Prague - The Czech banking sector remains highly resilient even in a strong recession, according to results of stress tests made by the Czech National Bank (CNB).
The results are similar to previous tests.
Insurers are resilient as well but the segment of credit units is riskier, the CNB said in the Financial Stability Report published today.
Capital adequacy of the banking sector would remain well above the minimum 8 percent requirement even in a scenario predicting a strong recession accompanied by deflation for the next three years, according to the stress tests that are part of the CNB´s report.
The CNB said that the business model of two small banks is unsustainable.
The stress tests showed that banks and insurance companies would withstand a strong recession accompanied by deflation thanks to their capital buffers.
The pension management company sector remains sensitive to developments in prices of securities holdings and would probably have to increase its capital in the event of a sharp future rise in yields, the CNB said.
The credit union segment is still riskier compared to banks. The ratio of non-performing loans to total loans rose sharply year on year to almost 23 percent, and other indicators of credit union activity also remain unfavourable.
"It is necessary to amend the relevant law so as to improve the situation," said CNB governor Miroslav Singer.
The resilience of banks, insurance companies and pension management companies was tested in macro stress tests using a Baseline Scenario for the most probable future developments. Under the scenario, which foresees a recovering economy, two domestic banks would be below the 8 percent capital adequacy level.
"Those are small banks accounting for less than 1 percent of assets in the banking sector," Singer told journalists today.
To meet the requirement, the banks would need a capital injection of Kc300m.
The banking sector´s total assets reached Kc5,200bn at the end of March.
Using a stress scenario called Europe in Deflation, which is not much likely according to the CNB, 11 domestic banks would fail to meet the capital adequacy requirement, for which they would need a capital injection of over Kc12bn. The banks´ share in the sector´s assets is 17 percent. Overall capital adequacy of the sector would not fall below 12 percent, however.
The stress scenario assumes that seriously negative developments in the EU would result in a sizeable decline in economic activity in the Czech Republic. The financial reserves of some households and corporations would be exhausted and debt repayment by the real sector would deteriorate sharply. This would be reflected in a sizeable rise in the default rate in both the non-financial corporations and household sector and in an overall increase in the banking sector’s credit losses, the central bank said.
"Developments observed last year confirmed that if banks have sufficient capital and liquidity buffers, they are able to maintain stability and profitability even in a period of weak economic activity," said CNB governor Miroslav Singer.
Forty-five banks and foreign banks´ branches are active on the Czech market as well as 12 credit unions, 51 insurance companies and branches of foreign insurers and 10 pension management companies.
The Financial Stability Report, published on an annual basis, presents results of the CNB´s financial stability analyses, and aims to identify risks for the country´s stability in the foreseeable future on the basis of the previous and expected development of the real economy and financial system.