Banking in the Czech Republic - from crises to stability

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 của Ngân hàng Trung ương Cộng hòa Séc- từ khủng hoảng đến ổn định hệ thống

Tóm tắt: Thời kỳ chuyển đổi sang nền kinh tế thị trường tại Cộng hòa Séc có những tác động bất lợi đối với
hệ thống ngân hàng. Nhiều ngân hàng nhỏ rơi vào rắc rối, các vấn đề tích tụ ở các ngân hàng lớn nhất. Ngân
hàng Trung ương Séc lần đầu tiên tham gia vào việc giải quyết khủng hoảng ngân hàng với tư cách là người
cho vay cuối cùng. Cùng với sự thay đổi hệ thống ngân hàng, chính sách tiền tệ của ngân hàng trung ương
cũng chuyển đổi từ cơ chế truyền tiền tệ đến mục tiêu kiểm soát lạm phát. Bài viết này phân tích 3 vấn đề chính
trên khía cạnh lý thuyết và thực tế, bao gồm vai trò của Ngân hàng Trung ương trong việc giải cứu các ngân
hàng, mối liên hệ giữa chính sách tiền tệ và những được mất của Ngân hàng Quốc gia Séc, tác động của một
hình thức nới lỏng định lượng đối với hệ thống Ngân hàng Séc.

Từ khóa: quy định và giám sát ngân hàng, ngân hàng trung ương, khủng hoảng, người cho vay cuối cùng,
chính sách tiền tệ.
Professor Zbyněk Revenda, Dr. Ing.
Email:
Đại học kinh tế Praha, Cộng hòa Séc
Ngày nhận: 13/09/2019

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Số 209- Tháng 10. 2019

Ngày nhận bản sửa: 22/10/2019

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Ngày duyệt đăng: 22/10/2019

© Học viện Ngân hàng
ISSN 1859 - 011X


ZBYNĚK REVENDA

1. 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.
1

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 5 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,

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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 do 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.

2. 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
2

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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.
3. 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

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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 5 to 7 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

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Chart 1. Number of banks in the Czech Republic 1993-2019

Source: />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
/>releases_cnb/2016/20161024_erb_bank_licence.html
3

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.
4

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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 1.
4. 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-

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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

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Banking in the Czech Republic - from crises to stability

Table 1. 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: />
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 1 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 1 pp lower and the Lombard rate 1
pp higher. A decrease of the repo rate to 1
% 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.

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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 do 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 do 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

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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 6 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.

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ZBYNĚK REVENDA

Chart 2. 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.
5. 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

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81


Banking in the Czech Republic - from crises to stability

Table 2. 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

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 ± 1 pp

2.0 ± 1 pp

2.0

2.7

CPI target
Annual CPI inflation

* Including IMF
** Bank reserves minus Required reserves
Source: />balance_sheet_archives/, />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=., />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 2.
Data in Table 2 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

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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

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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.

6. 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

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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
1. Bagehot, W. (1873), Lombard Street: A Description of the Money Market, Henry S. King & Co., London. ISBN:
978-0-471-34536-7 (1999).
2. 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.
3. Bullard, J. (2012), “Death of a Theory”, Review, Federal Reserve Bank of St. Louis, Vol. 94 No. 2, pp. 83-102.
4. 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.
5. Financial Choice Act - Executive Summary, />act-_executive_summary.pdf
6. 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.
7. Hoenig, T. (2017), “Restoring the structural integrity of banks”, Central Banking, Vol. XXVIII No. 1, pp. 29-36.
8. Kindleberger, C. (2000), Manias, panics, and crashes: a history of financial crises, 4th ed. Wiley, New York. ISBN
0-471-38945-5.
9. 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.

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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.

tiếp theo trang 19

kể trong lĩnh vực phát triển kinh tế trong
khu vực và trên thế giới. Trung Quốc cách
đây vài thập kỷ còn thiếu thốn rất nhiều
về cơ sở hạ tầng, nền tảng cạnh tranh, sự

bất bình đẳng giữa khu vực tư nhân và nhà
nước thì nay đã trở thành quốc gia dẫn dắt
sự phát triển của công nghệ và đổi mới
sáng tạo toàn cầu. Cuộc CMCN 4.0 đã tạo
ra nhiều cơ hội cho Trung Quốc trong việc
nâng cao trình độ công nghệ, năng lực sản
xuất cũng như mang đến thách thức cho
quốc gia này trong lĩnh vực kinh doanh và
cạnh tranh trong việc cung ứng chuỗi sản
phẩm. Chính việc hiểu được các tác động
tích cực trong dài hạn của cuộc CMCN
4.0 đến phát triển kinh tế, xã hội và môi
trường sẽ giúp Trung Quốc xác định rõ
các chính sách ứng phó cụ thể, mang tính
tích cực. Việt Nam là quốc gia đang trong
quá trình công nghiệp hóa, hiện đại hóa
và hội nhập quốc tế sâu rộng. Những kinh
nghiệm của quốc gia láng giềng Trung
Quốc sẽ giúp Việt Nam trong việc nâng
cao trình độ công 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- cuộc CMCN 4.0.
■
tiếp theo trang 8

thanh khoản của các cổ phiếu trong suốt
cửa sổ nghiên cứu có thể dễ dàng quan
sát ở Hình 2. Từ các kết quả nghiên cứu

86

ở trên, có thể kết luận rằng thông tin
chia tách cổ phiếu có tác động tích cực
đến thanh khoản của các cổ phiếu.
5. Kết luận
Nghiên cứu này đã bổ sung thêm các bằng
chứng thực nghiệm về ảnh hưởng của
thông tin chia tách cổ phiếu đến sự thay
đổi giá và thanh khoản của các cổ phiếu
niêm yết trên TTCK Việt Nam. Sử dụng
mẫu nghiên cứu bao gồm 237 sự kiện chia
tách của 150 công ty niêm yết trên HOSE
trong giai đoạn 2015- 2017, kết quả kiểm
định thống kê cho thấy giá của các cổ
phiếu đã có sự thay đổi xung quanh ngày
công bố thông tin chia tách cổ phiếu. Cụ
thể là, giá cổ phiếu đã tăng 0,33% từ trước
2 phiên khi thông tin được công bố và tiếp
tục tăng 0,59% ở phiên tiếp theo sau ngày
công bố thông tin. Đặc biệt là, sự tăng
giá của các cổ phiếu được duy trì liên tục
suốt 10 phiên sau ngày công bố thông tin.
Ngoài ra, nghiên cứu này còn ghi nhận
sự ảnh hưởng tích cực của thông tin chia
tách cổ phiếu đến thanh khoản của các
cổ phiếu. Thanh khoản của các cổ phiếu
đã tăng mạnh trong suốt giai đoạn nghiên
cứu, đặc biệt là hai phiên sau ngày công
bố thông tin. Dựa trên các bằng chứng

thực nghiệm có thể kết luận rằng thông tin
chia tách cổ phiếu đã có ảnh hưởng tích
cực đến sự thay đổi giá và thanh khoản
của các cổ phiếu niêm yết trên HOSE ■

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