Development of Banking sector and PSE Banking sector n One of the most tickler problem of whole economic transformation was development of the banking sector. Banking sector before 1989 n Mono-structure banking system n In 1950 was established State Bank of Czechoslovakia (SBCS). n SBCS “hybrid” between state and private bank and investment bank. q Central bank functions n Monetary police q Issue of paper money and q Foreign exchange rate policy q Government function n Tax collection n Control of wage development q Commercial bank functions n Collection of savings n Granting credits n Exchange of foreign currencies n Organization and running of payment mechanism n Clients of SBCS were only business companies not households. Banking sector before 1989 n In Czechoslovak banking system existed banks with specific functions q Trading bank (Zivnostenska banka) the most important bank during interwar period that was confiscated in 1945. n In communism regime provided foreign exchange operations for private clients n It had business branch in London for q Arrangement relations with foreign banks q Foreign trade and other international transactions Banking sector before 1989 q Czechoslovak business bank (CSOB) was established in the 1960’s n Owned by SBCS and businesses of international trade (monopoly for trading with foreign countries) n Provided international payment with subjects in RVHP markets (social countries in Europe, Asia and Africa) n In banking sector existed two saving-banks q Czech state savings-bank q Slovak state savings-bank n Collected savings from households and granted credits for households. n Surplus of savings were transferred in SBCS and divided into state companies. Banking sector before 1989 n Communism regime was aware of problems in banking system. n In 1989 was decided about transformation of mono-structure banking system in two tire banking system. n From SBCS were set off three state banks q Commercial bank (Komercni banka) q General Credit bank (Vseobecna uverova banka) q Investment bank (Investicni banka) Development of banking sector in the 1990’s n Development of banking sector in the 1990’s can be divided in three phases q Establishing of new small banks q Privatization of large state banks q Banking crisis New banks n The number of new banks in Czech market was growing since the beginning of the transformation process. n At the beginning of transformation process conditions for establishing of new banks were weak. q Shareholder’s capital 50 million CSK in 1990 q But was accepted every tenth application for banking license n Government and State bank set these weak and liberal conditions to improve competition in banking sector. q This conditions were getting more restrictive in the process. q In April 1991 basic capital 300 millions of CSK and q from 1993 till nowadays 500 millions CZK n Despite of these liberal conditions banking sector in the Czech Republic was concentrated. q Small 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 New banks n In 1991 were established first credit banks (kampelicky) n Simultaneously the number of small Czech bank was growing and also foreign banks opened their subsidiaries in the Czech republic. q Foreign bank focused only on the best clients - n Foreign companies that they were familiar with them from their domestic market. q According to government expectation: n Foreign banks should have promoted real competition in banking sector. n But these institutions were interested only in the most lucrative clients with the lowest rate of risk. New banks n In domestic market arose double pressure q Foreign banks overtook the most profitable clients and domestic banks cared only about subject with high level of risk or insolvent clients q Foreign bank pushed down banking fees for these profitable clients and thus limited possible fees of domestic banks New financial institutions n Specific group of institutions in banking sector were transformation institutions. n The best known is Consolidatory bank q In Consolidatory bank were transferred n Bad liabilities of companies doing business in central planned economy n Bad loans in time of cleaning assets of banking sector n Other institution is the Bohemia and Moravia Guarantee bank established in 1992 by government and large banks q Support of small and middle-size companies with credits and bank guarantees n Czech Export bank q Granting cheap credits for export companies q Owned from 66,7% by the government Consolidation bank/agency n Established in February 1991 originally only for 126 days but in fact existed till 2007. n In this bank were transferred q bad debts from state companies in the value of 80 billion CSK and q bad assets from large state banks. n Primary aim of Consolidatory bank was q restructure or decay of companies that transferred assets in Consolidatory bank. q This aim was not never fulfilled. n Consolidation bank became a store for bad loans and played important role in cleaning of Czech bank before their sale to foreign investors. n In Consolidation bank were during 1999 – 2000 five institutions q Revitalization Agency – cleaning financial accounts of specific companies like Aliachem, CKD Praha, Skoda Plzen q Czech Financial – buyout of classified credits in small banks q Konpo – control and debt recovery of the Commercial Bank q Prisko – transferred all liabilities from former state company Skoda – Car q Sanakom – transferred bad credits of bank Investment banks n Because Consolidatory bank was established as a bank it had to fulfill all conditions suitable for commercial bank although its purpose was different q E.g. According to Banking Act n Consolidation bank had not acquired a majority share in non-banking subjects and it limited its restructured aims in controlled companies. n Capital adequacy n In 2001 Consolidatory bank was transferred in Consolidatory agency and became its continuator without limitation related with its former bank statue. Bank privatization n At the beginning of the 1990’s existed 4 large fully state banks q Czech state