Financial Crime World

Czech Republic Introduces Updates to Banking Regulations Amid Global Economic Uncertainty

Strengthening the Banking Sector

The Czech National Bank (CNB) has recently introduced several key regulatory updates aimed at strengthening the country’s banking sector and ensuring financial stability amidst ongoing global economic uncertainty.

Support for Basel III Framework

In a joint letter with 24 other supervisory authorities and central banks from EU Member States, the CNB expressed its support for a full and timely implementation of the Basel III international framework for prudential regulation of banks. The framework aims to:

  • Enhance bank capital requirements
  • Increase leverage ratio
  • Improve liquidity standards

Ultimately, this will reduce the risk of financial crises.

Interest Rate Adjustments

The CNB has also decided to increase interest rates for the second time this year in response to:

  • Improved economic expectations
  • Rapid changes on the property market
  • High levels of previously accumulated risks on banks’ balance sheets

The central bank stated that it is prepared to further increase rates if loan growth continues to accelerate, while remaining ready to decrease rates or release buffers if the economy worsens.

Enhanced Crisis Management Capabilities

Act No. 298/2021 Coll., amending the Act on Recovery and Resolution of the Crisis on the Financial Market, has entered into force. This amendment strengthens the CNB’s competences in crisis management, including:

  • The power to order a financial institution to suspend payments and fulfill obligations for up to two days
  • Definition of persons subject to crisis management in accordance with the TLAC standard
  • Rules for Minimum Requirements for Own Funds and Eligible Liabilities (MREL) and Internal Minimum Requirement
  • Regulation of the issue of sale of subordinated eligible liabilities to non-professional customers

Recapitalization Instrument

The CNB has published a simplified process for implementing the recapitalization instrument from internal sources intended to address potential failures of financial institutions. The resolution of a crisis using the bail-in instrument involves:

  • Writing off or converting depreciable liabilities that are not excluded under Section 75 of the Act on Recovery and Resolution of the Crisis on the Financial Market

Conclusion

These regulatory updates aim to enhance the resilience of the Czech banking sector, ensuring its ability to withstand potential economic shocks and maintain market confidence. As global economic uncertainty persists, these measures demonstrate the CNB’s commitment to maintaining financial stability in the country.