Gaps remain in applicants’ bank reform

Date: 13/07/2000

By Chris Johnstone

BANKING and financial services have emerged painfully in the candidate countries from a situation where cash (usually foreign currency) was king, plastic was unknown as a means of payment, and travellers cheques were given the sort of magnifying glass treatment usually reserved for a priceless stamp.

While the dark ages of banking are definitely over, it would be an exaggeration, even in the front-line candidate countries, to say that western-style services have developed fully.

Runs by fearful customers to withdraw their deposits are still commonplace, as witnessed by the recent queues outside Czech bank Investicni a Postovni Banka (IPB) before the government stepped in late June and imposed an emergency administrator.

That controversial move - provoked by government and central bank suspicions that IPB's bosses had been cooking the books and the bank's real results would show that it would fail to meet its capital adequacy requirements - can be read both ways: either as showing a supervisory system that works or as a sign of an immature and still-flawed banking system.

The Czechs respond to criticism by pointing out that top staff at the Belgian bank lined up to take over IPB, KBC, are currently facing fraud charges for encouraging wealthy clients to take part in a multi-million-euro tax fraud involving its Luxembourg subsidiary.

Even so, all the candidate countries are still putting the finishing touches to moves to align their banking and financial services laws with the EU's. The Czech Republic expects to pass two pieces of legislation on the supervision of accounts on a consolidated basis and on consumer rights related to payments systems by the start of 2001. This should, say central bank officials, fill in the main gaps in the current legislation. However, legislation allowing foreign banks the opportunity to set up branches easily in the country, under the second banking directive, will only enter into force when the Czech Republic eventually joins the Union.

A third piece of legislation, which could make the central bank more answerable to politicians, is also proceeding through parliament, with the European Commission and European Central Bank looking on anxiously. Some of the proposed changes could conflict with the EU treaty and ECB rules. "Proper banking supervision is a big issue in all the candidate countries," said a European Commission official.

Poland, which passed a new banking act in January 1999 covering provisions for large risks and money laundering has, according to Commission officials, gone a long way towards bringing its legislation into line. However, problems over own-fund requirements for banks and securities companies still have to be thrashed out, with the Poles arguing that Union rules on the capital reserves needed to cover risks would place too heavy a burden on some small companies. The basic problem stems from the fact that the turnover of some cooperative banks and securities firms is small compared with their western counterparts, so the minimum own funds requirements are outside their reach. "We have had several rounds of negotiations which have narrowed the differences and defined what the problem points are," said a Commission official.

In spite of some setbacks, such as the legal battle for control of BIG Bank and the state rescue and re-sale of some institutions, Poland's bank privatisation process has advanced much further than in the Czech Republic, with more than 60% of the sector now in foreign hands and few of the main banks left for sale. Prague still has to sell two of its big five big banks, Konsolidacni banka and Komercni banka, with the hurried sale of IPB likely to pored over by lawyers and accountants for months to come.

Poland has even begun selling off the biggest insurance companies, a step still hardly even on Czech policy-makers' radar screen. The Commission has recognised the "substantial progress" made in Polish privatisation.

Fellow membership front-runners, Hungary and Estonia, have also taken large strides both as regards harmonisation of laws and privatisation. Estonia has adopted almost all the EU's required laws in the banking sector and its banks survived the considerable wobble caused by the Russian economic crisis of 1998. The regulatory framework, however, still needs to be strengthened.

Only the rump of Hungary's banks, the worst cases, still have to be sold, according to the central bank, with foreign investors already heavily present in the sector as a result of past purchases and the Commission characterising the sector as highly competitive.

Banking and financial services have emerged painfully in the candidate countries from a situation where cash (usually foreign currency) was king, plastic was unknown as a means of payment, and travellers cheques were given the sort of magnifying glass treatment usually reserved for a priceless stamp. Article forms part of a survey on financial services.