Banking in the Czech Republic - from crises to stability

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Banking in the Czech Republic - from crises to stability

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The transition period towards a market economy in the Czech Republic was accompanied by unfavourable effects on the banking system. Many small banks fell into trouble, and problems accumulated in the largest banks.

Banking in the Czech Republic - from crises to stability Zbyněk Revenda Prague University of Economics Abstract: The transition period towards a market economy in the Czech Republic was accompanied by unfavourable effects on the banking system Many small banks fell into trouble, and problems accumulated in the largest banks The central bank was first involved in the resolution of banking crises as a lender of last resort, though its role was gradually taken over by the state The last economic and financial crisis had only limited impact Together with the changing banking system, the monetary policy of the central bank also evolved from the monetarist transmission mechanism to inflation targeting Three main areas are theoretically and practically analysed, including the Central bank’s role in rescuing the banks, the link between monetary policy and the profit or loss of the Czech National Bank, and the impact of a specific form of quantitative easing on the Czech banking system Key words: banking regulation and supervision, central bank, crisis, lender of last resort, monetary policy Vai trò Ngân hàng Trung ương Cộng hòa Séc- từ khủng hoảng đến ổn định hệ thống Tóm tắt: Thời kỳ chuyển đổi sang kinh tế thị trường Cộng hòa Séc có tác động bất lợi hệ thống ngân hàng Nhiều ngân hàng nhỏ rơi vào rắc rối, vấn đề tích tụ ngân hàng lớn Ngân hàng Trung ương Séc lần tham gia vào việc giải khủng hoảng ngân hàng với tư cách người cho vay cuối Cùng với thay đổi hệ thống ngân hàng, sách tiền tệ ngân hàng trung ương chuyển đổi từ chế truyền tiền tệ đến mục tiêu kiểm soát lạm phát Bài viết phân tích vấn đề khía cạnh lý thuyết thực tế, bao gồm vai trò Ngân hàng Trung ương việc giải cứu ngân hàng, mối liên hệ sách tiền tệ Ngân hàng Quốc gia Séc, tác động hình thức nới lỏng định lượng hệ thống Ngân hàng Séc Từ khóa: quy định giám sát ngân hàng, ngân hàng trung ương, khủng hoảng, người cho vay cuối cùng, sách tiền tệ Professor Zbyněk Revenda, Dr Ing Email: zbynek.revenda@vse.cz Đại học kinh tế Praha, Cộng hòa Séc Ngày nhận: 13/09/2019 Tạp chí Khoa học & Đào tạo Ngân hàng Số 209- Tháng 10 2019 Ngày nhận sửa: 22/10/2019 70 Ngày duyệt đăng: 22/10/2019 © Học viện Ngân hàng ISSN 1859 - 011X ZBYNĚK REVENDA Introduction1 The Czech Republic, one of the two successor states of former Czechoslovakia, continued in its transformation from a former centrally planned and directly controlled economy to a modern market economy following the split of the country on 1 January 1993 Key monetary issues related to the split were solved without any major problems Federal currency was replaced with the Czech currency, and the exchange of money in circulation went quickly and efficiently The split of the federal central bank’s assets occurred in a similarly smooth way The Czech National Bank (Česká národní banka, CNB) started its activities on 1 January 1993 as the central bank of the Czech Republic It is also the supervisor of the Czech financial market (since April 2006) and has the main role as the Czech resolution authority (since 2013) It must be noted, that its predecessor, the State Bank of Czechoslovakia (Státní banka Československá, SBCS), was - until the banking reform (1 January 1990) - a completely different central bank: it acted as a “socialist“ institution under the conditions of a centrally planned economy The other five banks existing at the time in the country could not be considered commercial banks, they rather operated as specialized branches of the central bank (Vencovský et al., 1999) The major problems of the banking system at early ninetees were associated with loans provided to state-owned enterprises and agricultural cooperatives in the economic environment of the previThe article was written within the project VSEIP 100040, University of Economics, Prague ous socialist era It must be noted that Czechoslovakia maintained the highest level of nationalization of all countries of the socialist block including the USSR In most cases, non-performing loans could be sorted out in two basic ways - through an “inflationary process“ (with negative impacts on value) or using the state budget Czechoslovakia and subsequently the Czech Republic used the latter approach, namely after the specialized Consolidation Bank was established in 1991 The slow development of the necessary rules for banking, lack of experience with banking supervision, economic development including the wide-ranging privatization, and the moral hazard and greed always present in the banking business can be considered the causes of the first serious crisis phenomena in the Czech banking system The benevolent approach of the central bank to granting banking licenses was another important reason for the banking crisis The total number of banks increased from to 55 in the period 1990 through 1994 Following a virtual moratorium on new banking licenses (1994 - 1998) saw just seven (!) exceptions: the Czech Export Bank, two branches of foreign banks, and four building societies In total, 51 banking institutions operated in the Czech Republic in mid-2019 Later in the 1990s, the political pressure on the then stateowned banks to “fund transformation and privatisation“, contributed to the abovementioned development The development of monetary policy was also linked to the transitive economic period both in terms of the related procedures and the used instruments Nevertheless, Số 209- Tháng 10 2019- Tạp chí Khoa học & Đào tạo Ngân hàng 71 Banking in the Czech Republic - from crises to stability the Czech National Bank still focused on price stability as its main goal, until 1998 jointly with the exchange rate stability This article mainly focuses on changes in the approach to the solution of banking crises and monetary development in the Czech Republic Since May 2004, the Czech Republic is a member of the European Union (EU) With its admission, the country accepted the obligation to join and implement the common currency, however, with no specific deadline Currently, the prospects of Euro adoption not enjoy much political support The second