CREDIT RISK AS A CAUSE OF BANKING CRISES

Pavla Vodov
Assistant Professor
at
Silesian University, School of Business Administration
Department of Finance
Univerzitn nm. 76
733 40 Karvin
Czech Republic
phone: +420 596 398 306
e-mail: vodova@opf.slu.cz

ABSTRACT
This paper defines what the banking crisis is, how to identify the banking crisis, enumerate
possible causes of the banking crisis and briefly characterises the banking crisis in the Czech Republic.
One of the factors that usually stand behind the banking crisis is inadequate risk management. Therefore
after the description of parts of credit risk and methods of credit risk mitigation the evolution of approach
toward the credit risk and the using of methods of credit risk mitigation in the Czech Republic are
analysed.
Keywords: banking crisis, causes of the crisis, credit risk management, nonperforming loans, collateral,
credit risk transfer
Research area: banking and finance

1. INTRODUCTION
In recent decades, many countries have experienced banking sector problems. According to
some studies, at least two-thirds of IMF member countries have gone through banking crisis in last
twenty years. The banking sector faced to banking crises in the Czech Republic as well.
One of the factors standing behind banking crises is risk management in banking, together with
risk exposure of banks. Pirner (2003) maintained that from total exposure of Czech banks credit risk
makes up 60 70 %, operational risk 20 30 % and market risk only about 10 %. Consequently this
paper will analyse the contribution of credit risk management and credit risk exposure of banking sector
to the Czech banking crisis.

The second chapter characterises what a banking crisis is and how to identify it. Possible causes
of banking crises are divided into macroeconomic and microeconomic. The description of the banking
crisis in the Czech Republic is mentioned in the third chapter.
The fourth chapter briefly discusses the problem of credit risk, its components and determinants.
Possible methods of credit risk mitigation and problems connected with these methods are characterised.
The evolution of the approach towards credit risk in the Czech Republic is described in fifth
chapter. The structure of credit portfolios of Czech big banks and methods of credit risk mitigation used
by these banks are analysed.

2. BANKING CRISIS AND ITS CHARACTERISTICS

2.1 Definition of Banking Crisis

At first it is necessary to specify what the banking crisis is. Some of reported definitions are:

IMF (1998): A banking crisis refers to a situation in which actual or potential bank runs or failures
induce banks to suspend the internal convertibility of their liabilities or which compels the
government to intervene to prevent this by extending assistance on a large scale.

Slaessens, Klingebiel and Laeven (2001): A systemic banking crisis is a situation where an
economy faces large-scale financial distress within a short period.

Gupta (1996): A banking panics occurs when bank debt holders at all or many banks in the
banking system suddenly demand that banks convert their debt claims into cash to such an extent
that the banks suspend convertibility of their debt into cash.

All these definitions specify banking crisis as a situation in which most of the banking sector is
affected by the financial distress. This means that problems of an individual bank do not signify the
systemic banking crisis.

2.2 Identification of Banking Crisis

It could be quit difficult to identify a banking crisis. For that purpose the following indicators are
used:

Number of bank failures usage of this indicator can be a little misguided: due to the public
intervention not all of the affected banks need to failure (especially when it comes to state-owned
banks or big banks1);

Intervention acts of the government (for example deposit guarantees, bank recapitalization plans,
deposit freezes, nationalizations etc.);

Such banks are too big to fail

2

Significant depositors runs;

Level of nonperforming loans the applied threshold differs among studies: Caprio and Klingebiel
(1997) exercise the threshold about 5 10 % of total loans, Goldstein and Turner (1996) determine
the share as 15 20 % of total loans;

Costs of the crisis paid from the government budget the threshold differs as well: Caprio and
Klingebiel (1997) apply as the threshold 2 % of GDP, Goldstein and Turner (1996) consider that
the costs should increase 5 % of GDP in case of a banking crisis.

It is evident that the exact identification and timing of banking crisis is difficult and that is the
reason why many economists rely on expert judgement and use it in their studies.

2.3 Causes of the Banking Crises

Possible causes of the financial distress can be divided into two groups: macroeconomic and
microeconomic factors.
According to some studies2 the most important macroeconomic factors that usually stand behind
banking crises are generally the following:

Macroeconomic instability;

Lending booms and asset price bubbles;

Inadequate preparation for financial liberalisation;

Nonperforming loans.

Although all banks in a country are exposed to the same macroeconomic conditions generally
not all of them fail. The appropriate approach of banks management can substantially reduce the
probability of financial distress. From this idea arises microeconomic causes of banking crises:

Problem of information asymmetry;

Frauds of management;

Risk exposure and risk management.

3. BANKING CRISIS IN THE CZECH REPUBLIC

The Czech banking sector has experienced two periods of the banking crisis in the 90s.
The number of failures points to the first period of banking crisis. This period was connected
with troubles of small and medium sized banks it started in 1993 with forced administration of Kreditn
a prmyslov banka Praha and continued with troubles of other small banks. The number of small banks
decreased from 22 in 1993 to only 8 in 2002 (see Appendix 1). 17 banks have lost their licence because

For example Goldstein and Turner (1996), Ingves (2002), Jon (1997), Polouek (1999)
3

of their bad financial situation3, the others because of mergers and sales. The share of nonperforming
loans strongly exceeded both thresholds mentioned in previous chapter (see Appendix 1).
Although the segment of small and medium sized banks has only 9 % share of the bank sector in
1993 (and it does not correspond to definitions of banking crises because 9 % share on bank market is
not large scale financial distress), the number of failure banks has substantially weakened public
confidence in the banking sector. The support of public confidence was main reason why the
Consolidation Program II4 at the end of 1995 and the Stabilization Program later were applied. These
programs should help small and medium sized banks through capital injection and transfer of
nonperforming loans from banks.
The second period of the banking crisis concerned troubles of big state owned banks. Though
the indicator number of failures has no sense to use because these banks were too big to fail, the share
of nonperforming loans exceeded 30 % in 1999 and strongly confirm the existence of systemic banking
crisis. Due to the Consolidation Program I these banks have started their enterprise with healthy balance
sheets so their following problems were produced by both macroeconomic and microeconomic causes
of banking crises (see previous chapter). Jimnez and Saurina (2002) came to the conclusion that
Spanish savings bank which have no shareholders or owners have higher level of credit risk than
Spanish banks. They explained it by problem of adverse selection. This argument can be no doubt
applied very well on Czech big state owned banks because state is an unpretentious owner. Bank
managers were those who take most advantages from this situation. It supported strongly moral hazard
of the management. Moreover the problem of moral hazard was worsened by the fact that it concerned
banks that were too big to fail and management relied on it.
The financial situation in 3 Czech big banks - esk spoitelna (S), eskoslovensk obchodn
banka (SOB) and Komern banka (KB) is documented by selected economic indicators see
following tables.
Table 1 Selected economic indicators of eskoslovensk obchodn banka
Indicator

