Development of Banking sector and PSE Banking sector nOne of the most tickler problem of whole economic transformation was development of the banking sector. n n Banking sector before 1989 nMono-structure banking system nIn 1950 was established State Bank of Czechoslovakia (SBCS). nSBCS “hybrid” between state and private bank. qCentral bank functions nMonetary police qIssue of paper money and qForeign exchange rate policy qGovernment function nTax collection nControl of wage development qCommercial bank functions nCollection of savings nGranting credits nExchange of foreign currencies nOrganization and running of payment mechanism nClients of SBCS were only business companies not households. Banking sector before 1989 nIn Czechoslovak banking system existed banks with specific functions qTrading bank (Zivnostenska banka) the most important bank during interwar period that was confiscated in 1945. nIn communism regime provided foreign exchange operations for private clients nIt had business branch in London for qArrangement relations with foreign banks qForeign trade and other international transactions q q Banking sector before 1989 qCzechoslovak business bank (CSOB) was established in the 1960’s nOwned by SBCS and businesses of international trade (monopoly for trading with foreign countries) nProvided international payment with subjects in RVHP markets (social countries in Europe, Asia and Africa) nIn banking sector existed two saving-banks qCzech state saving-bank qSlovak state saving-bank nCollected savings from households and granted credits for households. nSurplus of savings were transferred in SBCS and divided into state companies. q n n Banking sector before 1989 nCommunism regime was aware of problems in banking system. nIn 1989 was decided about transformation of mono-structure banking system in two tire banking system. nFrom SBCS were set off three state banks qCommercial bank (Komercni banka) qGeneral Credit bank (Vseobecna uverova banka) qInvestment bank (Investicni banka) Development of banking sector in the 1990’s nDevelopment of banking sector in the 1990’s can be divided in three phases qEstablishing of new small banks qPrivatization of large state banks qBanking crisis New banks nThe number of new banks in Czech market was growing since the beginning of the transformation process. nAt the beginning of transformation process conditions for establishing of new banks were weak. qShareholder’s capital 50 million CSK in 1990 qBut was accepted every tenth application for banking license n nGovernment and State bank set these weak and liberal conditions to improve competition in banking sector. qThis conditions were getting more restrictive in the process. qIn April 1991 basic capital 300 millions of CSK and qfrom 1993 till nowadays 500 millions CZK nDespite of these liberal conditions banking sector in the Czech Republic was concentrated. nSmall banks were weak and financial resources for their business activities were getting in the form of credits from large banks in interbank market. New banks Share of commercial banks in savings and credits in 1990 Bank % of credits % of savings Commercial bank 47,8 17,5 General Credit bank 20,1 7,9 Investment bank 14,6 8,3 State credit-houses 10,3 62,3 Others 7,2 4 New banks nIn 1991 were established first credit banks (kampelicky) nSimultaneously the number of small Czech bank was growing and also foreign banks opened their subsidiaries in the Czech republic. qForeign bank focused only on the best clients - nForeign companies that they were familiar with them from their domestic market. qAccording to government expectation: nForeign banks should have promoted real competition in banking sector. nBut these institutions were interested only in the most lucrative clients with the lowest rate of risk. New banks nIn domestic market arose double pressure qForeign banks overtook the most profitable clients and domestic banks cared only about subject with high level of risk or insolvent clients qForeign bank pushed down banking fees for this profitable clients and thus limited possible fees of domestic banks q q n New financial institutions nSpecific group of institutions in banking sector were transformation institutions. nThe best known is Consolidate bank qIn consolidation bank were transferred nBad liabilities of companies doing business in central planned economy nBad loans in time of cleaning assets of banking sector nOther institution is Bohemia and Moravia Guarantee bank established in 1992 by government and large banks qSupport of small and middle companies with credits and bank guarantees nCzech Export bank qGranting cheap credits for export companies. qOwned from 66,7% by state Consolidation bank/agency nEstablished in February 1991 originally only for 126 days but in fact existed till 2007. nIn this bank were transferred qbad debts from state companies in the value of 80 billion CSK and qbad assets from large state banks. nPrimary aim of Consolidation bank was qrestructure or decay of companies that transferred assets in Consolidation bank. qThis aim was not never fulfilled. nConsolidation bank became a store for bad loans and played important role in cleaning of Czech bank before their sale to foreign investors. nIn Consolidation bank was during 1999 – 2000 five institutions qRevitalization Agency – cleaning financial accounts of specific companies like Aliachem, CKD Praha, Skoda Plzen qCzech Financial – buyout of classified credits in small banks qKonpo – control and debt recovery of Commercial Bank qPrisko – transferred all liabilities from former state company Skoda – Car qSanakom – transferred bad credits of bank Investment bank nBecause Consolidation bank was established as a bank it had to fulfill all conditions suitable for commercial bank although its purpose was different qE.g. According to Banking Act nConsolidation bank had not acquired a majority share in non-banking subjects and it limited its restructured aims in controlled companies. nIn 2001 Consolidation bank was transferred in Consolidation agency and became its continuator without