part of the article covers the theoretical framework behind the approach to problem banks Following part contains description of crises, solutions specific to the Czech economy and later developments The fourth part deals with monetary policy including its specific form - quantitative easing (QE) The next section provides an analysis related to the development of the Central Bank’s performance and its balance sheet The final part contains summary and main conclusions Theoretical framework The term “banking crisis“ is not consistently defined, see e.g (Kindleberger, 2000; Mishkin, 2013) For the purposes of this article, the banking crisis is defined as a situation when a higher number of small (and mid-sized), or even large, banks have solvency problems In a broader sense, insufficient liquidity of the banking system as a whole is considered a crisis Key principles underlying the central banks’ approach to resolving banking crises were laid down by Henry Thornton 72 in 1802, however, Walter Bagehot, who published principles of assistance to distressed banks in 1873, won a much bigger reputation The 20th century reality - as well as the current experience - differs a lot, though The central bank should (1) be a single lender of last resort in the banking system; (2) provide an emergency loan only to a bank in temporary liquidity problems, under the conditions that such a loan is: - secured by a purchase or pledge of sufficiently liquid and high-quality securities, i.e., securities comfortably tradeable prior to a banking panic; and - exclusively short-term; (3) burden the emergency loans with rates above the market interest rates, to discourage banks able to tap the financial markets from relying on the central bank’s assistance; (4) announce the three principles above in advance, and comply with them strictly during the banking crisis; (5) strictly avoid and deny assistance to insolvent banks: such banks must be either sold at a market price or liquidated - the ultimate losses must be primarily borne by the shareholders The current practice of the developed countries gives evidence on frequent noncompliance with the set principles Large banks, or banks with State ownership, are assisted by the State A similar approach holds for situations where there are a larger number of troubled banks Sufficiently credible security for emergency loans may limit the amount of necessary assistance and, thus, the loans frequently run over relatively long periods2 Penalty rates must The credit union sector fell – just three years after its re-opening - into a deep and lasting crisis at the end of the 20th century Losses reached 85% of assets (!) Only 10 out of 135 credit unions operate at the market Tạp chí Khoa học & Đào tạo Ngân hàng- Số 209- Tháng 10 2019 ZBYNĚK REVENDA not complicate the repayment of loans Just the opposite: in crises, interest rates are very low and real rates may be even negative Strict compliance with the set principles may prove questionable during a particular crisis On the other hand, changing the principles during a crisis raises doubts about the rationale for their setup Compare e.g provision or refusal of an access to the “discount window” to the largest American investment banks in 2008 Disposals or closures of insolvent banks may appear difficult with respect to the potential impact on the credibility of the banking system, losses on customers’ deposits (mitigated or neutralized by insurance) and so on In addition, an accurate demarcation between still solvent and already insolvent banks may be problematic The role and tasks of central banks in crisis management are under discussion, in particular following the development of the post-2007 crisis, both in theoretical terms and in practice when setting up respective legislation The focus is primarily on the “too-big-to-fail banks“, or, in a new politically correct language, the “systemically important financial institutions“, and on the limits to the central banks’ assistance within the Bagehot’s principles; compare e.g potential adjustments to the “Dodd-Frank Act“ in the U.S (Hoenig, 2017; Financial Choice Act, 2018) In broader terms, the discussion deals with the “too-big-to-fail financial institutions and/or government-sponsored enterprises“; see e.g (Poole, 2005; Vives, 2010; El-Erian, 2012) In the Czech Republic, as an EU member, now the regulation of (not only) banking must comply with the respective EU Directives Key regulatory changes address - according to the author of this article correctly - the primary responsibility of the shareholders, and, therefore, lead to minimization of the hard-to-defend approach of “privatizing profits and nationalizing losses” Solutions of the overall banking crises - not the problems of individual banks - remain very controversial, at least from the theoretical point of view Here, a higher level of compliance with Bagehot’s principles is concerned, at least as regards the role of the central banks Namely the last rule on liquidation or sale of insolvent banks is “modified“ by the existence of the European Stability Mechanism (ESM) Here, the author appreciates the pressures on increases in the banks’ minimum capital adequacy including the discretion of the national central banks regarding the requirements for the countercyclical capital buffer Fundamental regulatory changes, driven by BASEL III, are accepted in EU countries In the U.S., certain issues, such as whether the capital adequacy as a percentage should be related to the total assets (+ limits of financial derivatives), at the minimum level of 10 % (Hoenig, 2017), or to the risk-weighted assets (+ market risk + operational risk) as is the practice so far, are still discussed Overview of banking crises in the Czech Republic a later developments The events and circumstance mentioned in the introduction led consequently to three banking crises In the first two of them - related to small banks - the CNB was heavily involved, particularly as the Số 209- Tháng 10 2019- Tạp chí Khoa học & Đào tạo Ngân hàng 73 Banking in the Czech Republic - from crises to stability lender of last resort The third crisis was related to three of the four largest banks Its solution was primarily financed from the state budget, specifically through the Consolidation Bank (that was later transformed into the Czech Consolidation Agency in 2001) and through the National Property Fund 3.1 Banking crisis in 1996 The problem of non-performing loans started to unfold also