1997

1998

1999

2000

2001

2002

Capital adequacy (BIS)

13.33 %

18.16 %

20.24 %

13.70 %

15.04 %

13.99 %

ROAE

11.24 %

12.11 %

9.57 %

14.26 %

16.49 %

16.65 %

ROAA

1.15 %

1.29 %

1.11 %

1.18 %

1.05 %

1.11 %

28.55 %

19.55 %

32.17 %

24.97 %

17.61 %

10.62 %

Nonperforming loans

Source: Annual reports of eskoslovensk obchodn banka

The Belgian KBC has bought SOB in 1999. Due to bad financial situation of Investin a
potovn banka (IPB), one of Czech four big banks, SOB has taken over its assets in 2000. Share of
nonperforming loans exceeds even the higher threshold of Goldstein and Turner (1996) till 2000; this
ratio decreases gradually when the bank has a new owner. Nevertheless, SOB was profitable even in
times of high level of nonperforming loans and it does not need any capital injection or cleaning up its
balance before privatization.

15 banks have problems with bad asset quality, 1 bank with liquidity. 1 bank has lost its licence due to frauds.
Consolidation Program I concerned the transfer of debts from state owned banks to a special institution
Konsolidan banka

Table 2 Selected economic indicators of esk spoitelna

Indicator
Capital adequacy (BIS)

1997

1998

1999

2000

2001

2002

8.97 %

9.20 %

13.62 %

16.00 %

16.50 %

16.80 %

ROAE

n.a.

0.20 %

7.60 %

21.40 %

ROAA

n.a.

0.01 %

0.04 %

1.10%

Nonperforming loans

n.a.

14.18 %

23.44 %

38.60 %

19.70 %

14.40 %

Source: Annual reports of esk spoitelna

Data in Table 2 document that situation in esk spoitelna was much worse than in case of
SOB. S was not able to create profit and bank closed its book for 1998 and 1999 with a loss. The
government decided to sell S but colossal volume of nonperforming loans (more than 38 % in 2000)
required cleaning up its balance sheet before privatisation assets in nominal value CZK 32.7 bln have
been transferred to Konsolidan banka in November 1999. Problem with reaching the determined level
of capital adequacy has been solved by increasing registered capital from CZK 7.6 bln up to CZK 15.2
bln in July and August 1999. The higher quality of loan portfolio together with better management of
new private owner (S was sold to the Austrian Erste Bank in 2000) manifest in increasing profitability
of S.
Table 3 Selected economic indicators of Komern banka
Indicator

1997

1998

1999

2000

2001

2002

Capital adequacy (BIS)

8.31 %

9.56 %

10.69 %

14.38 %

15.18 %

13.40 %

ROAE

1.72 %

11.60 %

30.60 %

ROAA

0.12 %

0.60 %

2.00 %

25.99 %

28.65 %

32.81 %

33.70 %

24.20 %

15.48 %

Nonperforming loans

Source: Annual reports of Komern banka

Privatization of Czech big state owned banks has been ended in 2001 when the French Societe
Generale has become a new owner of Komern banka. Financial ratios in Table 3 confirm the existence
of financial distress of KB. Analogously with S, the share of nonperforming loans exceeded 30 % and
the result of enterprising was a loss in 1998 2000. So it is evident that with objective to reach an
acceptable price it was necessary to transfer some of nonperforming loans and increase capital before
privatization. The contract from December 2000 between Konsolidan banka (and now its successor
esk konsolidan agentura - KA) and Komern banka includes the state guarantee that Konsolidan
banka (or now KA) will pay for the losses which will arise from the loan portfolio in 2001 2003 up to
CZK 20 bln. The registered capital was risen up to CZK 9.5 bln in January 2000. Values of economic
indicators gradually improve after the bank was privatized.
Although the share of nonperforming loans is now at its historical minimum less than 17 %,
the level is still quit high. Nevertheless, due to substantial financial support from Czech state budget the
current position of Czech banking sector is now much better than several years ago: number of operating
banks is stable, all banks have private owners who should manage banks better than the state. This is

being confirmed by improvement of important financial ratios, by increasing profits of banks and by
more professional and competitive services.

4. CHARACTERISTICS OF CREDIT RISK

Banks face several risks. These include credit risk, interest rate risk, operating risk, market risk,
liquidity risk and solvency (or capital) risk. According to the Czech banking law a bank is obliged to
accept deposits and to provide loans to various entities. Several types of loans are usually the greatest part
of bank assets so this is the reason why credit risk is the oldest, the most important and primary risk in
banking.
Credit risk refers to a risk that a borrower will default on a loan obligation to the bank or that the
issuer of a security hold by the bank will default on its obligation. Default means a total or partial loss of
any amount lent to the borrower. But also the risk of a decline in the credit standing of the borrower is
credit risk. This situation does not imply default, only the probability of default increases.
Large losses generated by default of borrowers or issuers of securities can lead to the insolvency
and possibly even to the bankruptcy of a bank or to the banking crises. Consequently it is evident that the
knowledge and usage of appropriate methods of credit risk monitoring, measuring, managing and
mitigating are essential for every bank and for banking sector as a whole. Because of lack of required
data it would be very difficult to analyse credit risk arising both from credits and securities hold by
banks. Therefore only a part of credit risk connected with providing loans to customers will be analysed
in this paper.

4.1 Components of Credit Risk

The credit risk has two main components a quantitative and a qualitative part of it. The sum of
potential loss represents the quantity of the credit risk. The amount depends on amount of principal,
amount of interests and on type of used credit risk mitigation (the higher the value of compensation for
bank the lower the amount of potential loss).
The qualitative part of credit risk is the probability that the bank will realise loss. This probability
depends on probability of borrowers default with respect to probability that the bank would lower its
loss from any kind of credit risk mitigation (see chapter 4.3). The default risk (probability of borrowers
default) is determined by credit standing of the borrower as a result of mutual operating of following
factors:

Risk of customer it consists in risk that the borrower will be not able or willing to meet its
obligation. To reduce this risk the bank should be able to separate bad customers from those with
low probability of default. Therefore every bank should have defined procedures of appreciation of
credit applicants (used methods of financial analysis or scoring, documents required for applicants,
etc.). In order to lower the credit risk banks should set a limit of maximum amount of money that
can be provided to one borrower. This limit can not be less strict than limits set by central bank or
other regulatory institution.

Political and territorial risks these are risks connected with providing loans to foreign borrower
and represent the situation that most entities in a country become unable to service their debts due to
some economic, social, legal or political conditions. Banks should set limits to individual countries
according to the level of their risk (macroeconomic situation, internal and external indebtedness
etc.).

