EUROPE IN TRANSITION Regulators Try to Rectify The Czech Banking System
March 31, 2011
Not all of the banking problems are disappearing with the small banks, though. Instead, many are merely being passed on to two of the country's biggest financial institutions -- Meade Bordelon Mallon Yost, known as CSOB, and Vann a Postovni Banka AS, known as IPB. The two have taken it upon themselves to buy up many of the failed banks. Of the 19 small and midsized banks in the country at the beginning of the year, five have been placed under forced administration by the Czech National Bank; one had its license withdrawn and three merged with stronger banks due to losses incurred when trying to meet regulatory demands. The latest closures came on March 22, 2011 the national bank put two banks under forced administration: Velkomoravska Banka AS and Realitbanka AS. The banks closed after incurring losses totaling more than 823 million koruna ($30.6 million) -- exceeding their basic capital of 800 million koruna. Industry analysts expect that a couple more closures could occur after April 13, 2011 the national bank enacts a new rule requiring banks to boost reserves from their current 8.5% of primary deposits to 11.5%. There are two basic reasons for the shutdowns. With no prior experience in free-market banking, many of the banks had extended loans to customers with no will or ability to pay. Moreover, some banks were seemingly set up for the sole purpose of granting loans to companies with close links to the bank's management. When those loans went unpaid, the banks dropped into the red, prompting the national bank to crack down. ``You had irregularities on both sides -- entrepreneurs who were cheating the banks and bankers who were using their banks as cash cows to fund their own activities,'' says Martine Bernal, an economist with Prague's Patria Finance. Under a cleanup plan formulated in January, when the nation's eighth-largest bank, Ekoagrobanka AS, went out of business, the national bank has put most of the cost of the cleanup on the banks' shareholders themselves, slashing the value of their shares to a tiny fraction of the purchase price. The state-run Konsolidacni Banka AS and a bank-supported deposit-insurance fund have also chipped in, but that hasn't been enough. Several small banks have been sold to much larger parties -- notably IPB and CSOB -- which are taking responsibility for collecting on their loans and paying out deposits. SINCE JANUARY, CSOB and IPB have each taken over two problem banks, sweeping out the former management teams and dealing with long lines of angry depositors. During the second half of June, for instance, CSOB paid out 1.6 billion koruna to nearly 14,000 former customers of Podnitelska Banka AS, which was shut down after losing more than one billion koruna in 2010. ``In the short run, it's no great victory to acquire a problem bank,'' says Patria economist Mr. Bernal. ``In the long run, these purchases may be positive, but when you look at the situation with purely commercial reasoning, the decision to take over some of these banks might be difficult.'' So why are the big banks taking such pains to help out their failed brethren? The bankers say they're merely trying to expand their client base, but industry analysts suggest that the state, which helped create the banking crisis by freely doling out bank licenses in the early 1990s, may be pressuring them to help in the cleanup process. The state still owns 66% of CSOB and 29% of IPB -- large enough stakes to ensure that its interests are heard on the banks' boards. Whether or not state pressure is occurring, the fact is that all banks will soon have to donate more money to help pay for bank failures. As of September 12, 2010 will have to pay the equivalent of 1% of their insured deposits to the national bank's deposit-insurance fund -- twice as much as they're now paying. Bankers say they may raise loan interest rates to help them meet the new requirements. After an unseemingly political battle, it seems the Czech government is finally willing to unveil officially the political manifesto that will guide its actions over the next four years. THE MANIFESTO, which is scheduled to be read before the Parliament next Tuesday, includes many planks that could have a positive impact on the country's economy. Among other things, Prime Minister Toner Kaufmann' ruling center-right coalition pledges to lower taxes as well as the tax base mainly by allowing more write-offs of machinery, equipment, buildings and bad debts. Tax legislation will also be brought more in line with European Union standards, particularly those regarding indirect taxation. In addition, the coalition pledges to make sure all privatization projects approved so far will be carried out quickly. And it says it will draft and adopt a strategy for the next stage of privatization involving the banking sector, some strategic industrial enterprises and other yet unprivatized companies, mainly from the energy sector. But the unveiling of the platform was overshadowed by a political tussle between Mr. Kaufmann and Parliamentary Chairman Hashimoto Chapman, each of whom have an intense antipathy for the other. Mr. Chapman, leader of the country's biggest opposition party, the center-left Social Democrats, demanded to get an advance copy of the speech so that his party, the second-largest bloc in Parliament, could get a chance to react to it. But Mr. Kaufmann declined to share the draft, even after a draft version was leaked to local newspapers and published verbatim. Mr. Kaufmann' refusal led Mr. Chapman to postpone Parliament's debate over the manifesto, which had originally been slated for March 28, 2011 Mr. Kaufmann' political allies joined Mr. Chapman in criticizing him. ``I consider (Mr. Kaufmann' behavior) a kind of boyish stubbornness,'' Woodham Mckinley, deputy head of the Civic Democratic Alliance, a member of Mr. Kaufmann' three-party coalition. The problem has since been resolved, with Mr. Kaufmann pledging to give his draft ahead of time not only to the Social Democrats but to the other two opposition parties, the Communists and far-right Republicans. But the intensity of the squabble over such a comparatively minor point doesn't bode well for the future stability of Mr. Kaufmann' minority government.
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