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Capital availability is the most slippery banana skin for the Czech bankers

Raising funds to increase their capital levels, insolvency of their clients and an overwhelming supply of regulations from Brussels and Basel are the greatest risks facing Czech bankers, according to the latest „Banking Banana Skins“ survey conducted by the Centre for the Study of Financial Innovation (CSFI) together with PricewaterhouseCoopers. Petr Kříž, PricewaterhouseCoopers Audit Partner and banking expert, comments on the top ten most serious risks for the Czech banking sector.

ČESKY: Čeští bankéři se nejvíce obávají o dostupnost potřebného kapitálu

1 Capital availability

“Concerns about capital availability are actually the result of the other mentioned risks. Due to their losses during the recession, banks around the world lowered their equity. Regulators are now pressing the banks to restore their equity to their original or even higher levels. However, capital available from the financial markets is sucked up by banking groups headquartered outside of the Czech Republic. “

2 Credit risk

“The Czech banking sector successfully avoided the initial financial crisis. Credit risk is however now becoming a major concern even for Czech banks, as the ongoing economic recession leads to a growing number of insolvencies and bankruptcies of local businesses. The number of credit-worthy projects and other credit opportunities has been declining, particularly in the small to medium-sized business and small account category. At the same time, we have seen a tendency known from the 90’s to pressure banks politically to soften the credit conditions. “

3 Too much regulation

“The cause for concern does not seem to be the regulations initiated by the Czech National Bank which has been adhering to its rational conservative approach, rather the “imported” regulations of the European Commission and the Basel committee for banking oversight. These two bodies are making a great effort to prevent another global financial crisis.”

4 Quality of risk management

“Insufficient risk management was one of the primary causes of the global financial crisis. The Czech banks were relatively unaffected by the crisis. However, the key risks remain, represented by the lack of risk management experts, pressure to produce short-term results and unclear trends in the economic cycle. “

5 Credit spreads

“During the global financial crisis, credit spreads have proved to be one of the least stable pricing elements. Along with the closely related liquidity preference, they have caused a several month-long freezing of the Czech inter-banking market. “

6 Liquidity

“During the financial crisis, liquidity represented a key risk as a majority of banks which ended up filing for bankruptcy did so not because of their losses but because of the lack of cash to cover the increased deposit withdrawals.“

7 Political interference

“Globally, political interference is currently considered to be the most slippery banana skin, however as the Czech tax-payers have not been forced to rescue any financial institutions during this last crisis, this topic is not perceived as a priority in the current political debate or as a major acute risk. This situation is however quite different in the United States or in Western Europe.”

8 Stock markets

“The stock market losses at the beginning of the last year were appalling. While since then we have seen a clearly positive trend, there is still a risk of another fall, particularly if a proper balance cannot be achieved among anti-crisis, anti-deficit and anti-inflationary measures.”

9 Fraud

“Declining and unstable economy and poor economic performance typically lead to an increased risk of fraud as well as to uncovering of earlier hidden fraud. Global Economic Crime Survey conducted by PricewaterhouseCoopers confirmed that the current economic recession has resulted in a weaker control environment due to job cuts, while at the same time there is an increased pressure on management to achieve set goals.”

10 Macro-economic trends

“Performance of national economy has a direct impact on the performance of banks. In the current situation, it is extremely difficult to find the right product, risk and growth strategy. Existing uncertainty is further enhanced by the dismal development of the Czech public funding.”

Currency risk is not an issue for Czech bankers
Comparison of the Czech and global survey results shows an interesting discrepancy between how currency risk is perceived by Czech and global bankers. While on the global scale, currency risk placed immediately after the top ten risks – in 11th place, in the Czech Republic it placed 23rd out of the total 30 risks.

“We believe that this is due to the fact that a significant proportion of bank deposits are in Czech crowns, which enables the banks in the Czech market to finance local businesses without the need to perform currency conversions and thus avoiding the increased risk. The currency risk affects Czech exporters and importers rather than the banking sector,” added Petr Kříž.