Transfer risk is risk that because of global shortage of foreign currencies in a country it is impossible
to service the debts. Banks should set limits as well.
Probability that the bank would lower its loss from any kind of credit risk mitigation depends on:

Type of borrowers default. It determines not only probability of lower loss but as well costs
connected with recovering of money from the borrower. It depends on the procedure that follows
the break of the contract5.

The use of method of credit risk mitigation. Existence of some kind of risk mitigation (see chapter
4.3) minimises credit risk if it can be easily enforced at some significant value. The value depends
upon the nature and market conditions.

4.2 Determinants of Credit Risk

In order to manage credit risk efficiently it is necessary to know that the concentration of credit
portfolio, the quality of credit rationing and monitoring, the existence and the level of collateral (see
chapter 4.3) and the structure of credit portfolio influence the level of credit risk.
Credit portfolio concentration
Probably the most important factor, which plays a key role in determining the level of credit risk,
is the extent of credit portfolio concentration. Credit concentrations are any exposure where the potential
losses are large relative to the banks capital, its total assets or the banks overall risk level.
Concentrations include concentrations of credits to single borrowers or counterparties, a group of
connected counterparties and to sectors or industries. Banks should set limits for individual economic
sectors. The possible ways to reduce concentrations are characterised in chapter 4.3; the concentration of
Czech big banks credit portfolios is analysed in chapter 5.2.
Process of credit rationing and monitoring
One of the elementary roles of credit department of the bank is the evaluation of credit
applications and monitoring and evaluation of existing credits. The process of assessments of credit
applicants differs from the type of the applicant: whether it is a legal entity or it concerns an individual.
The aim of this procedure is to answer if the client is and will be able in the future to meet its obligation
and repay its debt.

For example renegotiation, restructuralization of the debt, obligation to pay all outstanding balances, legal
procedures etc.
7

Historical and predicted financial statements (balance sheet, income statement and cash flow
statement) and business plan are integral parts of the credit application when companies or entrepreneurs
apply for a loan. The final decision is the result of expert evaluation of commercial and financial risk of
the borrower. Commercial risk of the borrower consists of factors as payment history of the client6,
analysis of the economic sector in which the applicant operates (its current position, future expected
position, level of competition, sensitivity to anti-dumped cycle, level of regulation in the sector etc.) and
the exact analysis of the credit application (amount and currency, collateral and maturity compared with
banks limits). The methods of financial analysis are applied in the course of assessing the level of
financial risk (the analysis of cash flow, liquidity, gearing and profitability indicates the ability to pay).
The process of evaluation an application for a loan to individual is much more simple and
standardised than in case of loans to companies. The bank has less information at the credit application at
disposal (information about average salary, length of employment) so further information are needed.
The bank can obtain information about historical payment willingness and about current outstanding
loans from credit agency or from its experience with the borrower. Decision about granting the loan is
usually made after use of scoring.
Both for applications of legal entities and individuals, the output of the credit analysis is the
classing of applicant into the appropriate risk group (internal ratings) and so to decide whether the credit
provides or not. In case of companies, the bank has (or will have in the future) the possibility to use
external rating (i.e. information from external rating agencies).
The accurate and perfect separation of good and bad borrowers becomes much harder in the
period of relatively high interest rates. Such a situation strongly deteriorates the problem of adverse
selection. The adverse selection is connected with the phase before providing the loan. It consists in the
fact that subjects with the most risky projects have the biggest interest on obtaining the loan. Applying
the thesis the higher the risk the greater the revenue it is evident that in the period of high interest rates
most of credit applicants are those with high probability of default. The increasing share of
nonperforming loans in banks portfolio brings the need of refundment of potential losses. Banks have to
create loan loss provisions; this process heightens costs, cuts profits and can lead to serious financial
distress.
After the loan is provided, it is necessary to look after the usage and repayment of it and care
about the value of the collateral (when used). The bank has to monitor also the structure and evolution of
the whole credit portfolio with the aim to eliminate the exceeding of the set limits.
Collateral or some kind of credit risk transfer
Possible kinds of assets that can be pledged as a collateral, possible of forms of credit risk
transfer and their influence on the level of credit risk are characterised in chapter 4.3.
Structure of credit portfolio
The structure of credit portfolio is determined by type of the borrower, currency and size of the
loans and by their maturity.

Type of borrowers

How can type of the borrower influences credit risk? To this issue belongs many factors, for
example the fact whether the borrower is an individual (or households) or a company, how the financial
6

Such information can be drawn from banks own experience or from special credit agencies (where exists)
8

health of the borrower is, how length the relationship between bank and borrower is etc. The roles of
some of these factors in the assessing process of credit rationing are described above.
Thanks to a close relationship between the banks and borrowers the banks can obtain extremely
valuable information about the borrower, about its financial situation. Such companies can benefit from
this situation, mainly in case of a need of credit with advantageous interest rate. According to Jimnez
and Saurina (2002) banks are willing to provide loans even to more risky borrowers if they have a close
relationship to the bank.

Currency and size and of the loans

When it comes to the currency of provided loans, Jimnez and Saurina (2002) came to the
conclusion that the probability of default is substantially and significantly lower for loans in foreign
currency than for loans in national currency. They explained it by the fact that loans in foreign currency
create only a small part of loan portfolio of the bank so they are scored and evaluated more in details.
It is possible to look on the size of the loan in two ways. The greater the sum of money that the
bank lent to one borrower the greater the potential loss for the bank is.
On the other hand, the size of loans is usually related to the size of the borrower. The greater,
older and with more stable financial position the company is the greater the loan can be. When it comes
to small or new companies with greater risk loans tend to be smaller. Banks usually monitor higher loans
more carefully and rigorously. Moreover, the decision-making process in granting loan is more difficult
and involves large number of employees with greater experience in case of great size loan, comparing to
small loans. Most studies support this kind of approach to the size of the loan7.

Maturity

Likewise the influence of maturity on the credit risk can be reviewed in two ways. The longer
the maturity the greater the risk of borrowers encountering problems. This uncertainty is usually
penalised by higher risk premium. In a situation of asymmetric information a borrower knows much
more about his company, about credit quality of his company. Therefore the borrower with low credit
risk will prefer short-term loan: he will signal the low level of credit risk and borrow money with lower
costs.
However it is possible to look on the maturity on the contrary. Long-term loans are monitored
and evaluated in the same way as great size loans more rigorously and in more details with respect to the
risk that during the long period of duration of the contract the borrowers financial health changes
significantly. Jimnez and Saurina (2002) confirmed partly this theory: they came to conclusion that very
short-term (loans with maturity under three months, for example unauthorised overdrafts of credit frames
or current accounts etc.) and medium-term loans have greater probability of default than long-term loans.
In contrary, the theory of credit quality signalling was proved for maturity between three months and a
year (the default probability was lower than for long-term loans).

