The Czech Republic, a Central European country, has a well-developed banking sector with an extensive regulatory framework in place. Despite these safeguards, the risk of bank failures remains a concern for international bank creditors. The primary laws governing the Czech Republic’s banking sector include the Banking Act (Act No. 21/1992 Coll., as amended), the Capital Market Undertakings Act (Act No. 256/2004 Coll., as amended), and the Act on Banks’ Recovery and Resolution (Act No. 374/2015 Coll., as amended). These laws establish the framework for bank licensing, operation, and resolution, as well as supervisory and regulatory oversight.

Bank failure in the Czech Republic is defined as a situation where a bank becomes insolvent or is unable to meet its obligations to depositors, creditors, or other stakeholders. A bank is also considered to have failed if it is deemed non-viable by supervisory authorities and requires extraordinary public financial support.

The Czech National Bank (CNB), as the country’s central bank and primary supervisory authority, is responsible for determining if a bank has failed or is likely to fail. The CNB assesses the financial health of banks through regular inspections, analysis of financial data, and examination of compliance with applicable laws and regulations.

The CNB has the legal mandate to conclude if a bank fails or is likely to fail, based on the Banking Act and the Act on Banks’ Recovery and Resolution. In case of an impending bank failure, the CNB can take corrective measures such as imposing higher capital requirements, restricting business operations, or replacing the bank’s management.

Upon concluding that a bank has failed or is likely to fail, the CNB initiates the resolution process. The most common reasons for bank failure in the Czech Republic include inadequate capital, poor governance, operational inefficiencies, and exposure to economic downturns.

The CNB’s bank supervision and resolution planning aim to preserve the critical functions of banks and ensure their continuation during financial distress. This involves regular monitoring of banks’ financial health, stress testing, and requiring banks to develop recovery and resolution plans. The CNB also actively cooperates with the European Central Bank (ECB) and other supervisory authorities to ensure a coordinated response in case of a cross-border bank failure. The resolution authority, in coordination with the Resolution Council, takes the following steps when a bank within the CNB’s jurisdiction fails:

  • Determine the appropriate resolution strategy based on the least cost principle and public interest.
  • Apply resolution tools such as the sale of the business, bridge bank, or asset separation to achieve an efficient resolution.
  • Implement the resolution plan while ensuring the continuity of critical functions and minimizing the impact on financial stability.

A failed bank in the Czech Republic may be reorganized, recapitalized, restructured, or dissolved by the resolution authority. To preserve the critical functions of the failed bank and maintain public confidence in the Czech financial system, there are several options available, including:

  • Sale of the business: Selling the failed bank or its assets to a third party.
  • Bridge bank: Establishing a temporary bank to take over the failed bank’s assets and liabilities, maintaining the continuity of critical functions.
  • Asset separation: Transferring the impaired assets of the failed bank to a separate entity, such as an asset management vehicle, to isolate them from the bank’s core operations and facilitate their orderly disposal.

In the Czech Republic, account deposits and other creditor interests are protected by law. The Financial Market Guarantee System (FMGS) provides deposit insurance, covering deposits up to EUR 100,000 per depositor per bank. This ensures that depositors can recover their funds even in the event of a bank failure.

In addition, the Act on Banks’ Recovery and Resolution provides for a creditor hierarchy, prioritizing secured creditors, unsecured creditors, and subordinated debt holders in the distribution of the failed bank’s assets.

The CNB, as the supervisory authority, plays a crucial role in ensuring that non-viable banks exit the market in an orderly manner. This involves identifying distressed banks early, imposing corrective measures, and initiating resolution or liquidation processes as required. The CNB’s proactive supervision and close cooperation with other supervisory authorities help minimize potential negative impacts on the financial system and protect the interests of depositors and creditors.

In cases where the resolution process is deemed not appropriate, the Czech Republic’s bank liquidation rules come into play. Liquidation involves the winding down of the failed bank’s operations and the distribution of its assets to its creditors. The CNB initiates the liquidation process by revoking the bank’s license and appointing a liquidator. The liquidator is responsible for conducting an inventory of the bank’s assets, identifying and verifying its creditors, and distributing the proceeds in accordance with the creditor hierarchy established by law. The liquidation process is subject to oversight by the CNB and the court to ensure transparency and fairness.