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Czech Banks to Withstand Escalating Crisis, Stress Tests Show

The Czech banking industry would withstand an escalating crisis in Europe and the domestic economy even as some lenders would need a capital injection, 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 long-lasting and significantly deeper decline in economic activity” over three years caused by trends in the euro area and tighter fiscal austerity.

“The capital adequacy of the industry as a whole would stay above the 8 percent regulatory minimum even in the significant-stress scenario, which combines very negative developments in the domestic and foreign economies caused by an escalation of the financial crisis in Eurozone countries,” 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 is affected by changes in demand from the euro area, which takes about 70 percent of all Czech exports.

The capital level of “several” lenders would fall below the regulatory minimum and they would need a capital injection totaling 18.7 billion koruna ($971 million), or 0.5 percent of gross domestic product, in the recession scenario that assumes an economic contraction in every quarter of the next three years, the bank said.

The bank didn’t name which institutions incorporated in the Czech Republic would need to increase their capital.

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

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