Berger and Udell (1990), Booth (1992), Jimnez and Saurina (2002), etc.
9

4.3 Methods of Credit Risk Mitigation

Credit risk can be mitigate by two basic ways either the banks require any type of assets acting
as a collateral or they can choose some of the methods to transfer the credit risk to another subject.
The use of collateral
As a collateral can be pledged several types of assets of which most common are real estates,
movable property, securities and receivables. Each type of assets has some benefits and disadvantages
but all types should fulfil at least these requirements: they should be enforced, liquid (and transferred to
the cash with acceptable costs), easy controlled and their value should be relatively stable.
The usage of real estate as a collateral belongs to most widened ways of credit risk mitigation (at
least in case of Czech Republic) but it is connected with problem of price asset bubble. The ensuring by
real estate can be then substantially inefficient and loss making as it was in case of the Asian banking
crisis and in the Czech Republic as well8.
To meet the requirements mentioned above, only a small part of movable property is acceptable
as possible collateral. It concerns usually assets traded on exchange raw materials, crops and other
goods. The requirements play the same role in case of securities: only shares and bonds traded on stock
exchange are usually accepted by banks as collateral.
When it comes to receivables, as the most qualitative and secure collateral acts money on the
deposit account (for example time deposit account, foreign currency account). Though any other
receivables can be used either to pledge them as a collateral or to assign it to the bank.
Two different approaches to the relationship between some collateral and the level of credit risk
are possible. The first approach arises from the idea that lower risk borrowers are willing to pledge more
and better collateral because they take into account that they will keep on the loan obligation. Therefore
the willingness of pledging collateral acts as a signal of the level of credit risk. The possibility of
obtaining a loan with low interest rate (due to the lower risk premium) is another reason why low risky
borrowers are willing to extend good collateral. In contrary, high risky borrowers do not pledge
collateral: because they do not plan to repay their debts they do not need lower interest rate. Collateral is
a way the problem of moral hazard and adverse selection can be limited in this approach.
But the second approach assesses the role of collateral in absolutely opposite way. According to
this theory the best borrowers do not need to pledge any collateral because their credit risk is small. The
fact that if banks are protected by collateral they monitor borrowers less confirms this approach. Study of
Jimnez and Saurina (2002) proved that due to the pledging of collateral the probability of default
increases when compared with unsecured loans. Within secured loans, the probability of default for fullsecured loans (to a value 100 %) is lower than probability of default for loans that are secured less.
Methods of credit risk transfers
Actually, some banks are beginning to think about credit exposures as tradable commodity and
ending only to hold the loans on the balance sheet until their maturity. This can help them to reduce
concentrations of credit risk to particular borrowers or market segments.
Credit risk transfer instruments typically change the relationship between borrowers and lenders
and establishes new relationship between lenders (referred as risk shedders, protection buyers or
8

See for example Hampl and Matouek (2000)

10

insureds) and those to whom the credit risk is passed on (also known as risk takers, protection sellers, risk
buyers, insurers or guarantors) see diagram 1.
Diagram 1 Stylised summary of relationships affected by credit risk transfer
Before
Borrower

Lender

Lenders creditors/shareholders

Screening, monitoring

Disclosure

After
Screening, monitoring,
moral hazard

Borrower

Disclosure

Lender/risk shedder

Screening,
monitoring

Lenders creditors/shareholders

Principal/agent problems
Incomplete contracting
Asymmetric information

Risk taker

Risk takers
Disclosure

Source: Credit risk transfer, (2003), p. 17.

Theoretically, lenders invest in monitoring the credit risk up to the point where the marginal
costs equals the marginal benefits (lower expected credit losses). If lender transfer credit risk, it might
therefore be expected to reduce their credit risk monitoring. With credit risk transfer the problem of
moral hazard of lender is also connected.
After the credit risk transferring, principal/agent problems can arise. The lender transfers credit
risk to the risk taker so that the risk taker should shift into lenders position. But there are some cases that
the lender retains some involvement in the relationship between the risk taker and the borrower for
example the lender collect instalments from the borrower and borrower do not need to know that the
loan has been sold. In such a situation the lender should monitor the creditworthiness of the borrower and
if need is he should take appropriate steps. The principal/agent problem is also connected with costs (the
risk taker should monitor the lenders monitoring efforts) and with potential moral hazard of the lender.
The problem of moral hazard can be solved by an easy measure: the lender does not inform its staff
which loans from the portfolio are sold and which are kept on the banks balance sheet.
Incomplete contracting is in Credit risk transfer (2003) defined as the failure of a credit risk
transfer agreement to define the rights and obligations of the parties in all possible circumstances, so that
one or both parties find the agreement unsatisfactory after an event in particular if it leaves one party
open to opportunistic actions by the other to take advantage of an unanticipated situation. A credit event
can be the failure of the borrower to pay, bankruptcy, obligation default or restructuring. One possible
reason of incompleteness of the contract is the fact that counterparties do not need to envisage the full
range of possible circumstances when drafting the contract and therefore it is difficult to define events.
Moreover, the risk shedders and sometimes risk takers as well may have some influence over the
occurrence of an event and so the problem of moral hazard arises. Either the bilateral negotiations
between counterparties or the use of standardised documentation are possible solutions of the problem of
incomplete contracting. Credit derivatives can be based on standardised definitions, developed by ISDA
but credit insurance contracts are not standardised and generally tends to emphasise the interests of risk
takers (credit events are defined relatively narrowly).

11

The risk taker can be faced with a type of asymmetric information with adverse selection
problem. This situation could arise by overstating the credit quality of transferred exposure by the risk
shedder because the lender has better information about the creditworthiness of its borrowers. Several
steps to protect risk takers have been made:

Single name credit risk transfer instruments are traded only for corporates and sovereigns about
which a significant amount of information is available;

Risk shedder typically select loans randomly from its portfolio under the monitoring of rating
agencies of auditors in case of ABSs;

Risk takers often require risk shedders to retain some proportion of the first-loss tranche in case of
portfolio credit risk transfer;

Risk takers typically require risk shedders to disclose any material facts about the creditworthiness
of the borrowers in case of credit insurance;

The strategy of overstating the credit quality is not profitable in long term due to reputational risk
and long term interest on credit transfer.

