Czech and Slovak Federative Republic: Consolidation Bank (KOB)

Beginning in 1991, the Ministry of Finance of the Czech and Slovak Federative Republic undertook a program of restructuring efforts in order to prepare for the national transition to a market-based economy (Rod 2014). One step in the process involved recapitalizing state banks through an allocation of five-year bonds worth approximately 8% of all bank loans to state-owned enterprises. In order to determine recapitalization amounts, the government asked the state banks what portion of non-performing loans should be removed from their balance sheets (Desai 1995).

The Czechoslovakian government positioned the KOB’s operations as a necessary step toward privatization. According to the Consolidation Bank Prague 1994 Annual Report, the KOB was established in order to “deal with the consequences of certain decisions from the time of the centrally planned economy, when loans failed to meet their main economic role of a mechanism for the optimal allocation of capital” (Rod 2014).

The Ministry of Finance was responsible for the creation of the KOB by governmental decree (Desai 1995).

Secondary sources consulted did not provide evidence of special powers.

The government utilized the newly formed KOB as a repository for bad loans that needed to be disposed of prior to banks’ privatization. The KOB purchased TOZ loans off state banks’ balance sheets and restructured them with eight-year maturities bearing interest rates of 13%, dependent on the discount rate (Desai 1995; Thorne 1993). According to leading expert on Czechoslovakian economics, Dr. Aleš Rod, the government anticipated that the old loans would be more easily refinanced within the context of the newly formed commercial banking sector.

Although the government established KOB specifically to handle bad loans, its operations were later extended in 1992 to encompass more regular banking activities (Rod 2014). According to Dr. Rod, the KOB operated with a limited banking license that enabled it to accept deposits from legal entities, provide and manage loans within the scope of the bank's business plan, and work out payments and settlements without payments with foreign countries.

All Czechoslovakian banking institutions created between the years 1989 and 1991 were government-owned (Rod 2014).

Although annual reports for the KOB’s operations exist, they have not yet been translated or digitized.

Secondary resources consulted do not mention any cap on the size of the program.

Initially, the KOB was charged with purchasing CZK 110 billion in TOZ loans from the Czech Commercial Bank and Slovak General Credit Bank. The State Bank of Czechoslovakia, the central bank, provided funds for these purchases at a real interest rate of -3%. Other Czech and Slovak banks, notably Czech Savings, provided funds at an average interest rate of 11%, or a real interest rate of -1% (Desai 1995). 

These four banks (Commercial Bank, Investment Bank, General Credit Bank of Slovakia, and Czechoslovak Trade Bank) held non-performing TOZ loans generated by the government in the decades leading up to privatization. In 1992, the KOB purchased CZK 14.7 billion in (non-TOZ) bad loans from Commercial Bank and Investment Bank (Rod 2014).^FNIt is unclear from sources consulted whether the KOB purchased TOZ loans from Trade Bank.

It appears from secondary sources consulted that any state-owned Czechoslovakian bank that held non-performing loans and was slated for privatization was eligible for participation (Desai 1995; Rod 2014). As previously noted, it seems that the government compelled participation in the program as a requirement for recapitalization (Desai 1995).

These non-performing loans, known as “trvale obracející se zásoby”—“TOZ” loans or, literally, “permanently revolving inventories”—were the result of a concerted government effort in the 1970s to seize special pre-tax reserves used by state-owned enterprises to finance their operating expenses. In their place, Czechoslovakian authorities began distributing these unsecured TOZ loans to enterprises with the expectation that they would be re-lent to the government. When interest rates on the TOZ loans increased sharply from 6% to 23% in 1989, the threat of large budget deficits pushed the government to recapitalize banks in exchange for the removal of TOZ loans from their balance sheets (Desai 1995).

The KOB also took on bad debt that accumulated during the first stage of economic transition, including non-performing loans made in relation to new foreign investment and “pioneer” loans made to new private companies (Horčicová and Payson 1997).

The KOB purchased CZK 110 billion (approximately $3.7 billion) in non-performing TOZ loans, which comprised almost 20% of all loans to businesses at the time (Desai 1995). In 1992, the KOB conducted its second round of acquisitions, removing CZK 15 billion in bad assets from commercial banks’ balance sheets at a 20% discount (Horčicová and Payson 1997). These acquisitions were considered to comprise “a large portion of loan collection from bank clients” (Desai 1995).

The first CZK 110 billion purchase of TOZ loans from the largest Czech and Slovak banks was carried out for 80% of their nominal value (Desai 1995).

The KOB was split up into two separate banks—Consolidation Bank Prague (CBP) and Consolidation Bank Bratislava—upon the breakup of Czechoslovakia in 1993. Following the split, the CBP took on the responsibilities and operations of a “normal” commercial bank (Rod 2014).

On September 1, 2001, the government of the Czech Republic created the Czech Consolidation Agency (CCA) for the express purpose of dealing with the bad loan portfolios of the CBP. Though it is unclear from sources consulted whether the CCA was created as a designated asset management company, it seemed as though the KOB continued to hold nonperforming loans without attempting to collect (Rod 2014).

After significantly reducing its assets under management through block sales of receivables,^FNAccording Dr. Rod, the block sales were composed of receivables from hundreds of firms (i.e. those that held de jure majority stakes) that were then sold en bloc to the highest bidder in one transaction. the CCA ceased operations on December 31, 2007, transferring the CZK 17.2 billion remaining on its balance sheet to the Ministry of Finance (Rod 2014).

The KOB as an institution existed from February 25, 1991, through December 31, 1992, at which point its portfolio and responsibilities were split between the newly formed Consolidation Bank Prague and Consolidation Bank Bratislava (Desai 1995; Rod 2014).