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Reports on Observance of Standards and
Codes
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CZECH REPUBLIC—AN UPDATE 1 This note provides a factual report on developments since the September 1999 "Experimental Report on the Observance of Standards and Codes—Czech Republic." For a full description of institutions and practices, it should be read in conjunction with the original report.2 | |||||||||||||||||||||||
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The Czech Republic is a subscriber and meets the specifications of the Special Data Dissemination Standard (SDDS) for the coverage, periodicity, and timeliness of data, as well as for advance release calendars. Since the September 1999 ROSC, it has put in place a National Summary Data page, which is linked to the IMF’s Dissemination Standards Bulletin Board and provides actual economic data corresponding to the SDDS requirements in a common format. Since April 2000, the Czech Republic has been releasing detailed information on international reserves and foreign currency liquidity that conforms with the required data template. Substantial progress has been made to address the issues identified in the September 1999 fiscal ROSC module. A new Law on Budgetary Rules has been approved by Parliament, which addresses many of the previous shortcomings (see below). In addition, the new Public Administration Reform Act and amendment of the Law on Municipalities aim at clarifying the roles and responsibilities of different levels of government. The new budgetary rules comprise five main changes: In early 2000, there was a wave of bankruptcies in the credit union (kampelicka) sector, and a large number of credit unions were placed under forced administration. The guarantee fund maintained by the credit unions does not suffice to cover all insured deposits and the government has proposed to step in to indemnify all depositors 80 percent of their deposits, up to a maximum of CZK 100,000. The credit union sector is regulated by a separate legislative act, which assigns the responsibility of supervising to the Office for Credit Union Supervision. A new regulation was issued in July 1999 regarding consolidated supervision, stipulating that from April 2000 the capital adequacy ratio (CAR) on credit risk and large exposure limits should be calculated both on a solo and a consolidated basis (only once a year on a consolidated basis). However, this does not cover cases where the bank is a subsidiary of a nonbank holding company, as reuired by EC directives.6 This would require an amendment of the Act on Banks, which is under consideration. The CNB has introduced a requirement for a capital charge for market risk, designed to contribute to the effective supervision of off-balance-sheet transactions. This is assessed on a solo basis, however. The CNB is considering extending it to a consolidated basis by 2002/03. The CNB has also introduced a market value accounting standard for the derivative transactions of banks starting in January 2000 in accordance with the international accounting standards. Conditional upon the amendment of the Accounting Act (see below), starting January 1, 2001, market value accounting will also be introduced for the securities portfolios held by banks. Since the August 1999 report, a number of changes are now being made to the regulatory framework governing the securities market, with the overall objective of bringing Czech legal and regulatory practice closer to international standards and harmonizing Czech law with EU law.7 All amendments listed below are due to enter into force on January 1, 2001. The Commercial Code is being amended. Key elements of the amendment are: (i) a strengthening of minority shareholders’ rights, including the disclosure requirements of large shareholdings and mandatory buy-outs in case of take-overs;8 (ii) a clarification of other take-over rules and providing the Czech Securities Commission with regulatory powers in this area; and (iii) a clarification of the responsibilities of boards of directors. Overall, the amendment is intended to accord with the OECD’s Principles of Corporate Governance. The Securities Act is being amended. A key feature of the amendment concerns tightening disclosure requirements to be listed as a publicly tradable company and standardizing the requirements in all public exchanges. With few exceptions, the amendment aims to incorporate all relevant EU directives. The Accounting Act is being amended. It is intended to align Czech accounting standards with international standards. It allows corporations to choose to publish accounts on either Czech standards or IAS. It also gives the stock exchange the power to require either Czech standards or IAS. The Accounting Act is being amended. It is intended to align Czech accounting standards with international standards. It allows corporations to choose to publish accounts on either Czech standards or IAS. It also gives the stock exchange the power to require either Czech standards or IAS. The Bonds Act is being amended. The amendment provides for enhanced disclosure requirements, streamlines the approval process for issuing bonds, and provides for the formation of creditors’ committees aimed at strengthening the position of creditors. Finally, the Stock Exchange Act is being amended, aimed at strengthening the supervisory powers of the Securities Commission and introducing several technical changes to ensure more transparency in trading. Later this year, the preparation of an amendment of Securities Commission Act will begin, with the objective of improving the ability of the Securities Commission to regulate capital markets and enforce existing regulations. This amendment would likely enter into force in December 2001. Meanwhile, the Securities Commission has recently submitted for public discussion a draft of principles of best practice in securities markets. The goal is to establish general rules of behavior for market participants and their basic responsibilities. The principles are grounded in the Commission’s authority to demand compliance with best practice in the Czech capital market, and to set market standards that would meet EU standards. The Commission intends to publish this proposal in the form of a recommendation whose principles should be obeyed by all market participants. The proposal is based on the Best Practice Principles published by the International Organization of Securities Commissions (IOSCO). Its aims are to increase trust in the Czech capital market, educate the investing public, protect investors, and fight against financial crime. 1Prepared by Mr. Nord (European I Department), in consultation with the Czech authorities. 2The report was issued to the Executive Board as EBS/99/158, Supplement 5 (9/1/99) and is available on the IMF website as http://www.imf.org/external/np/rosc/cze/index.htm. 3The new Law on Budgetary Rules covers only the operations of the State Budget. However, together with the new State Property Law, it stipulates that any extrabudgetary funds must be created by separate laws, which themselves must be in conformity with the new Law on Budgetary Rules. 4There are a few small, and well-defined exceptions. For example, if certain mandatory expenditures are running above expected levels (for example, unemployment benefits because of a higher-than-anticipated number of unemployed) then the government is not obliged to call for a halt in payments. Also, if expenditures are linked to precise additional financing such as EU funds, then they do not fall under the ceiling. 5However, the medium-term framework required by law can remain quite general; it does not require, for example, medium-term projections of individual spending items or even budgetary chapters, but only broad revenue and expenditure magnitudes. 6Under the Agreement on Cooperation with the Ministry of Finance and the Securities Commission, the CNB has the possibility of acquiring information from other domestic financial market regulators and, under certain circumstances, the possibility of requiring on-site examinations; however, the Czech legal system hampers a full exchange of information. 7Draft laws have been submitted to Parliament and, in some cases, approved. Before entering into force, they must also be approved by the Senate and signed by the President. 8A buyer is required to make an offer to minority shareholders if its purchase results in a shareholding exceeding 40 percent of outstanding equity. This compares with levels of 25-30 percent in many other market economies. |