1. Supervision and Financial Sector in the Czech Republic Vladimir Tomsik Czech National Bank „ The Future State of the Eurozone and its Effects on European Economy “ Prague Centre for Transatlantic Relations of CEVRO Institute 11 June, 2015

2. 2 Financial System Banking sector is the key segment of the CZ financial system

3. 3 Capital Adequacy of Czech Banks As of December 2014, capital adequacy was 18.0% (Tier 1 ratio 17.5%)

4. 4 Profitability of the Banking Sector The Czech banking sector remains profitable during crisis despite the adverse economic conditions which feeds into capitalization

5. 5 Czech Banks‘ Funding Funding structure is sound

6. 6 Stress Tests 2014: Results The stress tests and other analyses demonstrate that the Czech financial sector is well prepared for potential stresses. Banks have a large capital buffer which enables them to absorb adverse shocks and maintain the sector’s overall capital adequacy sufficiently above the regulatory threshold of 8% even in a very unfavorable scenario. No acute risks to financial stability requiring immediate action are identified.

7. Banking Union and the Czech banking sector (1) Entering the SSM means transferring powers (direct supervision), not necessarily responsibilities and costs in bad times – a disequlibrium For EA countries, this transfer is somewhat neutralized by ultimate power-sharing within the ECB. This is not the case for non-EA countries, despite the SSM voting rules For EA countries, BU membership makes much more sense: 1) single monetary policy + 2) single lender of last resort + 3) single supervision + 4) single resolution (SRF) + 5) single backstop (ESM)… and maybe single fiscal policy in the future Complete equality among EA and non-EA members within the BU probably unachievable

8. Banking Union and the Czech banking sector (2) One of aims of the BU was to eliminate regulatory/supervisory “home bias”. But there is the EC/EBA to set up a single regulatory framework in the EU, and it is desirable to harmonize „minimum standards“ with a right to increase requirements in order to address national stability, specifications or prudent (mis)behaviour… The BU was meant to break the vicious circle between banks and public finances. But the agreed burden-sharing within the BU is rather too small to achieve this: SRF’s ultimate target EUR 55bn vs. total bank assets of almost EUR 30tn.

9. Banking Union and the Czech banking sector (3) For all these reasons the Czech government has decided not apply for close cooperation with the SSM at the moment = = “wait and see” approach.

10. 10 Colleges of Supervisors – Banking Sector CNB actively participates in activities of 11 colleges: Exchange of information on financial situation and risks of individual entities of respective group Standardized risk assessments, joint risk assessments and joint capital decisions (JRAD) Coordination of supervisory activities – e.g. coordinated on-site inspections, off-site reviews Joint on-site inspections – e.g. ICAAP of the group Currently prevailing form of cooperation with foreign authorities – We are a full fledge member of the colleges until we stay outside the BU…

11. 11 Banking Union: Some questions Harmonization of regulatory standards is necessary given the cross border linkages. However, national financial sectors and banks still differ in several aspects. How to reflect these differences in single regulation and supervision mechanism? What will be the future role of national supervisors given the SSM? While systemically important banks are subject to SSM, the small banks have been left to national supervisors. How to mitigate risks of different regulatory and supervisory requirements on the single European and the national level?

12. 12 Thank you for your attention www.cnb.cz Vladimir Tomsik Vice-Governor Vladimir.Tomsik@cnb.cz