According to the funding instruments of credit risk transfer can be classified to funded and
unfunded the distinction consists in the fact whether the risk shedder receives funds in the transaction
or not. Credit risk transfer instruments can be classified also according to the fact whether the shedder
transfers credit risk of individual borrower or portfolio. Risk can be transferred directly (between risk
shedder and risk taker) or indirectly (through a special purpose vehicle - SPV). This classification is
mentioned in Table 4.
Table 4 Characteristics of credit risk transfer instruments
Single name

Funded

Unfunded

Loan trading

Guarantees and letters of credit

Credit insurance
Derivatives

Portfolio Direct risk transfer

- Risk transfer via SPV

Credit-linked notes

Credit default swaps, baskets

ABSs, cash CDOs

Synthetic CDOs

Source: Credit risk transfer, (2003), p. 5.

Single loans can be sold on secondary market (where such a market exists). Sometimes the
borrower have to allow it therefore loans are often traded under the conditions that the original lender
remains the only direct lender to the borrower and a part of the exposure shift to the risk taker.
A third-party guarantee is a bilateral contract under which the risk taker (guarantor) has an
obligation to perform for the benefit of the risk shedder if the borrower is not able to meet its obligation.
The guarantor can be a bank, a legal entity or an individual. The greater the creditworthiness of the
guarantor the lower the credit risk for the risk shedder, therefore the most secure guarantees are those
where a trusty bank is the risk taker. Nevertheless, the bank acting as a guarantor is exposed to credit risk
in the same way as it was as a lender. When providing a loan the bank earns more money on interests
than it could earn for the guarantee. That is the reason why bank guarantees are commonly used only for
12

foreign trade operation. Loans guaranteed by individuals or legal entities are much more widened. After
an event, the third party (guarantor) repays lender face value of debt and takes over claim on the
borrower.
Credit insurance represents a kind of unfunded credit risk transfer that is suitable for single name
instruments. It is typically provided by specialist insurance companies to support trade credit and often
used by beneficiaries to obtain bank financing of the receivables. The risk shedder pays regular insurance
premiums and the risk taker pays amount depending on conditions defined in contract of insurance
(usually up to any limit) in case of a loss event.
In asset-backed securities (ABSs), an underlying pool of assets (such as mortgage loans or credit
card receivables which are homogeneous) is transfer to a special purpose vehicle that holds it as a
collateral to back the securities issued to investors. To obtain higher ratings for the securities the credit
and liquidity enhancements are used. Credit enhancements such as letters of credits or guarantees from
highly rated financial institution lower the credit risk for investors; liquidity enhancements compensate
the incomplete synchronisation of interest payments or cover rollover risk when maturities of the
underlying assets and maturity of the securities do not coincide.
Many types of derivatives belong to methods of credit risk transfer. Credit default swaps can be
used for single name loans, others for portfolio. The use of credit-linked notes and collateralised debt
obligations bring funds, other instruments are unfunded.
A credit default swap (CDS) is a bilateral financial contract in which the risk shedder pays a
fixed periodic fee in return for a contingent payment by the risk taker triggered by a credit event on a
reference asset. CDSs are based on standardised documentation to encourage trading.
In portfolio credit default swaps (unfunded synthetic securitisation) the risk transfer is achieved
without any change in legal ownership of the underlying assets either via a series of single name CDSs
or a single CDS referenced to all the loans in the portfolio. A basket credit default swap is similar to CDS
in which the credit event is the default of some combination of the credits in a specified basket of loans.
The risk shedder pays regular premiums over life of the swap; the risk taker pays amount depending on
agreed conditions in the contract after a credit event occurs.
Credit-linked notes embed credit derivatives in a security issued by the risk shedder. The
performance of the note is linked directly to the performance of the reference pool. The investor receives
coupon payments that include a risk premium and par redemption at maturity. If the risk taker wants to
avoid counterparty risk9 a special purpose vehicle may be used and then it becomes a synthetic
collateralised debt obligation.
When it comes to collateralised debt obligation (CDO), credit risk is transferred from the risk
shedder to an special purpose vehicle either by a transfer and selling of the assets (cash CDOs) or
synthetically by use of credit derivatives (synthetic CDOs). CDOs can be structured as static portfolio or
as managed pools where the portfolio manager can alter portfolio composition subject to limitations on
concentration.
The concentration of use of the credit risk transfer instruments varies across instruments and
from country to country. Although the development in credit risk transfer methods is lately very robust
and trends in this area seems to be firmly established they have only a small impact in the banking sector
as a whole (with exception of mortgages and credit card receivables in some countries) see table 5.

on the risk shedder

13

Table 5 Size of credit risk transfer markets (in USD billions)

Instrument

1995

1996

1997

1998

1999

2000

2001

Loan sales (turnover) in USA

34

40

61

78

79

102

118

180

350

586

893

1189

144

287

426

395

810

1398

816

947

1114

68

80

134

85

125

167

42

71

114

26904

27221

27442

Credit derivatives (outst.)

- British Bankers Assessm.
10

- US OCC

- Risk Magazine
Asset-backed securities
- US market (outstanding)

315

403

517

684

- European market (issuance)

Collateralised debt obligations
- US market (outstanding)

19

48

- European market (issuance)

Total bank credit (outst.)11

23424

23576

23309

26018

Source: Credit risk transfer, (2003), p. 10.

5. CREDIT RISK MANAGEMENT IN THE CZECH REPUBLIC

5.1 Attitude towards Credit Risk in the Czech Republic

The transformation from central planed to market economy began in the Czech Republic after
the Velvet Revolution in November 1989. The beginning of transformation process was characterised by
the replacement of mono-banking system by two-tier banking system based on market principles as of
1st January 1990. Completely new institutional framework (commercial law, accounting standards,
bankruptcy law etc.) has been creating.
From the former Sttn banka eskoslovensk the Komern banka and Veobecn verov
banka (in the Slovak Republic) were establish; eskoslovensk obchodn banka, ivnostensk banka
and Investin a potovn banka have already operated. These banks were strongly undercapitalised and
had substantial share of nonperforming loans. Bank staff missed needed knowledge and experiences.
The process of creating market economy was connected with originating of thousands new
entrepreneur subjects. The demand for banking services (payment transaction, credits) increased rapidly.
The pressure on banks to finance business plans in framework of voucher privatization intensified, partly
thanks to the absence of capital market. Because of absence of historical financial statements, knowledge
and experience of staff the assessments of creditworthiness of borrowers were very difficult. This
10
11

Holdings of US commercial banks

Domestic and international credit to non-bank borrowers (USA, United Kingdom, Japan, Canada, euro area)
14

problem was worsened by the relatively high level of interest rates which brought the problem of adverse
selection (see figure 1) and by negative influence of frauds.
Figure 1 The evolution of nominal and real interest rates in the Czech Republic12
20,0
15,0
10,0
5,0
0,0
-5,0