with new credits provided by commercial banks once a two-tier banking system was established, i.e., following the banking system reform At several banks, bad debts resulted from frauds made by management, shareholders, but also employees Solutions were first initiated by the CNB, as the loans were provided more or less on the basis of independent decision making of banks as entrepreneurial entities Classified loans (overdue for 31 or more days) represented around 30% of total loans in the 1996 2000 period In these years, the Czech banking system went through three consecutive crises The approach to solving the first crisis in 1996 was linked to the Consolidation Programme II, covering fifteen small local banks “In exchange“ for loans to the banks, the central bank required an increase in the capital adequacy from 8% to 10%, primarily by existing shareholders strengthening the capital base The program eventually led to the closures of nine banks They were either sold to other investors or their banking licenses were revoked This approach established the unfortunate precedent whereby depositors got back 74 100% of their deposits with regards to the banks to be closed, up to CZK 4 million (approx USD 150 000) per depositor, regardless of the legislative rules (significantly lower limits, reimbursement of 80% or 90%) The same non-systemic approach was used - with one exception - for all other banks; see details by (Revenda, 2013) 3.2 Banking crisis in 1997 The second banking crisis was sorted out by the Stabilization Programme, again targeted at small banks This time, the State was already significantly involved The banks were allowed - only if in compliance with strong CNB supervision - to sell temporarily, for to years, their bad assets to the specialized Czech Financial (Česká finanční) institution By these sales, the banks obtained reserves and treasury bills with zero weight of risk, resulting in a significant increase in their capital adequacy and liquidity During a pre-set time period the banks were supposed to get liquidity for the buybacks Six banks entered the programme Three banks ended up later with their banking licenses withdrawn, one bank was taken over, and the remaining two banks were sold to new owners The programme was terminated in June 2000 by the sale of the Czech Financial to the Consolidation Bank 3.3 Banking crisis 1998-2000 The problem of new bad loans gradually escalated at three of the four largest banks The state saved two State-owned banks -Czech Savings Bank (Česká spořitelna) and Commercial Bank (Komerční banka) - particularly by capital increases and bad Tạp chí Khoa học & Đào tạo Ngân hàng- Số 209- Tháng 10 2019 ZBYNĚK REVENDA Chart Number of banks in the Czech Republic 1993-2019 Source: https://www.cnb.cz/cnb/STAT.ARADY_PKG.PARAMETRY_SESTAVY?p_sestuid=33049&p_ strid=BAA&p_lang=EN assets purchases The recovery of these banks was later reflected in a higher sale price when privatized to foreign investors (Erste Bank and Société Générale) Investment and Post Bank (IPB, Investiční a Poštovní banka), clearly a too-big-to-fail institution in local terms, was a spectacular example The Czech National Bank issued a guarantee for all deposits at the bank at the time of forced administration on 16 June 2000 Three days later, the bank was sold to the Czechoslovak Commercial Bank (Československá obchodní banka) The Czech state later issued a guarantee to the Czech National Bank to cover some of the losses that the central bank incurred due to obligations related to reimbursements towards the Czechoslovak Commercial Bank taking over IPB The method of settlement resulted in international arbitrations between the State and the main shareholder of the bank (Nomura International) running until 2016 The estimated net costs - deducting various proceeds, including those from bank privatization - of the assistance to the Czech banking system between 1990 and 2007, i.e., until the Czech Consolidation Agency was closed, ranged between 10% and 15% of GDP in 2007.3 3.4 Post-crisis period - banks in the new millennium After 2000, banking licenses were withdrawn from two smaller banks (2002 and 2003) to whom neither the central bank nor the state gave any assistance In the last case so far, the license was removed from ERB Bank in 2016 As the main reasons, the central bank noted: “a non-functioning governance system and purchases of bonds in contravention of legal rules“.4 The world crisis, post 2007, did not have a significant impact on the Czech banking system The CNB provided favourable https://www.cnb.cz/en/public/media_service/press_ releases_cnb/2016/20161024_erb_bank_licence.html From time to time, there were “proposals“ to revalue gold reserves to their market levels and transfer the resulting “extraordinary profit“ to the state budget Maximum value of these “hidden gold reserves“ is currently CZK 7,9 billion (EUR 305 million), or 0.56% of the budget income in 2018 This would not be the first case in recent history – in 1997 and 1998, Deutsche Bundesbank was forced by the German government to such a revaluation This way, Germany managed to fulfil the Maastricht criterion of the share of the state budget deficit to GDP Số 209- Tháng 10 2019- Tạp chí Khoa học & Đào tạo Ngân hàng 75 Banking in the Czech Republic - from crises to stability terms of credits to banks to replenish their liquidity Despite that, loans were only drawn in minimum amounts and did not exceed 0.75% of the central bank’s assets Since February 2012 - except for negligible amounts - these loans are no longer demanded by the banks The high bank reserves at the central bank are the main reason for such a lack of demand As a whole, the Czech banking system is undoubtedly highly liquid This is mainly driven by the very cautious credit activities of the banks, negligible exposure to financial derivatives, prudential supervision and the monetary policy of the Czech National Bank The same holds for solvency The average capital adequacy ratio is above 17%, while the largest banks maintain 18%, thus complying with the tougher rules (countercyclical capital buffer etc.) that increase the minimum level to the required 15% The number of banks is shown in the chart Monetary policy framework in the Czech Republic Since the banking reform in January 1990, the central State Bank of Czechoslovakia (SBCS) ceased to act as a “commercial bank” At that time, the central bank transferred assets and liabilities of the commercial entities into