* Czech banking sector remains resilient
* In adverse scenario, CZK 18 bln cash injections seen
* Low provisions for non-performing loans a possible risk
(Adds governor comments, non-performing loans, stress test
PRAGUE, June 17 The Czech financial sector is
stable and could withstand a strong recession accompanied by
deflation thanks to capital buffers, the central bank said on
The main risks to the sector were a possible return to
recession because of developments in trading partners as well as
a deterioration in domestic demand, the central bank said in its
regular financial stability report.
"(Global) central banks and supervisory authorities are
facing the task of avoiding a renewed decline in demand and a
fall of economies into the deflation trap, and at the same time
preventing excessive risk-taking on financial markets," the
central bank (CNB) said.
"The CNB is actively preventing the risk of a drop in demand
and deflation by using the exchange rate as a monetary policy
instrument, which is contributing to the stability of the
The central bank launched interventions in November to
weaken the crown currency and fight deflation risks as the
economy recovers from a record-long recession that ended in
The bank said another possible risk for the banking system
stemmed from non-performing loans where the provisions set aside
by the banks "might not be sufficient" due to the worsening
profile of those loans.
Non-performing loans made up 6.5 percent of all loans at the
end of the first quarter compared to 6 percent at the end of the
same period last year, Czech Banking Association said in May.
"It is a universal state of the sector, on the other hand
the sector is quite highly capitalized, so the buffer is there
somewhere else than in the provisions," Governor Miroslav Singer
said at a press conference.
The bank's semi-annual banking sector stress tests showed
Czech banks would go through a series of adverse scenarios
without significant trouble.
In the scenario called "Euro zone in deflation" adjusted for
writedowns of bonds issued by the most indebted member states,
total cash injections would reach 18 billion Czech crowns
($888.58 million), or 0.5 percent of the gross domestic product.
In the baseline scenario, seen by the bank as the most
probable, only two banks - representing less than 1 percent of
the sector's overall assets - would fall below the capital
adequacy requirement (CAR) of 8 percent, the bank said.
Czech banks have been relatively unscathed in the
half-decade since the global financial crisis.
The largest Czech banks are units of Austria's Erste Group
, Belgium's KBC, France's Societe Generale
and Italy's UniCredit.
($1 = 20.2570 Czech Korunas)
(Reporting by Robert Muller and Jason Hovet; Editing by Andrew