Bank Account Holders in Czechia: Protect Your Account Balance and Qualify for Deposit Insurance Repayment When Banks Fail or Stop
The Czech Republic has a diverse and developed, high income export-oriented social market economy. Innovation, services, and manufacturing dominate the Czech economy. Despite its EU membership, the Czech Republic maintains its own currency, the Czech Koruna. The Czech National Bank (CNB) is responsible for the countries monetary policy where fiscal policy is managed by the Ministry of Finance. In the past, economic growth and public investment were strongly interconnected. A fiscal reform agenda necessary for EU entry mitigated public budget deficits and initiated an era of stability. In the aftermath of the global health crisis inflation rose and was furthered by the aggressive developments in the Ukraine. High inflation in the Czech Republic slowed down economic growth, had an impact on the labor market and lowered living standards. Further consequences or alternative measures for stabilization are currently uncertain.
Financial Stability in the Czech Republic
As most transactions in the real economy are made through the financial system, financial stability and confidence in the financial system are paramount to economic growth. The decline in public confidence can destabilize the economy and therefore have consequences for society and the public at large. Maintaining financial stability is therefore one of the central objectives of the CNB. Macroprudential policy tools are used to assess, identify, monitor and mitigate risks to the financial system. As a result, the financial system should operate without any major failures or undesirable effects on the present and future development of the domestic economy.
The current era places a burden on many local economies and individual prosperity in society. The Czech Republic suffers from a reduced growth outlook, high inflation, and a dependence on Russian energy. Public finances are under strain and debt continues to rise. Rising house prices and mortgage loans remain sources of systemic risk, especially now that interest rates are low, inflation is on the rise, and incomes are stagnant. In order to combat such risk factors and foster resilience, the CNB continuously monitors the financial system and imposes additional safety measures on market participants. These measures include credit growth and leverage, maturity mismatches and market liquidity, exposure concentrations, and the resilience of financial infrastructures.
Banking and Finance
Prior to the Czech independence, the local banking sector was controlled by the government. Bank licensing, regulation, supervision and risk management protocols were not always sufficient. Back then, banks were kept alive with public support, while protectionism furthered moral hazard and defaults in loan portfolios. An initial transition from a one-tier banking system under public control and ownership to a two-tier banking system separating central banking from commercial banking. Challenges derived from inherited debt, soft licensing requirements and voucher privatization, where ordinary citizens received a priority position to bid on shares of state enterprises, have persisted for a long time.
Privatization and restructuring of the financial sector changed ownership of financial institutions to regular private shareholdings. Personal wealth in transition economies is often high. This allows ordinary citizens to contribute to the financing of bank assets. Alongside this local ownership, equity in the banking sector held by foreign investors grew to substantial proportions. This ownership distinction revealed a serious gap between a legacy of weak central planning and experienced foreign professionals. Weaknesses of the financial sector in the Czech Republic included a lack of efficiency and banking skills, limited profitability and high levels of non-performing loans.
Over time, the Czech financial sector stabilized. The Ministry of Finance and the central bank take their position serious. This resulted in a high level of capital buffers and capital surpluses in excess of regulatory requirements. As a result, the banking sector is able to mitigate volatility and absorb shocks in times of financial distress. However, contagion and connectivity on a local and international level cannot be completely ruled out, so creditors and the public interest need to be protected.
Bank Deposit Protection in the Czech Republic
A financial institution can change its operations, merge, lose its license or close for several reasons. In these matters, legal frameworks streamline procedures and protect the interests of creditors and other stakeholders. Bank account holders are protected by resolution measures and include statutory administration, deposit insurance and insolvency and liquidation procedures. The common element of these measures is that secured claims are reimbursed from the available assets of the bank and that further collection provides equality for unsecured creditors. For most creditors, deposit insurance is a critical part of the recovery process because of its scope and size.
Bank deposit protection in the Czech Republic is handled by the Financial Market Guarantee System, locally referred to as the Garanční Systém Finančního Trhu (GSFT). In addition to protecting bank deposits via the Deposit Insurance Fund, the GSFT administers the Crisis Resolution Fund. If the continuation of the financial institution is in the public interest and reimbursement of deposits via the deposit insurance fund can be avoided, the critical functions and core activities of the institution must be maintained. The Crisis Resolution Fund is primarily responsible for the financing of this operation.
If resolution efforts do not provide the desired outcome and intervention by the CNB or court results in the closure of the bank, the guarantee systems starts to prepare for reimbursement of eligible account holders. The GSFT makes a public announcement that the institution is unable to meet its commitments to creditors. Simultaneously, the scheme informs the customers of the bank that a pay-out event is forthcoming. The pay-out bank is commissioned and the exact claim filing procedures for both the secured account balances as well as temporarily high deposits are defined. The scheme is open for a period of three years and DGS claims that are submitted after this time are not taking into consideration.
The GSFT applies to banks, building savings banks, and cooperative credit unions supervised by the CNB and covers a maximum of 100.000 euro per account holder and institution. Natural persons may be eligible for additional compensation of 100.000 euro under certain conditions. Deposit insurance is available regardless of the currency, for current, savings, term, and deposit accounts, as well as savings books. Excluded from DGS coverage are securities and bills of exchange, deposits held by public authorities and financial institutions, subordinated debt, and receivables from deposits arising from the intentional crime of money laundering, unless they were secured for the benefit of victims of the crime. Reimbursement of an insured account balance can also be rejected or suspended. This applies to matters where the account balance is subject to known civil or criminal proceedings against the account holder, the account holder cannot be identified, there is indistinctness over the account between the account holder, credit institution and the GSFT.
An application to the GSFT must be made in person by default. However, international creditors and local account holders unable to visit the pay-out bank in person may issue an officially certified Power of Attorney to authorize another person to act on his behalf. Alternatively, the creditor can provide the pay out bank with a certified compensation transfer request. A request for reimbursement of the insured account balance must be substantiated by a government issued identity document of the account holder and a transfer request to another bank account of the account holder. For claims that exceed the equivalent of 15.000 euro, additional documents may be required to verify the identity of the account beneficiary and the underlying activities that led to the account balance.
Insolvency Regime and Asset Recovery
The objectives of bank regulators and law makers in the Czech Republic is to provide for a fair, equal and credible system for resolution and recovery. A failing institution should be able to exit the market without causing systemic disruption, irrespective of its size or interconnectedness, to avoid moral hazard. Generally, failing institutions should be liquidated under normal insolvency procedures. In some cases, liquidation under normal insolvency proceedings may jeopardize financial stability, disrupt critical functions, and affect depositor protection. Such events may have an impact on society and the application of resolution tools is justified as a matter of public interest.
Global standards on insolvency follow the distinction that secured creditors are paid in full before unsecured claims can be considered. This also applies to the insolvency regime in the Czech Republic. Creditors who are left with unsecured claims often face lengthy procedures and a lag between the realization of assets and the full repayment of their claim. Individual creditors whose account balance justifies additional action may therefore take legal action against the bank or its asset holders and ultimately ensure a priority position in the recovery procedure.
Contact us for More Information and to Discuss Your Case…
This website is an initiative of Legal Floris LLC. We assist international creditors recover money when their bank fails or their investments disappears. Due to our vast experience in bank failures in different countries, we are able to maximize repayments and minimize risks for our clients. Contact us right now to find out how we can help you too to reclaim your account balance if your bank in Czechia stops operating:
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