specialized state-owned banks Internal and external monetary stability became the main objectives of monetary policy, i.e., the efforts to keep inflation under control and to maintain a stable domestic currency The CNB very quickly abandoned its direct instruments, and began to use market instruments, such as open market operations and interest rates 76 Anti-inflationary policy was highly successful, and, after the sharp oneoff jump in the consumer price index in 1991 (CPI, 56.6%), the annual rate of inflation decreased significantly The older loans to the corporate sector that were not “absorbed“ by inflation represented the other, unfavourable, side of the policy In 1990, the currency was hit by three devaluations, and managed exchange rate served for the next seven years - i.e., including also 5 years in the newly established Czech Republic - as a “nominal anchor“ against inflation Furthermore, internal currency convertibility was introduced In September 1990, the country’s membership in the International Monetary Fund and the World Bank Group was renewed The split of Czechoslovakia led to the immediate separation of Czech and Slovak crowns held on accounts and used in non-cash payments In February 1993, the currency separation was carried out 4.1 Monetarist transmission mechanism Until 1997, the CNB carried out its monetary policy using a modified monetarist transmission mechanism, where monetary aggregate M2 (money supply in the CR) served as a target Monetary base components were used as operational criteria - undrawn bank reserves, excess bank reserves since mid-1994, and short-term PRIBOR (the Prague Inter-bank Offered Rate) since 1996 Inflation and exchange rate stability remained the central bank’s objectives The exchange rate was limited to a range of ±0.5% from the central parity, there- Tạp chí Khoa học & Đào tạo Ngân hàng- Số 209- Tháng 10 2019 ZBYNĚK REVENDA fore, foreign exchange interventions played a significant role In October 1995, the Czech crown became externally convertible, still with a limited exchange rate Gradually, the Czech currency came under growing pressure for appreciation Given the two monetary policy objectives, it was necessary to address the dilemma of the preference of one of them In February 1996, the central bank extended the fluctuation band to ±7.5 % This increased the exchange rate risks and caused a decline of foreign investment incentives driven by the highly positive interest rate differential, i.e., by the difference between the nominal interest rates locally and abroad Due to the growing trade balance deficits, the Czech crown was exposed to a “classic” speculative currency attack in 1997, openly striking on 13 May The exchange rate of the Czech crown gradually reached the limits of the devaluation band The CNB began to intervene massively, indirectly through substantial increases in the discount, Lombard and repo rates, as well as directly by purchases of Czech crowns with foreign currency 1W repo rate (minimum - for purchases of securities) was the highest in the 23 May through 2 June period at 75% p.a High interest rates subsequently complicated the situation to the debtors (increase in interest payments) and, in consequence, also to the banks Despite all the efforts, the central bank was forced to give up, specifically due to the substantial decline in foreign currency reserves On 27 May 1997, the exchange rate corridor and the central parity were abolished, and the floating exchange rate was introduced 4.2 Inflation targeting The floating exchange rate allowed the CNB to focus on inflation as the sole objective of its monetary policy This later enabled the bank to change the transmission mechanism fundamentally The CNB switched to inflation targeting at the end of 1997 Short-term PRIBOR remained the operational criterion, the intermediary target was abandoned - money supply became one of the criteria and the inflation target was quantified The target was initially quantified as so called clean inflation, i.e., CPI adjusted for impacts of changes in regulated prices However, the indicator was not sufficiently transparent to the public An effective monetary policy is conditional on the independence, transparency, credibility and accountability of the central bank Independence is ensured by an amendment to the 2001 Constitution Credibility and accountability are constantly “scrutinized” by the market and the wider public Transparency requires a comprehensible goal - since January 2002, it is the CPI The specific values of annual CPI are also set by the central bank The last target was quantified in January 2010 as an annual CPI of 2% ± 1 pp The repo rate is the operational criterion 4.3 Quantitative easing A special way of implementing monetary policy, quantitative easing, is known since 2000 from Japan (Spiegel, 2001), and e.g (Besley and Kohn, 2009; Lenza et al., 2010; Thornton, 2011; Bullard, 2012; Reis, 2013; Williamson, 2015) In the last financial crisis, for example, the European Central Bank (ECB) and the US Fed took Số 209- Tháng 10 2019- Tạp chí Khoa học & Đào tạo Ngân hàng 77 Banking in the Czech Republic - from crises to stability Table The CNB’s interest rates (%) Changes 2W Discount Lombard Changes Repo rate rate rate 2W Discount Lombard Repo rate rate rate February 8, 2008 3.75 2.75 4.75 October 1, 2012 0.25 0.10 0.75 August 8, 2008 3.50 2.50 4.50 November 2, 2012 0.05 0.05 0.25 November 7, 2008 2.75 1.75 3.75 August 4, 2017 0.25 0.05 0.50 December 18, 2008 2.25 1.25 3.25 November 3, 2017 0.50 0.05 1.00 February 6, 2009 1.75 0.75 2.75 February 2, 2018 0.75 0.05 1.50 May 11, 2009 1.50 0.50 2.50 June 28, 2018 1.00 0.05 2.00 August 7, 2009 1.25 0.25 2.25 August 3, 2018 1.25 0.25 2.25 December 17, 2009 1.00 0.25 2.00 September 27, 2018 1,50 0,50 2,50 May 7, 2010 0.75 0.25 1.75 November 2, 2018 1,75 0,75 2,75 June 29, 2011 0.50 0.25 1.50 May 3, 2019 2,00 1,00 3,00 Source: https://www.cnb.cz/en/monetary-policy/instruments this approach - the main reason, however, was to increase the liquidity of the banking, or rather financial, system The CNB began to use QE in October 2008, initially with the same goal - securing liquidity of the banks QE has two basic forms - central bank interest rate cuts, and purchases of securities by the central bank from banks (reverse repos, i.e., liquidity-providing repos) The CNB sets three basic rates: - Discount rate charged on excess reserves at predetermined multiples (CZK 100 million); - Repo rate - the