Recent Czech Bank Scandals Taint Economic Reforms

THREE scandals in recent months are raising questions about the soundness of the banking industry in the Czech Republic. Political and banking leaders have rushed to reassure domestic and foreign business circles that the scandals are isolated incidents.

Prime Minister Vaclav Klaus compared the banking incidents to out-of-control, inexperienced drivers, according to the Czech daily Lidove Noviny. ``It could be that there will be more car accidents,'' Mr. Klaus said. ``A pileup will certainly not happen because our main banks are simply in solid shape.''

Borivoj Prazak, deputy chief executive of Komercni Bank, one of the Czech Republic's largest banks, defends the banking sector as one of the strongest pillars of the country's new economic foundation. The four top banks in the Czech Republic are still partially owned by the state.

``[The banking sector] has made great strides in a short time, making changes in procedures, structure, and technology,'' Mr. Prazak says.

The Czech Republic has arguably made the most progress of any Central European country in ushering in a new age of market democracy. The economy is showing signs of recovery after years of severe recession. In the first quarter of this year, for example, Czech gross domestic product rose 3.5 percent over the same period in 1993.

But continued disarray in the banking sector could pose a serious threat to attempts to reorient the economy. It could reduce the availability of capital and further shake public confidence in financial institutions. The national bank has stopped issuing licenses for new banks, pending a review of the sector.

The Czech Republic's banking troubles began late last year, when the government moved to take over operations of Kreditni a Prumyslova Bank, which had come under scrutiny for unsound lending practices. A June 23 decision confirmed the Czech National Bank's administration of Kreditni.

In April, authorities forced Bank Bohemia to suspend operations after a run on the bank threatened its collapse. The run followed the uncovering of an alleged scam involving top bank officials. Police arrested three officials in May and were seeking a fourth suspect, Jiri Cadek, former Bank Bohemia vice chairman. The suspects are accused of issuing bogus bank guarantees worth an estimated $1.2 billion. Following a June 28 shareholders' meeting, the bank announced it was going into liquidation.

The third scandal involved AB Bank, which was accused of making improper loans to shareholders, who then had trouble repaying. The national bank now is in charge of AB Bank's operations.

Virtually every Central European state has had its difficulties with the banking sector. Late last year Hungary announced a $1.4 billion bailout plan to help 10 commercial banks remain solvent after they were hit by a tidal wave of loan losses.

Prazak, the Komercni Bank deputy chief, says bad banking moves are not surprising considering Central Europe's recent political history.``Banks in the past didn't engage in banking; it was more the simple distribution of funds,'' he says.

When Communist governments began collapsing in 1989, few people had the experience necessary in Western banking methods. The lack of qualified personnel, combined with a proliferation of small banks, created the proper conditions for scandals. ``We [Komercni Bank] had to hire new people with little knowledge and train them on the job,'' Prazak says.

Prazak complains that the local press has exaggerated the seriousness of the bank scandals and has overlooked efforts to improve services. He cites Komercni Bank's installment of a computer network linking its more than 400 branches. ``Computerization allows us in seconds to make payments and transfers,'' he says. Before, transactions could take weeks.

Czech National Bank Chairman Josef Tosovsky said in May that the combined assets of the three scandal-tainted banks amount to just 1.2 percent of the nation's total assets.

To diminish the chances of more banking scandals, the Klaus government is promoting measures to increase the national bank's regulatory authority. The proposed legislation would allow the national bank to approve management appointments and force banks to fire incompetent officers.

Banking consolidation should also help reduce incidents of malfeasance, Prazak says. Many smaller banks will either merge or be swallowed up by larger financial institutions, he predicts. ``Soon the situation should start to quiet down,'' Prazak says.