savings-bank q Trading bank q Commercial bank q Investment bank n And Czechoslovak business bank with significant state share. n According 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. n In 1992 were 4 fully state banks transferred in joint stock companies and part of their stocks designed for privatization process. n After privatization process state became minority shareholder in these banks with share from 48-49 %. n In next years privatization process left off q Because of lack of rules for sale of banks to foreign investors. q Whole process was slowed down by several minority shareholders actions against important bank decisions. n Dispute point of whole transformation process is slow privatization of banking sector. n The main problem was existing credit channels between banks and state companies established in central planned economy n This credits became uncollectible and in final phase they were paid off by tax payers. n Privatization process of banks was postponed because of privatization process as a whole. n The main fear was related with turn off the financial resources for domestic companies that did not fulfill strong international criteria. n If privatized bank stopped credit granting to state companies these companies would get in troubles. n On 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. n Banks nourished companies that should have bankrupted and granted credits for losing projects. n It is reason why important part of credits became classified. n State proprietorship encourage morale hazard q Bank expected that in case of financial problems will get financial support by government that also happened for several times. What does term-classified credits mean l All bank's credits are classified according to Czech National Bank criteria l Five main groups: - Standard credits - Watch credits - Substandard credits - Doubtful credits - Loss credits What does term-classified credits mean l Standard credits - no doubts about future pay-off of the credits. Instalments and securities are settled regularly. l Watch 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. l Substandard 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. What does term-classified credits mean l Doubtful credits - total settlement high improbable. Instalments and securities are settled with troubles, but there are not longer than 360 days after settlement. l Loss credits total settlement impossible, will not payoff or payoff in small rate. Instalments and securities are longer than 360 days after settlement. l Classified credits are the last three groups of credits. l In the Czech Republic in the 1990's high share of these classified credits, mainly loss credits. l For example: in 1995 21.3% of credits were loss credits. n In 1998 was privatized Investment bank to Japan investment company Nomura n Price of this bank was low only 6 billion CZK n Bank was weak with classified credits about 20% n Nomura was not a strategy partner and their main purpose for this business was getting the portfolio of companies owned by this bank q Especially brewery and glass companies n In recession this bank got in serious trouble with high flow off of savings (34 billion CZK) and became insolvent. n In 2000 bank was move on Czechoslovak Business bank. q Sometime is this process labeling as a state confiscation q Czechoslovak Business bank overtook this bank with government guarantee (it is expected that this guarantee are in value of 160 billion CZK) n In 1998 was elected left oriented party Social Democracy that promised no other state aids in banking sector. n In reality new government started looking for new foreign owners for state banks and offered state guarantees. n Government promised sell all state banks till 2000. n In spring 1999 Czechoslovak business bank was sold Holland KBC q 40 billion CZK q The higher revenue from bank sale in transformation period q This bank was the most healthy bank in Czech banking system n In 2000 was sold Czech state savings-bank to Austria Erste Bank q Erste Bank paid for 52 % shares 19,3 billion CZK q Government must invest in his bank 46 billion CZK before sale to recover bank balance sheet. q Classified credits were transferred into Consolidatory bank. q The main loses of this bank were from n Bad loans from the beginning of the 1990’s n Poor quality guarantees n Losses form collapse of Russian market after 1998 n Privatization of the Commercial bank was stopped by company B.C.L. Trading when bank lost 8 billion CZK in one single trade q Between 1998 and 1999 the Commercial bank lent 100, 150 and 200 millions dollars. q Documentary credits were bound by delivery of agricultural products from Ukraine and Russia. q Investigation found out that this supplies never happened. n Commercial bank was privatizes as the last large bank in 2001 when was bought by Societe Gererala in 40 billion CZK. n Total cost for recovery of this bank are estimated in value of 75 billion CZK. Crisis in banking sector n During the 1990’s banking sector in the Czech Republic passes several crisis n At the beginning of transformation process there was a need of credit and fears from oligopoly structure of banking sector. n Bank licensing was benevolent till the first banking crisis in 1993. n In first transformation phases only small banks were suffered by crisis. n First small bank in troubles was q Credit and Industry bank q Classified loans in this bank got 90 % and in bank lost 450 millions dollars. q The reason was over limit granting of credits in general manager that was also owner of the bank. q CNB withdrew license this bank. n In the same year other banks got in financial troubles q AB bank q Credit bank q Czech bank n In largest debtors of these bank were their shareholders. n Other bank that went bankruptcy was Bank Bohemia q Managers of this bank signed guarantee in value 30 times higher that was basic capital of this bank. n As a reaction to problems in small bank sector there was announced program for consolidation of banking sector. q Consolidation program II q Central