maximum rate offered to banks when selling central bank bills (interest rate repo tenders, liquidity–accepting repos, three times a week) - mostly two-week (2W) rates; - Lombard rate for overnight loans to banks Table shows interest rate changes since their highest level in February 2008 Until December 2009, the CNB announced only 78 the repo rate Discount rate was automatically pp lower and the Lombard rate pp higher A decrease of the repo rate to % would result in the discount rate of 0% The CNB started to announce the discount rate at the same time, and from October 2012 also the Lombard rate In November 2012, the CNB introduced “technical zero” rates (0.05 %) for both the repo rate and the discount rate Unlike the ECB, for example, the CNB did not use negative interest rates (the reasons were rather in the tax system and in the “psychology of the Czech households”) Since 2012, interest rate cuts were linked mainly to efforts to stop deflationary tendencies that were associated with both the previous economic recession and the appreciation of the Czech crown The reason for ensuring liquidity in the banking system gradually came to an end, as banks had already sufficiently high excess reserves Tạp chí Khoa học & Đào tạo Ngân hàng- Số 209- Tháng 10 2019 ZBYNĚK REVENDA The same fact led to the “spontaneous extinction” of the second form of QE reverse repos Insignificant amounts of liquidity-providing repos (with minimum repo rate) ran since October 2008 to January 2012 - high bank reserves de facto eliminated efficiency of this form of QE 4.3.1 Riddle of repos Looking at the same discount and repo rate levels in detail (Table 1, November 2012 - August 2017), an economist may ask: Why the banks spent their excess reserves buying the CNB bills, when their return could reach the announced repo rate at the maximum, i.e., the level of the discount rate? Is not it better not to buy anything when the reserves potentially bear (just slightly) lower interest rate? The explanation lies (above all) in the interest rates applied on the multiples of excess reserves For example, if the bank has reserves of CZK 350 million, only the amount of CZK 300 million is interestbearing - the remaining CZK 50 million are interest-free, unless the bank buys the CNB bills With a “return to normal“ in terms of the higher repo rate compared to the discount rate, banks’ interest in the CNB bills is obvious Then, one could ask: Why the banks not use “almost all” of their excess reserves for the purchases of the CNB bills? The answer is clear - these securities are not offered in such amounts Further, purchases of the CNB bills are limited, of course, by the use of excess reserves for interbank payments Potential uncertainties are also associated with the repo rate as an instrument and the operational criterion - the short-term interest rate - in the inflation targeting process The announced (maximum) repo rate is an instrument, while the role of the operational criterion is fulfilled by the actually achieved (and typically just slightly lower) repo rate More frequently - in countries with inflation targeting the interbank offered rate is used as the operational criterion 4.3.2 Foreign exchange interventions Almost zero interest rates and the high excess reserves exposed the CNB to a fundamental problem - how to further deal with the deflationary pressure In the end, the central bank started to use a “special form” of QE - interventions against the Czech crown The Czech Republic is a highly open economy, with the share of foreign trade on GDP of 160% Therefore, exchange rate movements have - through import prices - a potentially high impact on domestic price levels In October 2012, the CNB started strong verbal interventions The situation repeated itself after each monetary session of the Central Bank Board However, the impacts on the Czech crown gradually diminished - “the longer you talk and nothing, the less attention is paid“ It was then necessary to start “real“ foreign exchange interventions (FXI) The first one took place on 7 November 2013 in the amount of CZK 200 billion (approx EUR 7.5 billion; the CNB purchased also other currencies during the interventions, e.g., USD ) Most analysts were very surprised The author modestly notes that “he was surprised by the surprise of the analysts“ as the CNB already intervened Số 209- Tháng 10 2019- Tạp chí Khoa học & Đào tạo Ngân hàng 79 Banking in the Czech Republic - from crises to stability verbally for over a year The interventions were problematic, namely the broader public considered these steps as “depreciation of savings“ This attitude was encouraged by some politicians and the CNB suddenly became almost a “public enemy“ However, the last option, at least by the author, was to “do nothing and hope quietly“ The author does not question “the dark side of the FXI“, namely a tough impact on travel agents This way, the CNB depreciated the Czech crown to CZK 27/EUR, i.e., by 4.7%, and, at the same time, used an exchange rate commitment to intervene at the market, if necessary, to weaken the Czech crown so as to maintain the CZK 27 to the euro With respect to the exchange rate commitment, further FXIs were necessary, however, as late as in July 2015 (EUR 1.3 billion) Interventions were then applied - with two exceptions - regularly every month and reached a record high in March 2017 (EUR 19.3 billion), shortly before the monetary session of the Bank Board The market expected the end of the exchange rate commitment and was not surprised this time On April 2017, the CNB terminated the commitment with the conclusion that - in case of strong Czech crown appreciation - it is ready to intervene again So, it was not a “shocking decision” such as in case of the Swiss National Bank - sudden abolition of a three-year-old cap on the franc, 15 January 2015 The last interventions took place only up to the time of the monetary session (EUR 653 million) Since then, there were no interventions The strengthening of the crown was insignificant (less than 2%), because “excessive amounts of the Czech currency were 80 held by market participants speculating on its appreciation” The currency slightly strengthened afterwards but not to levels preventing the CNB from increasing interest rates This time, the weakening of the inflationary pressure is the issue It is evident - according to the author - that, when looking at the price development, the interventions succeeded in precluding the deflation