1993

1994

1995

1996

1997

1998

1999

2000

2001

nominal

14,9

13,0

13,2

13,4

16,2

14,7

8,6

6,1

6,3

real

-2,8

2,5

4,9

4,4

5,6

7,4

6,0

2,0

2,1

Source: Czech National Bank and authors calculation

The institutional framework of banking sector belonged to most neglected at the beginning of
transformation. Changes in legislation have often fallen behind the rapid process of transformation.
The process continued with opening banking sector in order to increase competition. The
applicants for banking licence were evaluated very benevolently which manifested in significant increase
in number of operating banks till 1994 (see Appendix 1). The newly operating banks were mostly poorly
capitalised and managed so the problems of small and medium sized banks which followed have led to
more strict conditions for obtaining a licence (the required registered capital gradually rose from CZK 73
millions in 1990 up to CZK 500 millions now), to almost no new licences and to establishing more
appropriate prudent man rules and bank supervision.
The first set of prudent man rules was create in 1992 and contained arrangements on capital
adequacy, credit exposure and liquidity. The arrangement on classification of assets was introduced in
1993 and according to it loans were divided into four groups standard, non-standard, doubtful and loss;
banks could create provisions 20 %, 50 % and 100 % for non-standard, doubtful and loss credits. In 1993
the novelette of credit exposure arrangement introduced banks the obligation to set limits for economic
sectors and geographic areas; in 1994 the new arrangement on classified loans divided loans into
standard, watched, non-standard, doubtful and loss and introduced the obligation to create provisions
5 %, 20 %, 50 % and 100 %.
The another novelette of this arrangement issued in 1998 changed the level of provisions to loss
credits: if the bank is not able to realise the collateral (real estate) before one year after the maturity and
the loan is classified as loss, the bank has to create provisions to full amount of the loan (i.e. even to the
part of the loan which is secured by real estate). This change was caused by the inadequate protection of
lenders by recovering receivables and realising collaterals and by the fact that due to the insufficiently
developed real estate market banks were practically not able to sell the pledged real estates.

12

Annual average interest rates from new provided loans; real interest rates are deflated by CPI
15

Actually, the Czech banks have the choice between two possible ways of classification of
credits: either to classify single name loans or to classify credit portfolio. In case of single name loans
classification, credits are classified into five groups standard, watched (provisions 1 %), non-standard
(20 %), doubtful (50 %) and loss (100 %). As a credit portfolio can be classified sufficient large
portfolios of homogenous receivables (e.g. credit card receivables). The provisions are created according
to statistical estimates of expected losses of these portfolios.
The Czech central bank has set following limits of credit exposure: the net credit exposure of the
bank one subject or economic joint persons can not be higher than 25 % of banks capital and not higher
than 20 % in case of subjects with special relationship to the bank. The total amount of net credit
exposures to subjects of economic joint persons with exposure higher than 10 % of banks capital can
not exceed 800 % of banks capital.
The establishment of two special credit agencies can help to assess the creditworthiness of
borrowers better. Five Czech banks have participated on establishment of the credit agency, which has
started on 13th June 2002. Banks usually give above two thousands questions a day to the agency. The
agency contains information how instalment and non-instalment loans and credit card receivables are
repaid until four years after the end of the loan contracts but only for loans to individuals.
In contrary, the Czech central bank has started the operation of its own credit agency in
November 2002. It contains information about loans to companies and entrepreneurs. Nevertheless, this
agency is being used much less frequent see figure 2.
Figure 2 The number of answered question in credit agency of Czech national bank
600
400
200
0

Questions

XI.02

XII.02

I.03

II.03

III.03

IV.03

V.03

VI.03

XI.02

XII.02

I.03

II.03

III.03

IV.03

V.03

VI.03

199

171

257

318

382

390

423

447

Source: www.cnb.cz

5.2 Credit Portfolio of Czech Big Banks

This chapter tries to analyse the structure of these banks portfolios. Possibilities of this analysis
are limited due to the fact that every bank has its own classification of portfolio structure according to
economic sector, not all banks mentioned classification according to maturity and currency in their
annual reports. Available data are therefore not fully comparable.
Three following tables show the structure of credit portfolio of eskoslovensk obchodn banka,
esk spoitelna and Komern banka, according to economic sector.

16

Table 6 Credit portfolio of eskoslovensk obchodn banka (in percent of total credits)
Economic sector

1998

1999

2000

2001

2002

Non-financial institutions

77.2 %

81.2 %

77.7 %

66.2 %

n.a.

Insurance, Finance

17.6 %

5.9 %

7.6 %

7.9 %

n.a.

Government sector

0.2 %

0.4 %

1.8 %

11.2 %

n.a.

Non-profitable institutions

0.0 %

0.0 %

0.1 %

0.1 %

n.a.

Inhabitants

0.8 %

1.1 %

2.1 %

2.4 %

n.a.

Foreign countries

3.9 %

11.2 %

10.8 %

11.6 %

n.a.

Others

0.3 %

0.3 %

0.0 %

0.7 %

n.a.

19.55 %

32.17 %

24.97 %

17.61 %

10.62 %

Nonperforming loans

Source: Annual reports of eskoslovensk obchodn banka

The table 6 shows that most of loans provided SOB to non-financial institutions. This type of
classification of credit portfolio does not allow distinguishing to which economic sectors these loans
were provided.
Table 7 Credit portfolio of esk spoitelna (in percent of total credits)
Economic sector

1998

1999

2000

2001

2002

Financial institutions

45.8 %

53.9 %

9.1 %

7.5 %

7.7 %

Inhabitants

12.3 %

13.2 %

25.3 %

19.3 %

26.8 %

Trade

8.2 %

5.6 %

13.2 %

8.7 %

5.9 %

Energetic industry

2.1 %

2.4 %

4.2 %

2.7 %

2.7 %

State institutions

2.5 %

2.0 %

4.2 %

31.6 %

27.8 %

Building industry

1.9 %

1.4 %

2.8 %

1.3 %

0.9 %

Hotels, Restaurants

1.9 %

0.9 %

1.9 %

1.0 %

0.9 %

Processing industry

5.2 %

2.0 %

15.5 %

11.5 %

10.1 %

Others

20.1 %

18.6 %

23.7 %

16.3 %

17.2 %

Nonperforming loans

14.18 %

23.44 %

38.60 %

19.70 %

14.40 %

Source: Annual reports of esk spoitelna

Data in table 7 shows the completely new credit policy of esk spoitelna after the
privatization: from bank which was oriented mainly on credits for financial institutions now most of the
credits are provided to inhabitants13. The second most important part of credit portfolio is loans to the

