Twelve Czech Banks May Need More Funds in Depression, Test Shows

Twelve Czech banks would need a capital injection if Europe falls into a prolonged economic recession, while the banking industry as a whole would remain stable, results of central bank stress tests showed.

The Prague-based Ceska Narodni Banka said it tested banks under two outlooks, including economic developments according to the bank’s own forecast and a stress scenario assuming “a significant and long-lasting decline in economic activity over the entire three-year horizon” covered by the tests.

“Even in the case of the extremely stressed variants of the ‘Europe in Depression’ scenario, assuming collapses of large debtors or problems in the parent banks of Czech units, the capital-adequacy ratio of the sector remains above the 8 percent regulatory minimum, although some banks would have to strengthen their capital,” according to the central bank.

The Czech Republic didn’t have to bail out any banks during the global financial crisis as the amount of toxic assets accounted for less than 1 percent of all assets and deposits exceeded loans, according to central bank data. The economy depends on demand from the euro area, which takes about 70 percent of all Czech exports.

Twelve lenders’s capital would fall below the 8 percent regulatory minimum and would need a capital injection totaling about 14.6 billion koruna ($721 million), or 0.4 percent of gross domestic product, in the depression scenario, the bank said.

To contact the reporter on this story: Peter Laca in Prague at placa@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net