Role and Functioning in Financial Markets

• financial sector reached 11.4 in CZK (= 168% of GDP) in 2022

• banking sector accounts for almost 80 % of the domestic financial sectors assets —> Banking sector in comparison to the others (NFCELs, pension etc) is huge

• Financial system after velvet revolution changed a lot —>similar to the western countries

• Similar to german system (commercial banking system)

• Investment funds are rising a lot (people are starting to invest more instead of just “saving” money at the bank), also due to covid etc they couldn’t spend a lot of money and had more monetary fluency to invest the money, the importance of saving money for retirement and not relying on the pension is also a reason for more investments

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• Uncertainty (economic and political uncertainties associated with the pandemic, followed by invasion of RF into Ukraine) - consequences for the world market, trade and growth

• Inflation (covid, = not much to buy, more liquidity but not that much to spend it on,  quantitative easing => lot of cash) à highest inflation rate in EU (Baltic states the highest, but CR also really high atm, 6-8% )

• increased interest rate level (Macroecomonics: high interest level on the market -> loans are very expensive) à most loans are euroloans for big companies etc bc the interest rate is lower on them and its therefore cheaper to get them —> national bank should decrease the interest rate again so the loans get cheaper again => Support the loans and the economy)

• Geopolitical risks

• Deglobalization, fragmentation, cross border flows interuptions • Increasing indebtness (sovereigns): countries are more indebted, you need more moneys to borrow and pay more for the bons (some countries cant even afford buying the bons)

• Climate change related issues (ESG Environmental social government - concept focus, but it seems like the interest/focus on this decreased the last year, other things are more In the focus)

• Consolidation, centralization of some activities to parent bank or group

• Commoditisation of banking products

• Digitalization, changes in distribution network

• Fintech - establishment, co-operation with or control of new FinTech companies

• Search for other revenue opportunities (revenue sources) —>„Related activities“ (bancosurance, telecommunication products, tax and legal advice on financial services, securities brokerage etc.)

-          Highest inflation in 2022 (Euro also went up, but krown was even more

o   Peoples aren’t used to inflation in CR, before 2022 inflation rate was stable and relatively low

-          Policy rates were introduced (a lot), but it wasn’t able to reduce the inflation that much

-          Reason for inflation: dependent on Russian gas/oil even more than Germany/western countries, close to 100% ; also treatment of the first signs of the inflation turned out bad (putting just more money on the market didn’t work out to save the economy), also: CR economy is really an industrial economy more than service etc (therefore even more dependent of Russia/energy etc).

-          When yields are going up the price has to decline

-          Hoping that it will go down again (good time to place bons rn)

really high bond yields atm (peak in 22)

• liquidity transformation: via transformation of lots and terms

risk transformation: Banks offset risk, risk-offsetting tends to be inter-temporal, restricted to a few risk carriers

information transofrmation: internalization of information by banks, leading to duplication; restricted information transparency

corporate control: controlling orientation (relationship lending), maximalization of staholder value

lgislation/supervisory authorities protection: strong culture of creditor and depositor protection

• banks know, investors not, not that transparent -> you don’t know what the banks are doing with the money -> therefore: creditor and depositor protection

• lidiquity transofmration: savings flow into the economic cycle directly cia carious investment intruments (bons, stocks, funds, derivatives)

• risk transformation: investors offset risk, risk-offsetting tends to be inter-sectoral; investors assume risk in line with their readiness to take risks

• information transformation: externalization of information via brokers and media; high information transparency

• corporate control: lidiquity orientation/maximization of return; maximization of shareholder value

• legislation/supervisory authorities protection: increased level of shareholder and investor protection

• -          Capital market: USA/UK market is much more transparent (investors know) —> no need for that strong protection, market by itself serves more protection

• is limited

• o   Little amount of companies which get to the stock exchange to borrow money (8 companies, that’s it)

  o   Also: some of the companies are involved in other markets (warsow, Vienna..)

-          Role of Prague Stock Exchange - limited, number of stocks traded – limited

-          It exists, but position is really weak

-          RSE 50 (index)

• both represented in CR

• - retail bank: banks are mostly financed by clients deposits and providing credits

• wholesale banks —> corporate banks (less working with client deposits etc) (less common in CR)

• Czech banking sector – ca 80 % of the whole financial sector (2022), measured by assets

• As of end 2022 - direct and indirect foreign control accounted for more than 92 % of banking assets (stable since 2001, after completion of Komeční banka privatization)

As of 09/2023 – 46 banking institutions

• 17 banks • 5 building societies • 24 branches of foreign banks (out of these 2 non-European - China) and 6 neglible cooperatives

• Czech ownership prevails only in 2 state-owned banks (CEB – support of CZ exporters, Národní rozvojová banka (former ČMZRB) – support of SMEs)

5 others mid-sized and small banks (Fio banka, PPF banka, Air Bank, Banka Creditas and Max Banka, Trinity Bank) have Czech shareholders as well;

• CZ/SK J & T Banka

• Moneta Money Bank (disperse ownership)

• However, all other (and all big) banks are direct or indirect subsidiaries of foreign banks

• Recent wave of consolidation

• All parent banks of CZ subsidiaries are coming from EU countries

• Distribution of ownership is diversified across EU countries. The largest banks are owned by banks from different EU countries

• The foreign bank branches in the Czech Republic are mainly from EU countries (based on single licence principle) – just 2 are indirectly (through European subsidiary) owned by Japanese, 1 by Chinese and 1 by the US bank, 2 branches are from a third country (China)

Large banks tend to be organized in banking groups, head of the groups is the bank, the group comprises e.g. insurance, brokerage, investment and pension funds and companies, leasing, factoring

• “head bank”, and then “sub”banks (brokerage, pension, insurance, leasing)

  • Every of the “big banks” works like this

-          Capital ratio (safety of the banks) à compared to the average EU is above average, so it is safe

-          Also below EU average —> 1,5 % of the loans is non-performing

• The Czech National Bank (CNB) is the national regulator and supervisor of the Czech financial system The regulation and supervision consists of the following building blocks

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• Licencing, approval and authorization – proceedings and decision-making on licences, permits and approval applications • Regulation

- Setting regulatory framework National laws and enforceable regulation

- Enforcable regulation based on Basel recommendations (e.g. EU Directives, most countries apply to them and translate them into national regulation) —> makes it easier to compare the markets in EU (same definition for the terms)

- Additional guidelines, recommendation, explanatory notes, Q & As

• Macroprudential supervision – macroprudential (financial stability, supporting stability of the whole sector) policy

- safeguarding financial stability through the application of a set of instruments (e.g. via macroprudential buffers).

• Microprudential supervision

- Supervision on the level of individual banks

Enforcement - proceedings and decision

-making on licence, permit and approval revocation, on the cancellation of registrations and in matters regarding corrective measures

- shortcomings or administrative and proceedings on the imposition of conservatorship

- action using resolution tools and powers should be generally triggered only where necessary in the public interest (e.g. ensuring continuity of critical functions, protecting financial stability, minimising public support and protecting covered deposits) and liquidation or insolvency proceedings would not meet the resolution objectives and public interest to the same extent