Prague - The Czech Republic will get "guarantees" from the EU that its banking sector will remain stable, and in exchange Prague will retract its threat to veto the planned transfer of the authority to supervise the eurozone's banking sector to the European Central Bank (ECB), reported Czech Radio quoting a senior diplomatic source.
More than 90 percent of the Czech banking sector are subsidiaries of eurozone banks.
The Czech government and the Czech National Bank (CNB) fear that the EU's banking union will allow Czech banks to be turned into "branches" of their foreign owners, and it will be easier for these owners to drain money away from them.
That's why the central bank asked for the right to ban the transformation of Czech banks into branches. However, the Czech Republic was not granted an exception from the treaty, due to the resistance of a majority of EU states.
Instead, Prague will receive assurances that the planned banking union will not encourage the owners to transform their Czech subsidiaries into branches, reported Czech Radio today.
According to the radio's diplomatic source, such "assurances" are enough for the government, but insufficient for the CNB.
Before the crisis, the proportion between dividends paid to the foreign owners and reinvestments in their Czech subsidiary banks was 50:50. Since then, the proportion has shifted in favor of dividends, which now constitute nearly 80 percent of the total.
The CNB says that the current conditions allow it to prevent such capital drain, but under the planned banking union it will no longer be able to do so.
CNB governor Miroslav Singer confirmed in an interview with Aktualne.cz last week that currently, Czech banks pay dividend to their foreign owners "with the consent and supervision" of the central bank. Singer said that the bank may and sometimes do interfere in the process.
"Our long-term goal is to preserve this state of affairs and decision making authorities," said Singer.
Britain is another EU state that is worried about the EU banking union's impact on its national financial services industry.