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Document Type

Case Study

Abstract

Following the disintegration of the Soviet Union and subsequent Velvet Revolution in 1989, the former Czech and Slovak Federative Republic (CSFR) began the complex transition from a centrally controlled command economy to a market-based economy. The transition necessitated the removal of non-performing loans from state-owned banks’ balance sheets, a task assigned by the Ministry of Finance to the newly formed Consolidation Bank (Konsolidační Banka, hereafter “KOB”). Established on February 25, 1991, the KOB was specifically mandated to acquire and restructure what were known as “TOZ” loans, unsecured debt with no amortization schedules and unsustainably high interest rates. The KOB used funds from the State Bank of Czechoslovakia to acquire CZK 125 billion (approximately $4.2 billion, or about 10% of GDP) in TOZ loans from four state-owned banks. The purchase was made at 80% of the loans’ nominal value. In 1993, upon Czechoslovakia’s split into two sovereign nations, the KOB’s loan portfolio and operations were divided between the Consolidation Bank Prague (CBP) and Consolidation Bank Bratislava. Although the CBP took over the management of the bad loan portfolio, it also engaged in many other commercial banking activities. The Ministry of Finance of the Czech Republic therefore decided in 2001 to create the Czech Consolidation Agency (CCA) to handle both the TOZ loans and other bad debt that had been accumulated throughout the economic transition period. After significantly reducing its assets under management through block sales of receivables, the CCA ceased operations on December 31, 2007, transferring the CZK 17.2 billion remaining on its balance sheet to the Ministry of Finance.

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