13

With an exception of the category state institutions because it contains esk konsolidan agentura in 2001
and 2002
17

processing industry. Significant part of provided credits represents loans to trade companies. Selected
financial ratios documented the average financial positions of these economic sectors see Appendix 2.
The financial health of trading firms was not very satisfied in 1998 2000: the average firm of
this sector closed its book with a loss. Financial leverage was too high, the income was not enough to
cover the interest expenses therefore these firms could potentially have difficulties with repaying their
debts. Slightly different was the situation in processing industry: the equity ratio gained more favourable
values, as well as coverage of interests ratio. Except of 1999, this sector was on average profitable.
Although the average values do not need to reflect the real financial health of Ss borrowers,
nevertheless, they could be used as an indicator of potential cause of the huge share of nonperforming
loans in this period.
Table 8 Credit portfolio of Komern banka (in percent of total credits)
Economic sector
Agriculture

1998

1999

2000

2001

2002

6.7 %

6.4 %

6.4 %

3.8 %

4.1 %

Processing industry

40.2 %

38.3 %

34.8 %

22.7 %

20.7 %

Energetic industry

3.8 %

4.2 %

5.3 %

3.9 %

4.0 %

Building industry

4.3 %

3.9 %

3.3 %

1.9 %

2.5 %

27.1 %

26.0 %

21.7 %

16.5 %

19.5 %

6.0 %

6.0 %

7.7 %

5.4 %

4.3 %

23.8 %

20.2 %

Others

11.9 %

15.1 %

20.8 %

22.0 %

24.7 %

Nonperforming loans

28.65 %

32.81 %

33.70 %

24.20 %

15.48 %

Trade, Restaurants, Transport, Commun.

Insurance, Finance
KA

Source: Annual reports of Komern banka

Loans provided to processing industry, together with loans to trading firms and sector of
restaurants constitute almost half of the credit portfolio of Komern banka. The financial
health of processing industry and sector of trade were described above, the financial position
of restaurants is similar to trading firms: the average firm operating in restaurants had closed
its books with a loss and its income was not enough to cover interest expenses in 1998 and
1999. The equity ratio moved around 20 %. The insufficient financial health of sectors trade
and restaurants which represent fifth of total provided credits could be one of the causes of the
increase of nonperforming loans.

5.3 Credit Risk Mitigation in Czech Big Banks

Although the chapter 4.3 characterises wide palette of methods to reduce the credit risk , the
number of used techniques is much smaller in the Czech Republic. One reason of this situation is
insufficiently developed capital market, which limits the possibilities to transfer credit risk through

18

derivatives and securitization. Only one special institution offers the credit risk insurance. Table 9 - 11
shows, which methods are used by Czech big banks.
Table 9 Methods of credit risk mitigation used in SOB (in percent of total credits)
Instrument
Bank and state guarantee

1998

1999

2000

2001

2002

42.8 %

35.7 %

15.6 %

6.8 %

5.8 %

Pledge of receivable

9.5 %

11.7 %

4.1 %

5.2 %

0.1 %

Pledge of real estate

4.7 %

4.9 %

4.6 %

3.7 %

5.8 %

Pledge of deposit

0.6 %

1.4 %

0.3 %

0.3 %

0.4 %

Pledge of securities

0.3 %

0.3 %

0.2 %

0.1 %

0.3 %

Credit risk insurance

1.1 %

1.6 %

0.9 %

2.7 %

0.1 %

Pledge of movable property

1.3 %

0.6 %

0.2 %

0.2 %

0.3 %

Guarantee from the take-over of IPB

0.0 %

0.0 %

45.2 %

41.5 %

0.0 %

Other

0.9 %

0.5 %

0.3 %

0.6 %

12.2 %

39.0 %

43.3 %

28.5 %

38.9 %

75.2 %

Unsecured loans

Source: Annual reports of eskoslovensk obchodn banka

Absolute most of the loans provided by eskoslovensk obchodn banka was unsecured last
year, from others methods state and bank guarantee and pledge of real estate and receivables were used.
Table 10 Methods of credit risk mitigation used in S (in percent of total credits)
Instrument

1998

1999

2000

2001

2002

Bank and state guarantee

0.6 %

0.5 %

9.0 %

33.2 %

27.4 %

Guarantee of bill of exchange

8.5 %

5.3 %

3.4 %

1.2 %

0.2 %

38.0 %

36.2 %

27.4 %

20.3 %

24.4 %

Pledge of movable property

2.5 %

0.9 %

0.4 %

0.2 %

0.5 %

Pledge of deposit

0.4 %

0.1 %

1.1 %

0.7 %

0.7 %

Pledge of securities

4.1 %

3.4 %

1.3 %

0.3 %

0.7 %

Pledge of receivable

7.5 %

9.2 %

4.0 %

5.0 %

5.2 %

Guarantee of individual and legal entity

17.7 %

19.2 %

14.3 %

1.1 %

0.9 %

Unsecured loan

20.8 %

25.0 %

39.1 %

38.1 %

40.0 %

Pledge of real estate

Source: Annual reports of esk spoitelna

In case of esk spoitelna, the share of unsecured loans is increasing as well., may be it can be
caused by the rise of individual loans on which are usually required no pledging due to relatively small

19

amount. The category bank and state guarantee contents the guarantee of esk konsolidan agentura,
so the share of other bank and state guarantees is not so significant. The pledge of real estates is use far
more often. The novelette of arrangement of loan classification therefore could mean the obligation to
create large volume of provisions and this could be one of the reasons of undermined financial health of
esk spoitelna.
Table 11 Methods of credit risk mitigation used in KB (in % of total nominal value of credit risk
mitigation)
Instrument

1998

1999

2000

2001

2002

Guarantee of the state

n.a.

3.2 %

3.4 %

20.1 %

20.1 %

Bank guarantee

n.a.

0.7 %

1.1 %

1.2 %

1.9 %

Pledge of bank deposit

n.a.

0.5 %

0.6 %

0.5 %

0.5 %

Pledge of security

n.a.

0.0 %

0.0 %

4.3 %

0.1 %

Pledge of real estate

n.a.

74.5 %

71.9 %

51.5 %

52.4 %

Pledge of movable property

n.a.

1.7 %

2.6 %

3.3 %

3.6 %

Guarantee of legal entity

n.a.

9.4 %

8.0 %

5.8 %

6.6 %

Guarantee of individual

n.a.

1.9 %

1.6 %

1.6 %

2.2 %

Pledge of receivable

n.a.

2.1 %

2.7 %

5.7 %

9.6 %

Credit risk insurance

n.a.

2.2 %

2.7 %

1.7 %

1.5 %

Other

n.a.

3.8 %

5.4 %

4.4 %

1.6 %

Source: Annual reports of Komern banka

The novelette of arrangement of loan classification could have far more weighty impact on the
financial health of Komern banka: the share of pledging real estates was almost three quarters of total
credit risk mitigation. Although the share now is slightly above 50 %, the bank would be still very
vulnerable to a problem of price asset bubble.

