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Twelve Czech Banks May Need 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.

Depression Scenario

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 that assumes a economic contraction of 3.2 percent in 2013, the bank said.

The central bank also examined a scenario assuming the impairment of half of all exposures at the five largest banks to their foreign owners. This “extreme” assumption would increase the required total capital injection to 32.5 billion koruna, or 0.8 percent of GDP, the bank added.

The Czech central bank bank, which holds the regulatory powers over the financial industry in the country, is monitoring business ties between local banks and their owners, including KBC Groep NV, Erste Group Bank AG and Societe Generale SA.

The bank in April tightened the rules for such exposure in a “reaction to possible risks stemming from the links between banks in the Czech Republic and their parent companies,” the central bank said.

“With the limit for net exposure remaining at 25 percent of capital, this reduction implies a decrease in the gross exposure limit from 100 percent of regulatory capital to 50 percent,” the bank said.

The new rules also require banks to report acquisition of credit risk exceeding 1 percent of assets from a parent group member.

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