threat; discussion in (Mandel and Tomšík, 2018) With the current positive development in both the EU and the Czech economy, monetary policy gradually enters a “normal“ interest rates environment It is worth noting here a relatively wellknown fact The interventions against the domestic currency may be (almost) unlimited - the central bank may buy foreign currencies for “newly printed“ money that is kept in the excess bank reserves Naturally, this has various impacts including the growth of the central bank’s balance sheet - the share of foreign reserves increases on the assets side with simultaneous increases of the bank reserves in liabilities These reserves are part of monetary base, therefore FXIs inevitably also lead to decreases of money multipliers (monetary aggregates / monetary base) See e.g (Gavin, 2009) There are significant limits in interventions in favour of the domestic currency, i.e., in interventions to defend it against depreciation (or devaluation) Interest rates can be increased (with negative impacts on bank debtors and often also on the banks themselves) or the central bank can sell foreign reserves - however, the central bank cannot generate these assets on its own and their levels are limited Tạp chí Khoa học & Đào tạo Ngân hàng- Số 209- Tháng 10 2019 ZBYNĚK REVENDA Chart Foreign exchange interventions and bank reserves (monthly changes in bil CZK) The economic results of central banks with a high share of foreign reserves are significantly influenced by exchange rate movements Depreciation of the domestic currency results in revenues, strengthening increases costs The impacts on the CNB are analysed in the following paragraphs Balance sheet and profit/loss performance Monetary policy, regulation and supervision, foreign exchange operations and other activities are reflected in the values on the balance sheet and profit and loss account items 5.1 Balance sheet In the double-entry accounting system, the change in any balance sheet item is simultaneously accompanied by an opposite change on the same side of the balance sheet or the same change on the opposite side of the balance sheet In addition to the traditional view of the balance sheet (assets = uses, liabilities = sources), a central bank’s balance sheet can be viewed as a summary of some methods of money issuance (as a component of assets) and some categories of money in the banking system and economy (components of liabilities) Contrary to the “majority opinion” on the issuance of money to the economy, the author emphasizes that central banks issue money (almost) exclusively to the banking system, including the currency (against banks’ accounts with the central bank, i.e., against bank reserves) - while the structure is changed, the monetary base amount stays at the same level There are three basic ways of issuing money: non-cash loans to banks, reverse repos (and outright purchases), and noncash purchases of foreign currencies In the Czech economy, loans and reverse repos have been almost unused for several years However, the primary reason for purchases of foreign currencies is not the issue of money to banks, but the depreciation of the domestic currency The effects Số 209- Tháng 10 2019- Tạp chí Khoa học & Đào tạo Ngân hàng 81 Banking in the Czech Republic - from crises to stability Table The CNB’s balance sheet (%) Indicators End of 2018 Q2 2019 Total balance sheet (bil CZK) 3260.6 3346.8 Foreign assets* ⁄ Total assets 99.7 99.7 Claims on banks ⁄ Total assets 0 Bank reserves ⁄ Total liabilities 70.6 80.2 excess reserves** ⁄ bank reserves 95.7 96.4 excess reserves** ⁄ Total liabilities 67.6 77.3 Banknotes and coins ⁄ Total liabilities 19.0 18.7 Balance sheet total / Nominal GDP 61.2 - 2.0 ± pp 2.0 ± pp 2.0 2.7 CPI target Annual CPI inflation * Including IMF ** Bank reserves minus Required reserves Source: https://www.cnb.cz/en/about_cnb/performance/ten_day_balance_sheet/ten_day_ balance_sheet_archives/, https://www.cnb.cz/cnb/STAT.ARADY_PKG.VYSTUP?p_period=12&p_ sort=2&p_des=50&p_sestuid=28837&p_uka=1&p_strid=ACCABA&p_od=201712&p_ do=201812&p_lang=EN&p_format=0&p_decsep=., https://www.cnb.cz/cnb/STAT.ARADY_PKG VYSTUP?p_period=1&p_sort=2&p_des=50&p_sestuid=21727&p_uka=1%2C9%2C13&p_ strid=ACBAA&p_od=201812&p_do=201906&p_lang=EN&p_format=0&p_decsep=., author on bank reserves are sometimes even sterilized (purchase of foreign currencies - increase in reserves, sale of central bank bills - decrease in reserves; sterilised interventions), the impacts on the domestic currency are, however, weaker than when central banks carry out non-sterilised interventions Their main role in issuing bank reserves is illustrated in the chart Data in Table show quite special structure of assets at the CNB; money for the banking system is issued through purchases of foreign currencies Massive FXIs against the Czech crown resulted in the dominant share of bank reserves in the liabilities of the CNB, 80% in mid-2019 The currency share is logically quite low, 19% The share of excess reserves, 96% on total reserves, means that the banking system is highly liquid 82 - no liabilities to the central banks, high excess reserves The share on the nominal GDP is much higher in the CNB than it is “usual” (about 30% in the European Central bank or the Federal Reserve System) So there are important the discussions about the necessity to reduce the “inflated balance sheet“ of our central bank The CNB would have to sell foreign reserves to local banks - then both assets and liabilities (bank reserves) would drop This would, however, lead to appreciation of the domestic currency The CNB would have to sell foreign reserves to local banks - then both assets and liabilities (bank reserves) would drop This would, however, lead to appreciation of the domestic currency The central bank formerly took steps to depreciate the Czech crown with the main objective to maintain the quantified CPI At the end of Tạp chí Khoa học & Đào tạo Ngân hàng- Số 209- Tháng 10 2019 ZBYNĚK REVENDA the second quarter of 2019, the annual CPI stayed just within the defined corridor (see Table 2) As the CNB targets the annual CPI within the horizon of the next 12-18 months, it should now react to the predicted future inflation The forecasting model has led so far to seven decisions on interest rate increases since the termination of the exchange rate commitment Ceteris paribus, increases in interest rates drive the currency appreciation and act in an anti-inflationary way The same results could be