limitation related with its former bank statue. Bank privatization nAt the beginning of the 1990’s existed 4 large fully state banks qCzech state saving-bank qTrading bank qCommercial bank qInvestment bank nAnd Czechoslovak business bank with significant state share. nAccording to current opinion the highest revenue from bank privatization could be obtained in 1991-1995 because of weak position of foreign bank in Czech market and Czech banks were not suffered by classified credits from transformation process. q nIn 1992 were 4 fully state banks transferred in joint stock companies and part of their stocks designed for privatization process. nAfter privatization process state became minority shareholder in these banks with share from 48-49 %. nIn next years privatization process left off qBecause of lack of rules for sale of banks to foreign investors. qWhole process was slowed down by several minority shareholders actions against important bank decisions. nDispute point of whole transformation process is slow privatization of banking sector. nThe main problem was existing credit channels between banks and state companies established in central planned economy nThis credits became uncollectible and in final phase they were paid off by tax payers. nPrivatization process of banks was postponed because of privatization process as a whole. nThe main fear was related with turn off the financial resources for domestic companies that did not fulfill strong international criteria. nIf privatized bank stopped credit granting to state companies these companies would get in troubles. nOn the other hand postpone of bank privatization arose opportunity for political pressure in banks to grant credit to companies that did not satisfy bank conditions. nBanks nourished companies that should have bankrupted and granted credits for losing projects. nIt is reason why important part of credits became classified. nState proprietorship encourage morale hazard qBank expected that in case of financial problems will get financial support by government that also happened for several times. Banking Sector in the Czech Republic 22 What does term-classified credits mean lAll bank's credits are classified according to Czech National Bank criteria lFive main groups: -Standard credits -Watch credits -Substandard credits -Doubtful credits -Loss credits Banking Sector in the Czech Republic 23 What does term-classified credits mean lStandard credits - no doubts about future pay-off of the credits. Instalments and securities are settled regularly. lWatch credits - high probability about future pay-off. Instalments and securities are settled with some troubles, but there are not longer than 90 days after settlement. lSubstandard credits- higher improbability of total settlement, but partly settlement high probable. Instalments and securities are settled with troubles, but there are not longer than 180 days after settlement. Banking Sector in the Czech Republic 24 What does term-classified credits mean lDoubtful credits - total settlement high improbable. Instalments and securities are settled with troubles, but there are not longer than 360 days after settlement. lLoss credits total settlement impossible, will not payoff or payoff in small rate. Instalments and securities are longer than 360 days after settlement. n lClassified credits are the last three groups of credits. lIn the Czech Republic in the 1990's high share of these classified credits, mainly loss credits. lFor example: in 1995 21.3% of credits were loss credits. nIn 1998 was privatized Investment bank to Japan investment company Nomura nPrice of this bank was low only 6 billion CZK nBank was weak with classified credits about 20% nNomura was not a strategy partner and their main purpose for this business was getting the portfolio of companies owned by this bank qEspecially brewery and glass companies nIn recession this bank got in serious trouble with high flow off of savings (34 billion CZK) and became insolvent. nIn 2000 bank was move on Czechoslovak Business bank. qSometime is this process labeling as a state confiscation qCzechoslovak Business bank overtook this bank with government guarantee (it is expected that this guarantee are in value of 160 billion CZK) nIn 1998 was elected left oriented party Social Democracy that promised no other state aids in banking sector. nIn reality new government started looking for foreign owners for state banks and offered state guarantees. nGovernment promised sell all state banks till 2000. nIn spring 1999 Czechoslovak business bank was sold KBC q40 billion CZK qThe higher revenue from bank sale in transformation period qThis bank was the most healthy bank in Czech banking system q n n nIn 2000 was sold Czech state saving-bank to Austria Erste Bank qErste Bank paid for 52 % shares 19,3 billion CZK qGovernment must invest in his bank 46 billion CZK before sale to recover bank balance sheet. qClassified credits were transferred in Consolidation bank. qThe main loses of this bank were from nBad loans from the beginning of the 1990’s nPoor quality guarantees nLosses form collapse of Russian market after 1998 nPrivatization of Commercial bank was stopped by company B.C.L. Trading when bank lost 8 billion CZK in single trade qBetween 1998 and 1999 Commercial bank lent 100, 150 and 200 millions dollars. qDocumentary credits were bound by delivery of agricultural products from Ukraine and Russia. qInvestigation found out that this supplies never happened. n Commercial bank was privatizes as a last large bank in 2001 when was bought by Societe Gererala in 40 billion CZK. nTotal cost for recovery of this bank are estimated in value of 75 billion CZK. Crisis in banking sector nDuring the 1990’s banking sector in the Czech Republic passes several crisis nAt the beginning of transformation process there was a need of credit and fears from oligopoly structure of banking sector. nBank licensing was benevolent till the first banking crisis in 1993. nIn first transformation phases only small banks were suffered by crisis. nFirst small bank in troubles