6. CONCLUSION
Although through the Consolidation Program I the state cleaned up the banks balance sheets by
transferring of nonperforming loans to special institution Konsolidan banka, the Czech banking sector
has experienced a banking crisis. At the peak of the crisis, the share of nonperforming loans exceeded
30 % of total credits. Such a huge level of nonperforming loans was caused by a combination of several
factors working together.
Banks played a key role in process of transition from central planned to market economy. The
enormous demand for credits needed to privatization has been satisfied under the conditions of
insufficiently prepared legislative and under the lack of needed knowledge and experiences with credit
risk management and assessing of creditworthiness of borrowers. The situation was complicated by the
20

macroeconomic instability and relatively high level of interest rates, which deteriorates the problem of
adverse selection, and by the fact that the state ownership of some banks worsened the moral hazard of
the banks management.
The use of real estates as collateral has worsened the financial health of banks in two different
ways the first one was the novelette of the arrangement of credit classification in 1998, the second one
represents the existence of price asset bubble in the same period14.
The situation in the Czech banking sector seems now to be relatively stable. The share of
nonperforming loans is at its historical minimum, the prudent man rules are clearly defined. All banks
have their private owners, which should exercise their rights and manage the banks better than the state.
When it comes to methods of credit risk mitigation, the possibilities of Czech banks are a little
limited. The insufficiently developed capital market do not allow to use credit derivatives and due to the
absence of secondary market banks can not sale loans. Only one special institution offers credit risk
insurance. Despite of this, banks can use and are using guarantees (either from other banks, state, legal
entities or individuals) and collaterals (most often real estates, but movable properties, receivables and
deposits as well). But the current trend is to provide more and more unsecured loans.

14

See Hampl and Matouek (2000)

21

REFERENCES
Annual reports of CS, CSOB and KB.
Bessis, J (1998), Risk Management in Banking, Wiley, Chichester.
Caprio, G and Klingebiel, D (1996), Bank insolvency: Bad Luck, Bad Policy, or Bad
Banking? The paper prepared for the World Banks Annual Bank Conference on
Development Economics, Washington, D.C., April 25-26.
Claessens, S, Klingebiel, D and Laeven, L Financial Restructuring in Banking and
Corporate Sector Crises: Which Policies to Pursue?
Demirgc-Kunt, A, Detragiache, E and Gupta, P (2000), Inside the Crisis: An Empirical
Analysis of Banking Systems in Distress, IMF Working Paper, no. 156.
Dvok, P (1998), Bankovnictv, VE, Praha.
Goldstein, M & Turner, P (1996), Banking Crises In Emerging Economies: Origins And
Policy Options, BIS Economic Paper, no. 46.
Gonzles-Hermosillo, B (1999), Developing Indicators to Provide Early Warnings of
Banking Crises, Finance and Development, no. 6.
Hampl, M and Matouek, R (2000), vrov kontrakce v R jej piny a dsledky,
Working Paper of Czech National Bank, no. 19.
Jimenz, G and Saurina, J (2002), Loan Characteristics and Credit Risk, Bank of Spain.
Jon, J (1997), Bankovn krize: zkuenosti, piny a prevence, Finance a vr, no. 8.
Jon, J (1997), Problmy bankovnho sektoru v R, Finance a vr, no. 9.
Mishkin, FS (2000), Financial Policies and the Prevention of Financial Crises in Emerging
Market Economies, WPS 2683.
Pirner, D (2003), Risk Management v eskm bankovnictv, Bankovnictv, no. 4.
Polouek, S (1999), esk bankovnictv na pelomu tiscilet, Ethics, Ostrava.
PriceWaterhouse (1994), vod do zen vrovho rizika, Management Press, Praha.
Vodov, P (2003). Causes of the Banking Crises, The paper prepared for the Fifth
International Conference Aidea Giovani, Milan, July 3-4.
Credit risk transfer, (2003) Committee on the Global Financial System, BIS.
Principles for the Management of Credit Risk, (2000) Basel Committee on Banking
Supervision.
www.cbcb.cz
www.cnb.cz

22

Appendix 1
Number of banks in the Czech Republic
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Total banks

24

37

52

55

54

53

50

47

42

40

38

36

Big banks

Small banks

14

19

22

21

18

12

Banks under forced administr. -

Banks without licence

11

18

21

23

25

27

Source: Czech National Bank

Classified loans as a % of total loans in the Czech Republic

1994

1995

1996

1997

1998

1999

2000

2001

2002

Total classified loans

36.53

33.04

29.33

26.98

27.10

32.15

29.83

21.53

16.89

Weighted classification

21.52

20.26

18.82

17.42

17.19

16.88

13.73

9.95

6.13

-0.28

0.10

-0.03

1.97

0.55

1.77

2.23

1.63

Reserve and provision surplus n.a.

(+) or shortage (-)
Source: Czech National Bank

23

Appendix 2
Selected financial ratios of some economic sectors in the Czech Republic
Economic sector

Financial ratio

1998

1999

2000

2001

2002

Processing industry

ROE
Quick ratio
Equity ratio
Coverage of interests ratio
ROE
Quick ratio
Equity ratio
Coverage of interests ratio
ROE
Quick ratio
Equity ratio
Coverage of interests ratio
ROE
Quick ratio
Equity ratio
Coverage of interests ratio
ROE
Quick ratio
Equity ratio
Coverage of interests ratio

1.75 %
0.70
41.83 %
1.70
4.75 %
0.51
59.43 %
3.90
-2.23 %
0.61
27.47 %
1.37
-5.11 %
0.80
20.96 %
0.92
-14.99 %
1.03
28.74 %
-0.62

-1.15 %
0.71
39.77 %
1.53
3.17 %
0.61
56.95 %
3.04
7.05 %
0.64
29.37 %
2.84
-11.27 %
0.73
23.97 %
0.39
-5.90 %
1.28
28.49 %
0.68

6.13 %
0.71
40.70 %
3.19
4.43 %
0.53
58.18 %
3.78
11.74 %
0.79
31.77 %
6.94
-0.57 %
0.73
28.86 %
1.56
12.58 %
2.08
23.92 %
3.47

7.37 %
0.76
40.73 %
3.64
5.49 %
0.52
59.80 %
5.08
13.95 %
0.95
34.19 %
9.70
6.75 %
0.77
31.28 %
2.90
34.48 %
0.70
14.62 %
3.29

8.47 %
0.71
43.51 %
4.76
5.44 %
0.60
60.06 %
6.05
11.83 %
1.02
34.66 %
12.05
8.70 %
0.75
33.73 %
3.87
14.52 %
0.81
24.00 %
2.86

Energetic industry

Building industry

Trade, Transport

Hotels, Restaurants

Source: www.mpo.cz
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