achieved using the above mentioned FXIs against the Czech crown, however, the inflation targeting is linked to short-term interest rates (operational criterion) which can be better controlled using the interest rates of the central bank 5.2 Profit/Loss performance of the CNB Profit or loss as a difference between revenues and costs is, in case of the CNB, primarily linked to the development of foreign reserves and the floating exchange rate Asset yields are generated by interest income from foreign bonds, to which a part of foreign reserves is invested, or from dividends and capital distributions from foreign equity holdings In general, central banks should invest exclusively in risk-free treasury bills On the contrary, equity investments are a relatively new asset with potentially significantly higher risk Income from deposits with foreign banks is negligible In the case of the CNB at the end of June 2019, the composition of the foreign reserves was as follows: deposits with foreign banks 35%, securities (bonds and stocks) 56%, and other receivables 9% Let’s assume a higher rate of return of foreign assets than an average cost of liabilities The costs of liabilities are driven by interest payments to banks related to the required and excess reserves (discount and repo rates) and to the sold CNB bills (repo rate on the repo transactions) Increases in foreign reserves lead to the growth of central bank’s revenues, decreases to their decline However, the movement of the exchange rate to currencies that are represented in the foreign reserves is the key parameter Let's assume the exclusive holdings of euros and the CZK/EUR exchange rate of CZK 26 (effectively, it was 25,8), i.e., EUR 125 billion at the end of 2018 Depreciation or appreciation of the currency by one Czech crown (3,85%) imply a positive impact of a weaker crown and a negative impact of a stronger crown of CZK 125 billion The retained loss of the CNB from previous years was CZK 187 billion Under these circumstances, the “required“ exchange rate for a zero loss would be CZK 27,5/EUR The extreme exchange rate sensitivity of nearly 100% of assets (i.e., foreign assets) determines the profit/loss performance of the CNB Regarding the potential reduction of foreign reserves (see also Section 5.1), two facts should be mentioned An absolute reduction in foreign assets would reduce the CNB’s revenues A relative reduction of foreign assets (i.e., the decrease of their level relative to total assets), and hence a respective increase in the share of other assets, is not realistic Loans to banks and/or purchases of treasury bills from banks are meaningless, none of the Số 209- Tháng 10 2019- Tạp chí Khoa học & Đào tạo Ngân hàng 83 Banking in the Czech Republic - from crises to stability commercial banks have any reason to increase their excess reserves this way In this sense, the CNB is in a sort of “foreign assets trap“ (and liquidity trap, too), but on the other hand it is “lucky enough“ not to be an “equity“ central bank owned by independent entities The central banks are not motivated to generate profits, however, the “privately owned“ equity central banks, such as the Federal Reserve Banks, the Swiss National Bank and some others, are sometimes under the pressure from shareholders to meet profit expectations Summary and conclusions These different approaches corresponded only in part with the theoretical framework But the author is convinced, that central bank’s help to problem banks should be only in short-term credits form to temporarily illiquid banks There are also never-ending discussions about large, systemically important banks Gradual increase of minimum capital requirements and higher level of this used for large banks seems to be hopeful and suitable solution This has to be combined with stronger supervision These changes are much better than rescue of large banks by funding this directly or indirectly by state expenses But from the other side, it does not mean that there would not be potential problems with too big banks longer The Czech banking system is currently characterized by high excess reserves The banks have sufficient liquidity, and any credit assistance from the central bank as the lender of last resort is highly unlikely Banks also report high capital adequacy The financial crises starting in 2007 in numerous countries did not have any significant adverse impact on the Czech banking system: no domestic bank fell into solvency problems, and temporary liquidity problems were insignificant Banks got into liquidity and solvency problems in the second half of the last decade of the 20th century Two small bank crises during that period were addressed differently - the first using credit (and similar) assistance from the central bank, and the second connected with the establishment of specialized institution funded by state budget The relatively worst crisis - at the end of the 20th century - was related to three out of the four largest banks, The institutional arrangement of banking supervision in the Czech Republic is atypical - the CNB is the only institution with off-site surveillance, also performing on-site examinations of the whole financial system (since 2006) - banks, credit unions, insurance companies, pension funds, investment companies, non-bank financial lenders (since 2017), etc The potential threat of paying up the central bank’s losses is not on the agenda as the Czech Republic still "does not consider“ joining the Eurozone and adopting the euro Joining the Eurozone would probably require the payment of losses, most likely through issues of long-term government bonds 84 and the central bank’s assistance was only indirect Two, at that time, state-owned banks were rescued using budgetary resources, and the third, already privatized, was sold to another domestic bank with its losses reimbursed from the state budget Monetary policy has evolved from the Tạp chí Khoa học & Đào tạo Ngân hàng- Số 209- Tháng 10 2019 ZBYNĚK REVENDA monetarist transmission mechanism to inflation targeting (since the end of 1997) The economic recession since 2009 has been the main cause of growing deflationary pressures At that time, the CNB used one of the two main forms of quantitative easing - interest rate cuts The other form purchases of securities from banks and/or increases in the amount of loans offered to commercial banks - was not realistic (because of high excess reserves) The continuing threat of falling into deflation led to an