Minutes of the CNB Bank Board meeting on financial stability issues on 7 March 2024
Present at the meeting: Aleš Michl, Eva Zamrazilová, Jan Frait (not present for the vote), Karina Kubelková, Tomáš Holub, Jan Kubíček, Jan Procházka
The countercyclical buffer (CCyB) rate
The meeting opened with a presentation given by the Financial Stability Department on the CCyB rate. According to the aggregate financial cycle indicator, the current degree of cyclical risks accepted was close to the bottom of the cycle. Based on its conditional projection, the Department expected the financial cycle indicator to stay at low levels over the next few quarters. The previously accepted cyclical risks in banks’ balance sheets were gradually diminishing, mainly as a result of the repayment of loans amid growth in nominal income and, to a lesser extent, through the materialisation of risks and growth in risk weights on credit exposures. This was being reflected in a gradual decline in the estimated capital needed to cover unexpected credit losses and the potential growth in risk weights. The Department recommended lowering the rate by 25 bp to 1.75%, although it added that the results of quantitative methods gave room for a reduction of as much as 50 bp. Assuming a shallow recession followed by a sustained economic downturn, more gradual risk materialisation over a relative long time scale was likely in the current conditions.
The board members agreed that the economy was close to the bottom of the financial cycle, credit losses were not materialising significantly and that reducing the rate was consistent with the gradual decline in the accumulated cyclical systemic risks in banks’ balance sheets. There was also a consensus that in the current situation there was a need to monitor the potential switch in the nature of the systemic risks to financial stability from cyclical to structural. The Board would return to this issue at its meeting on financial stability issues in June. At this meeting, it would assess the need to respond to the structural systemic risks by introducing a systemic risk buffer rate.
Eva Zamrazilová agreed with the analysis of the position of the economy in the financial cycle and with the proposed rate cut. As regards the assessment of the impact of the phase of the financial cycle on the real economy and the effectiveness of macroprudential policy, she also discussed the potential influence of the extent to which non-financial corporations are financed by their foreign parent companies and by foreign banks. Jan Frait agreed with the analysis of the position of the economy in the financial cycle and with the proposed rate cut. He emphasised the appropriateness of applying a conservative approach in a situation where the accumulated risks were receding only gradually, amid low materialisation of credit losses. He praised the advanced methodological toolkit used to determine the buffer rate and the long-term consistency of rate setting with the original logic agreed in the Basel structures. Jan Procházka agreed with the conclusions of the Department’s analysis and was in favour of the proposed rate reduction. He said that the current trend in the number of insolvent firms did not testify to elevated materialisation of credit risk either. He also discussed the positive effect of the growth in nominal income on the quality of the banking sector’s credit portfolio. Karina Kubelková stressed that the methodological approaches used by the Department to determine the buffer rate were conservative and provided a reliable estimate of the position of the economy in the cycle in the medium term. She was therefore inclined to lower the rate by the 50 bp indicated by the quantitative methods. Jan Kubíček was also in favour of cutting the rate by 50 bp. He drew particular attention to the estimates of unexpected credit losses and growth in risk weights and, given the conservative nature of the Department’s quantitative methods for determining the rate, recommended adhering to them. He also discussed the relationship between the evolution of loan portfolio quality and the modest increase in the average default rate on loans to non-financial corporations at the end of 2023. Tomáš Holub pointed to the fact that, despite the partial recovery of the credit market, the economy was in a very subdued phase of the financial cycle, with only modest materialisation of the accumulated risks and growth in risk weights. Given this fact, along with the length of time the economy had been near the bottom of the financial cycle and the conservative settings of the methodological approaches used by the Department, he saw room for reducing the rate by a further 50 bp. Aleš Michl emphasised the appropriateness of being cautious in lowering the rate. Given the only gradual decline in previously accepted cyclical risks in banks’ balance sheets, he was in favour of a 25 bp cut.
After the discussion, three board members – Aleš Michl, Eva Zamrazilová and Jan Procházka – voted to lower the CCyB rate by 25 bp to 1.75%. Three board members – Karina Kubelková, Jan Kubíček and Tomáš Holub – voted to lower the rate by 50 bp to 1.5%.
Given that the chair has the casting voting in the event of a tie, the Board decided to lower the CCyB rate for exposures located in the Czech Republic by 25 bp to 1.75% with effect from 1 April 2024.
Amendment of the Recommendation on the management of risks associated with the provision of consumer credit secured by residential property
In the second part of the meeting, the Financial Stability Department submitted a proposal to amend the Recommendation on the management of risks associated with the provision of consumer credit secured by residential property. The proposal concerned the provision on unsecured loans provided to applicants. The maturity of unsecured consumer credit provided to consumers that have consumer credit secured by residential property should not exceed eight years. In view of the approval of the government’s New Green Savings Programme, which involves the provision of bank loans unsecured by property with maturities extending beyond eight years, it was proposed to insert an exemption for this programme into the Recommendation.
All the board members present agreed with the proposed revision of the Recommendation.
Author of the minutes: Štěpán Pekárek, Financial Stability Department