Czech Banks May Need More Funds in Crisis Scenario, Test Shows

Several Czech lenders would need a capital injection if the euro area’s debt crisis worsened significantly, 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 an “extreme decline in economic activity stemming from a significant deepening of the debt crisis in the euro area.” The stress scenario, covering the next three years, implied rising risk aversion and a decline in Czech government bond prices.

“Capital adequacy of the entire industry would remain above the 8 percent regulatory minimum even in the very unfavorable stress scenario, which combines negative developments in the domestic and foreign economies and a renewed uncertainty on financial markets,” the central bank said in a report published today on its website.

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.

“Several banks” would need a capital injection totaling about 19 billion koruna ($1 billion), or 0.5 percent of gross domestic product, in the debt-crisis scenario that assumed a GDP fall of more than 6 percent in the third and fourth quarters of this year, the central bank said in the regular quarterly report on the health of financial institutions.

The bank also forecast the share of non-performing corporate loans held by Czech banks to rise to “nearly” 9 percent from the second half of 2012 in the basic economic scenario based on its forecast. The overall capital-adequacy ratio of Czech banks was 15.2 percent at the end of last year

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