June 22, 2012 / 9:06 AM / 7 years ago

RPT-CEE MONEY-EU bank plan unnerving for prudent Czechs

(Repeats to more subscribers, text unchanged)

* Czech cbankers oppose European bank resolution directive

* Proposal could ease process of shifting capital from Czech banks

* Issue underscores that Czech banking system almost fully foreign owned

By Michael Winfrey

PRAGUE, June 22 (Reuters) - Czech central bankers have taken affront at a push by some EU partners for a bloc-wide banking union that could threaten their country’s uncommonly strong capital buffers and undermine the years of conservative policy that helped support them.

The proposals could have deep implications for Prague and other newer EU members because the underscore that their biggest banks are simply assets held by foreign interests and not the stand-alone national champions that many domestic consumers believe them to be.

This week, two central bankers criticised a proposal for a directive adopted by the European Commission on June 6 outlining a framework for bank recovery and resolution that is aimed at shoring up the EU’s financial sector.

Board member Pavel Rezabek zeroed in on a section governing intra-group financial support that would make it easier for big banking groups to shift assets among its cross-border units in case they or one of their units faces collapse.

Experts say the measures will allow the unwinding of “too big to fail” banks by allowing them to spread risk among their units and remove the need of taxpayer-funded bailouts.

But for the Czechs, it could undermine efforts to ensure defences against crisis under which the country’s banking sector has built up an average capital adequacy of above 15 percent, almost double the minimum required under EU rules.

“This kind of mechanism is a moral hazard and in the next crisis can become a channel for the fast spreading of financial contagion,” Rezabek wrote in daily Hospodarske Noviny.

His colleague, deputy central bank Governor Mojmir Hampl, was more critical in an interview with Dow Jones Newswires.

Referring to the proposed directive and other plans towards a banking union, he said, “these half-baked measures mean that for stable systems there will be new risks rather than mitigation of existing ones”.

On Friday, the leaders of France, Germany, Italy and Spain were seeking to find common ground to restore confidence in the euro zone ahead of an EU summit next week.

Economists say work to create a banking union could take two years. It is running parallel to the proposed banking resolution directive adopted this month - and seen as a requirement for a wider union - which could come into force next year.


The EU’s 10 newest members sold most of their state banks to the private sector in the years following the fall of Communism, a crucial step in transforming from centrally-planned to market-oriented economies.

The main buyers were banks such as Austria’s Erste Bank and Raiffeisen, Italy’s Unicredit, France’s Societe Generale and Belgium’s KBC, whose home governments are now mulling an EU-wide banking union.

The Czechs, however, are resisting and have insisted since the height of the economic crisis three years ago that Czech units of foreign banking groups would be insulated from a wider EU banking crisis because of their high levels of domestic funding and rules limiting exposure to their parents.

But the EU directive, which must still be debated in parliament and then passed by EU states, could change that.

In its current form, the draft law would allow a regulator in country A to ask a parent bank there to take funds from a unit in country B to help itself or another unit in country C.

Supporters of the banking draft law have tried to alleviate concern by pointing to a phrase in the proposal.

“Transferring assets from a healthy entity could reduce its liquidity and capital and hence weaken the position of debt holders and depositors. Therefore the transfers should be executable only if they do not jeopardise the liquidity or solvency of the support provider.”

But a key question remains: whose definition of solvency or stability will be the standard?

Probably not that of countries with solidly capitalised banks like the Czechs and their neighbours, the Slovaks, who could quickly see their lenders’ capital targeted by foreign owners to help shore up troubled units elsewhere.

“This proposal opens the door to uncontrolled outflows of liquidity and assets,” Hampl told Dow Jones.


When contacted by Reuters, other bank regulators in central Europe said they would refrain from commenting on the proposed bank resolution directive until they saw a final draft.

The Czechs have tried to mitigate the risks. On Wednesday, they announced measures tightening rules cutting the gross exposure limit for Czech units to their parents to 50 percent of their Tier 1 and 2 capital, from a previous 100 percent.

But many consumers in the country of 10.5 million see the three largest Czech banks - Erste-owned Ceska Sporitelna, KBC unit CSOB, and Societe Generale’s Komercni Banka - to be national champions rather than foreign subsidiaries.

The central bank has not entirely discouraged that idea, touting the fact that “Czech” banks are more than fully funded by domestic deposits, compared to their regional peers where loans far out outstrip the cash in savings accounts.

Deposits amounted to 134 percent of outstanding loans at the end of 2011, and most Czech banks are net creditors to their parent units.

Rezabek himself wrote this week that “Czech banks currently hold virtually no assets from governments of highly indebted countries on their balance sheets”.

Once linked to their parents, however, that could be a different story. According to Karel Lannoo, CEO of the Brussels-based Centre for European Policy Studies, the idea that the banks are actually Czech is “only an illusion”.

He said big banks, such as Italy’s Unicredit, would find little help from Czech subsidiaries, as their assets are a tiny fraction of the groups total.

But when a bank would have to be liquidated somewhere, a European college of supervisors could meet and decide on a cross-border solution.

“They could force, say, (a bank subsidiary) in the Czech Republic to shift back some of its capital to the home country where it has capital problems,” Lannoo said.

“It’s 100 percent owned. There’s nothing you can do to stop this apart from some kind of exceptions.” (Additional reporting by Robert Muller and Jana Mlcochova in Prague, Chris Borowski in Warsaw, and Sam Cage in Bucharest; Editing by Jeremy Gaunt.)

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below