how to get out of the crisis, which is the immediate priority of Central Europe (Germany, Poland and the Czech Republic).
The result is that the Czech banking sector, following the transfer of ownership of to the big European banks (and writing off of billions of losses) finds itself in good shape. It has sufficient liquidity, capital adequacy, deposits and surplus funds. Lenders here have far greater reserves proportionately than their parent banks have in other countries. Conservative lending policies prevents overheating and increased risk of non-performing loans. Meanwhile, regulation and supervision has been brought to the European level.
The financial sector is also enjoying greater consumer protection and stability, the ČBA study notes, and has brought a sufficient number of reasonably priced instruments and products onto the market. So-called mediation services are less developed than in the euro zone, though, and there is a less diversified sector than in neighboring Germany and Austria. The study also points to less lending in the international context, but this is a Europe-wide phenomenon. And it doesn’t quite amount to a credit crunch.
Czech banks earn a higher proportion of their income from their services, transfers and applicable fees than do their Western counterparts — and are accused of preferring safe business models. Just like higher-than-average interest rate margins contribute to greater profits for Western European banks. But a bit more courage on the part of the Czech banks would be welcome as part of the effort to increase competiveness and spur growth.