atypical form of QE: verbal interventions first, and then, in November 2013, the “real“ foreign exchange intervention against the Czech crown The CNB made a commitment not to allow for currency appreciation below CZK 27/EUR FXIs continued to run from July 2015 till April 2017 when the exchange rate commitment was lifted The Czech Republic avoided the deflationary development, and, at the moment, the annual CPI stays above the 2% level, but still in the targeted corridor of 2% ± 1 pp FXIs, as well as the former development, led to the dominant share of foreign assets relative to the total assets of the central bank, close to 100%, and to the further increase of the excess bank reserves (77% of the CNB liabilities) These balance items are thus the determinants of the financial performance (profit or loss) of the Czech National Bank Potential reduction of such a big importance of foreign reserves is complicated because of consequences with exchange rate movements But it is still much better position than in many countries of the European Monetary Union, where the liquidity of banking system still strongly depends on the central banks loans ■ References Bagehot, W (1873), Lombard Street: A Description of the Money Market, Henry S King & Co., London ISBN: 978-0-471-34536-7 (1999) Besley, T and Kohn, D L (2009), “Interpreting the Unconventional U.S Monetary Policy of 2007–09”, Comments and Discussion, Brookings Papers on Economic Activity, Fall 2009, pp 166-182 Bullard, J (2012), “Death of a Theory”, Review, Federal Reserve Bank of St Louis, Vol 94 No 2, pp 83-102 El-Erian, M A (2012), “Evolution, Impact, and Limitations of Unusual Central Bank Policy Activism”, Review, Federal Reserve Bank of St Louis, Vol 94 No 4, pp 243-264 Financial Choice Act - Executive Summary, https://financialservices.house.gov/uploadedfiles/financial_choice_ act-_executive_summary.pdf Gavin, W T (2009), “More Money: Understanding Recent Changes in the Monetary Base”, Review, Federal Reserve Bank of St Louis, Vol 91 No 2, pp 49-59 Hoenig, T (2017), “Restoring the structural integrity of banks”, Central Banking, Vol XXVIII No 1, pp 29-36 Kindleberger, C (2000), Manias, panics, and crashes: a history of financial crises, 4th ed Wiley, New York ISBN 0-471-38945-5 Lenza, M., Pill, H., Reichlin, L and Ravn, M (2010), “Monetary policy in exceptional times”, Economic Policy, Vol 25 No 62, pp 295-339 10 Mandel, M and Tomšík, V (2018), Monetární ekonomie v období krize a konvergence, Management Press, Praha, ISBN 978-80-7261-545-2 11 Mishkin, F S (2013), The economics of money, banking and financial markets, Pearson, Boston ISBN 978-0-13277024-8 12 Poole, W (2005), “GSE Risks”, Review, Federal Reserve Bank of St Louis, Vol 87 No 2, Part 1, pp 85-91 13 Reis, R (2013), “The Mystique Surrounding the Central Bank's Balance Sheet, Applied to the European Crisis”, The American Economic Review, Vol 103 No 3, pp 135-140 14 Revenda, Z (2013), “Teoretické a ekonomické aspekty pojištění vkladů”, Politická ekonomie, Vol 61 No 2, pp 149-170 Số 209- Tháng 10 2019- Tạp chí Khoa học & Đào tạo Ngân hàng 85 Banking in the Czech Republic - from crises to stability 15 Spiegel, M (2001), “Quantitative Easing by the Bank of Japan”, Economic Letter, Federal Reserve Bank of San Francisco, No 31, pp 1-3 16 Thornton, D L (2011), “The Effectiveness of Unconventional Monetary Policy: The Term Auction Facility”, Review, Federal Reserve Bank of St Louis Vol 93 No 6, pp 439-454 17 Vives, X (2010), Competition and stability in banking, Working Paper, 852, IESE Business School, University of Navarra 18 Vencovský, F et al (1999), Dějiny bankovnictví v českých zemích, Bankovní institut, Praha ISBN 80-7265-030-0 19 Williamson, S (2015), “Monetary Policy Normalization in the United States”, Review, Federal Reserve Bank of St Louis, Vol 97 No 2, pp 87-108 trang 19 kể lĩnh vực phát triển kinh tế khu vực giới Trung Quốc cách vài thập kỷ thiếu thốn nhiều sở hạ tầng, tảng cạnh tranh, bất bình đẳng khu vực tư nhân nhà nước trở thành quốc gia dẫn dắt phát triển công nghệ đổi sáng tạo toàn cầu Cuộc CMCN 4.0 tạo nhiều hội cho Trung Quốc việc nâng cao trình độ công nghệ, lực sản xuất mang đến thách thức cho quốc gia lĩnh vực kinh doanh cạnh tranh việc cung ứng chuỗi sản phẩm Chính việc hiểu tác động tích cực dài hạn CMCN 4.0 đến phát triển kinh tế, xã hội môi trường giúp Trung Quốc xác định rõ sách ứng phó cụ thể, mang tính tích cực Việt Nam quốc gia q trình cơng nghiệp hóa, đại hóa hội nhập quốc tế sâu rộng Những kinh nghiệm quốc gia láng giềng Trung Quốc giúp Việt Nam việc nâng cao trình độ cơng nghệ, cải thiện khung pháp lý hỗ trợ ngành, phát triển nguồn nhân lực chất lượng cao để tiến vào kỷ nguyên công nghệ mới- CMCN 4.0 ■ trang khoản cổ phiếu suốt cửa sổ nghiên cứu dễ dàng quan sát Hình Từ kết nghiên cứu 86 trên, kết luận thơng tin chia tách cổ phiếu có tác động tích cực đến khoản cổ phiếu Kết luận Nghiên cứu bổ sung thêm chứng thực nghiệm ảnh hưởng thông tin chia tách cổ phiếu đến thay đổi giá khoản cổ phiếu niêm yết TTCK Việt Nam Sử dụng mẫu nghiên cứu bao gồm 237 kiện chia tách 150 công ty niêm yết HOSE giai đoạn 2015- 2017, kết kiểm định thống kê cho thấy giá cổ phiếu có thay đổi xung quanh ngày công bố thông tin chia tách cổ phiếu Cụ thể là, giá cổ phiếu tăng 0,33% từ trước phiên thông tin công bố tiếp tục tăng 0,59% phiên sau ngày công bố thông tin Đặc biệt là, tăng giá cổ phiếu trì liên tục suốt 10 phiên sau ngày công bố thông tin Ngồi ra, nghiên cứu ghi nhận ảnh hưởng tích cực thơng tin chia tách cổ phiếu đến khoản cổ phiếu Thanh khoản cổ phiếu tăng mạnh suốt giai đoạn nghiên cứu, đặc biệt hai phiên sau ngày công bố thông tin Dựa chứng thực nghiệm kết luận thơng tin chia tách cổ phiếu có ảnh hưởng tích cực đến thay đổi giá khoản cổ phiếu niêm yết HOSE ■ Tạp chí Khoa học & Đào tạo Ngân hàng- Số 209- Tháng 10 2019 ... both in terms of the related procedures and the used instruments Nevertheless, Số 20 9- Tháng 10 201 9- Tạp chí Khoa học & Đào tạo Ngân hàng 71 Banking in the Czech Republic - from crises to stability. .. mentioned in the introduction led consequently to three banking crises In the first two of them - related to small banks - the CNB was heavily involved, particularly as the Số 20 9- Tháng 10 201 9- Tạp... 30% of total loans in the 1996 2000 period In these years, the Czech banking system went through three consecutive crises The approach to solving the first crisis in 1996 was linked to the Consolidation

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