bank stopped licensing for new banks q Banking supervision became more restrictive n But other small banks got in troubles. n In 1996 the largest private Czech bank Agrobanka got in troubles with total lost 35 billion CZK. n Total costs for recovery small banking sector were insignificant in compare with recovery of large bank sector. n Large bank with some level of state proprietorship were consider to be too large for fail. n Large banks were supported during pre-privatization period. n Sector of credit banks get in trouble at the end of the 1990’s. q Since 1996 they became more popular and had approximately 110.000 members with savings 10,3 billion CZK q They were attracted because of higher interest rate in compare with commercial banks q In 1999 problems in three largest credit banks n In these three credit banks was concentrated 60% of all deposits n In next year in the troubles get next 12 credit houses. n As a reaction in 2000 was adopted of Credit houses act that q forbidden transfer of credit house savings in subsidiary companies q Limited licensing q Restricted supervision Reasons of banking crisis n I. Debts of companies and problems with debt redemption q In banking sector existed 1900 billions CZK bad debts from central planned economy. q Banks were vulnerable in face of failure of large debtors. q In the lack of capital companies oriented only in credits because capital markets did not work. n II. There was a lack of experiences with market oriented economy at the beginning of the 1990’s. q Subjects in the market existed without any business history q No market skills of bank employees q Information asymmetry in banks n Most active credit applicants were applicants with the most risk projects n Problem with bank supervisory q In small banks lots of cheap credits granted to shareholders q In large state bank no control of bank activities by government. § Political pressure for credit granting to support privatization and whole transformation n III. Worst situation in small bank in compare with large banks. q In these small banks were lack of basic capital thus carried out operation with higher risk q Lack of capital influenced the confidence of savers and limited possibilities for gaining cheap financial resources. q In this sector was also significant level of criminal acts n In whole sector was combination of lack educated management, disproportionately high interest rates and criminal acts Recovery of banking sector n In 1991 number of classified credits between 15-20 % q Consolidation program I for large state banks n Cleaning of banking sector from bad debts n This bad debts were taken over Consolidatory bank n Total costs of this program 100 billion CZK n Problems in sector small banks solved by q Consolidation program II n Designed for banks that did not pass capital adequacy (8 %) n Total costs of this program 33 billion CZK and bank in this program finished by withdrawing of license n Rescue of credit houses sector was related with withdrawing of licenses q Total loss from this sector 90 billion CZK. n Total cost for recovery of banking sector are differentiate q Recovery of 4 largest bank costs – 216 billion CZK q Revenue from sale of this banks – 112 billion CZK Stock Exchange n Beside banks other important institution is capital market. n Important event for establishing Prague Stock Exchange (PSE) was voucher privatization. n Till establishing of PSE all trades was realized in temporary market. n First issue outside of PSE was Commercial bank stocks traded since 1990. q Total volume was 1 billion CZK and was traded in primary market n In 1990 Ministry of Finance issued first Government securities for financing property restitutions. n At the end of 1992 all activities of temporary market was overtaken by PSE. n In 1993 was in PSE placed 622 issuances from voucher privatization and till the end of the year next 333 issuances were added. n 8,5 million Czechoslovak citizens became shareholders. n In 1993 first official Government bond was placed n 1994 was started day-to-day trading n In the half of the 1990’s was traded with more than 100 issuances in PSE. n The interest about securities in PSE was low. n The main volume of trade was with bonds. n The character of trade was “direct trades” q Bilateral trade with subjects out of PSE n Only with registration in PSE q Direct trades had no influence in prices of securities n 90 % of trading with stocks n 100 % trading with bonds n In 1996 a lot of foreign investors left PSE q Weak regulation q Fraud conductions q Lack of interesting investment possibilities n In the process the rules and trading conditions were improved. q Market was spitted in n main with the most quality stocks – blue chips (14 blue chips in 2010) n Mid market and free market Long-term trends n The most important event was decrease of issuances traded in PSE q Low liquidity and neglect of duties of PSE q In 4 phases were cancelled 1300 issuances q A lot of majority shareholders cancelled securities from PSE after controlled of company q In PSE did not entrance new primary issuances for long time n First IPO in 2004 Zentiva n PSE did not fulfill its primary function as a source of capital q As a reason companies gained new capital only in the form of bank loans that established narrow relationship between companies and banks n Successful segment in PSE was debt market. Sum up n Whole transformation process was closely connected with banking sector. n Banks play key role in process of transformation money in investments and if this relation is harmed it will influence whole economy. n Czech banking sector cumulated troubles during transformation q Faults in management q Lack of banking skill q Fraud conduction n It led to crisis of banking sector as a whole. n Suffered were small banks as well as large. n Small banks left banking sector n Large banks was rescued by tax payer’s money n Development of PSE was questionable q PSE did not become alternative resource of financing and in transformation process helped in concentration of proprietorship.