was qCredit and Industry bank qClassified loans in this bank got 90 % and in bank lost 450 millions dollars. qThe reason was over limit granting of credits in general manager that was also owner of the bank. q CNB withdrew license this bank. nIn the same year other banks got in financial troubles qAB bank qCredit bank qCzech bank nIn largest debtors of these bank were their shareholders. nOther bank that went bankruptcy was Bank Bohemia qManagers of this bank signed guarantee in value 30 times higher that was basic capital of this bank. nAs a reaction to problems in small bank sector there was announced program for consolidation of banking sector. qConsolidation program II qCentral bank stopped licensing for new banks qBanking supervision became more restrictive nBut other small banks got in troubles. nIn 1996 the largest private Czech bank Agrobanka got in troubles with total lost 35 billion CZK. q n n nTotal costs for recovery small banking sector were insignificant in compare with recovery of large bank sector. nLarge bank with some level of state proprietorship were consider to be too large for fail. nLarge banks were supported during pre-privatization period. nSector of credit banks get in trouble at the end of the 1990’s. qSince 1996 they became more popular and had approximately 110.000 members with savings 10,3 billion CZK qThey were attracted because of higher interest rate in compare with commercial banks qIn 1999 problems in three largest credit banks nIn these three credit banks was concentrated 60% of all deposits n In next year in the troubles get next 12 credit houses. nAs a reaction in 2000 was adopted of Credit houses act that qforbidden transfer of credit house savings in subsidiary companies qLimited licensing qRestricted supervision n Reasons of banking crisis nI. Debts of companies and problems with debt redemption qIn banking sector existed 1900 billion CZK bad debts from central planned economy. qBanks were vulnerable in face of failure of large debtors. qIn the lack of capital companies oriented only in credits because capital markets did not work. nII. There was a lack of experiences with market oriented economy at the beginning of the 1990’s. qSubjects in the market existed without any business history qNo market skills of bank employees qInformation asymmetry in banks nMost active credit applicants were applicants with the most risk projects nProblem with bank supervisory qIn small banks lots of cheap credits granted to shareholders qIn large state bank no control of bank activities by government. §Political pressure for credit granting to support privatization and whole transformation n nIII. Worst situation in small bank in compare with large banks. qIn these small banks were lack of basic capital thus carried out operation with higher risk qLack of capital influenced the confidence of savers and limited possibilities for gaining cheap financial resources. qIn this sector was also significant level of criminal acts nIn whole sector was combination of lack educated management, disproportionately high interest rates and criminal acts Recovery of banking sector nIn 1991 number of classified credits between 15-20 % qConsolidation program I for large state banks nCleaning of banking sector from bad debts nThis bad debts were taken over Consolidation bank nTotal costs of this program 100 billion CZK nProblems in sector small banks solved by qConsolidation program II nDesigned for banks that did not pass capital adequacy (8 %) nTotal costs of this program 33 billion CZK and bank in this program finished by withdrawing of license nRescue of credit houses sector was related with withdrawing of licenses qTotal loss from this sector 90 billion CZK. nTotal cost for recovery of banking sector are differentiate qRecovery of 4 largest bank costs – 216 billion CZK qRevenue from sale of this banks – 112 billion CZK q Stock Exchange nBeside banks other important institution is capital market. nImportant event for establishing Prague Stock Exchange (PSE) was voucher privatization. nUntill establishing of PSE all trades was realized in temporary market. nFirst issue outside of PSE was Commercial bank stocks traded since 1990. qTotal volume was 1 billion CZK and was traded in primary market nIn 1990 Ministry of Finance issued first Government securities for financing property restitutions. nAt the end of 1992 all activities of temporary market was overtaken by PSE. n nIn 1993 was in PSE placed 622 issuances from voucher privatization and till the end of the year next 333 issuances were added. n8,5 million Czechoslovak citizens became shareholders. nIn 1993 first official Government bond was placed n1994 was started day-to-day trading nIn the half of the 1990’s was traded with more than 100 issuances in PSE. n nThe interest about securities in PSE was low. nThe main volume of trade was with bonds. nThe character of trade was “direct trade” qBilateral trade with subjects out of PSE nOnly with registration in PSE qDirect trades had no influence in prices of securities n90 % of trading with stocks n100 % trading with bonds n nIn 1996 a lot of foreign investors left PSE qWeak regulation qFraud conductions qLack of interesting investment possibilities nIn the process the rules and trading conditions were improved. qMarket was spitted in nmain with the most quality stocks – blue chips (13 blue chips in 2009) nMid market and free market Sum up nWhole transformation process was closely connected with banking sector. nBanks play key role in process of transformation money in investments and if this relation is harmed it will influence whole economy. nCzech banking sector cumulated troubles during transformation qFaults in management qLack of banking skill qFraud conduction nIt led to crisis of banking sector as a whole. nSuffered were small banks as well as large. nSmall banks left banking sector nLarge banks were rescued by tax payer’s money nDevelopment of PSE was questionable qPSE did not become alternative resource of financing and in transformation process helped in concentration of proprietorship.