CNB increases countercyclical capital buffer rate to 1.75%

• The domestic financial sector has remained stable and sufficiently resilient to potential adverse shocks in 2018.
• According to CNB analyses, the domestic economy has moved further into the growth phase of the financial cycle. The banking sector’s vulnerability to an economic downturn has simultaneously increased.
• The Bank Board has therefore decided to increase the countercyclical capital buffer rate to 1.75% with effect from 1 January 2020.
• The overall risks associated with mortgage lending have not increased further. The CNB therefore considers the current recommended limits for mortgage loans to be sufficient and does not deem it necessary to tighten them at the moment.
• The volume of new mortgage loans has also increased this year, despite a gradual tightening of the LTV (loan-to-value) limits and increases in interest rates.
• Banks’ capitalisation also remains sufficient. A macro stress test has revealed, however, that if banks had no voluntary capital surpluses at the start of the test, the capital ratio of the sector as a whole would fall below the regulatory minimum.

Developments in the Czech financial sector have been favourable this year and banks have remained resilient even to potential negative shocks, including a deep recession. This is shown by stress test results and the CNB’s assessment published today in Risks to financial stability and their indicators – December 2018. However, the CNB’s analyses simultaneously indicate that the domestic economy has this year moved further into the growth phase of the financial cycle and the banking sector’s vulnerability to an economic downturn has simultaneously increased. The CNB Bank Board has therefore decided to increase the countercyclical capital buffer for all loans provided on the domestic market to 1.75% with effect from 1 January 2020.

The CNB stands ready to increase the rate further in the event of continued rapid credit growth, increasing risks connected with property purchase financing and a further rise in the vulnerability of the banking sector. By contrast, the CNB will immediately lower or zero the rate if there is a turnaround in the financial cycle or if risks assumed materialise excessively.

“The Bank Board’s decision to increase the countercyclical capital buffer means that the CNB’s macroprudential and monetary policies are currently acting in one direction. This is helping to maintain the stability of the Czech economy and its financial sector. Due to their profitability, domestic banks can continue to strengthen their capital without limiting the room for lending,” said CNB Governor Jiří Rusnok.

Most banks are compliant with the CNB’s overall capital requirement. Assuming reasonable dividend policies, banks have sufficient space for an increase in the countercyclical buffer and growth in their loan portfolios.

The countercyclical capital buffer was introduced as an important macroprudential policy instrument in the European Union in 2014. Obliged institutions are required to create this buffer on the basis of the regulator’s instructions in periods of excessive growth in lending. Excessive lending growth usually increases financial imbalances and leads to a rise in systemic risk. By contrast, at times of falling activity, accompanied by rising credit losses, this buffer should be released so that non-financial corporations and households continue to have access to loans without excessively tight conditions.

The CNB used this rate for the first time at the end of 2015, setting it at 0.5% with effect from 1 January 2017. Since then, it has raised the countercyclical capital buffer rate five times. The currently applicable rate is 1%. The CNB previously announced that the rate would increase to 1.25% from 1 January 2019 and 1.5% from 1 July 2019. More details on this decision are available in the Provision of a general nature on setting the countercyclical capital buffer rate for the Czech Republic IV/2018.

The Bank Board’s decision takes into account the fact that optimistic expectations regarding future household income and asset prices, including property prices, are supporting lending. It also reflects the fact that housing prices, despite having slowed, are continuing to rise apace and remain overvalued by the CNB’s estimation and that banks’ profitability is being supported by currently exceptionally low bad loan losses, the level of which, however, is not sustainable from the long-run perspective.

Banks are mostly compliant with the recommended LTV (loan-to-value) limits. Loans with LTVs of 80%–90% accounted for around 10% of new lending in the first half of 2018, so the recommended limit of 15% was complied with in the sector. Limits taking into account applicants’ income, i.e. ceilings on the DTI (debt-to-income) and DSTI (debt-service-to-income) ratios, have been applicable since 1 October 2018 and the CNB will assess them for the first time in May 2019.

Given the slowdown in residential property price inflation, the rapid growth in household income and the halt in the overvaluation of apartment prices, the CNB considers the current recommended limits to be sufficient and does not deem it necessary to tighten them further at the moment. However, taking into account the persisting overvaluation of housing prices and prevailing valuation of collateral on the basis of purchase prices, the CNB continues to regard the current LTV limits as upper bounds.

The CNB would simultaneously like to inform the public that it is changing the timing of the publication of the Financial Stability Report and Risks to financial stability and their indicators next year. Like with monetary policy, the CNB will in May start to publish the Bank Board’s decision on setting the countercyclical buffer or other prudential instruments in a media release on the day the Bank Board discusses it and will comment on it at the Governor’s press conference the same day. This will happen for the first time on 23 May 2019 and 28 November 2019 respectively. Two weeks later, on 11 June and 13 December, the CNB will issue the full text of the documents and newly also the minutes of the Bank Board meeting on financial stability issues.

Markéta Fišerová
Director of the Communications Division and CNB Spokesperson

Notes for journalists:

Maintaining financial stability is defined as one of the CNB’s key objectives in the Act on the CNB (pdf, 278 kB). The Act states that the CNB shall set macroprudential policy by identifying, monitoring and assessing risks jeopardising the stability of the financial system and, in order to prevent or mitigate these risks, contribute by means of its powers to the resilience of the financial system and the maintenance of financial stability.

Risks to financial stability and their indicators – December 2018 is the second issue of this document, which the CNB will publish in December every year. It is based on an update of Financial Stability Report 2017/2018, which was published in June 2018. The update was a source document for the Bank Board’s meeting on financial stability issues held on 29 November 2018.

The countercyclical capital buffer is set in the Czech Republic by the Czech National Bank on a quarterly basis in a document titled Provision of a general nature on setting the countercyclical capital buffer rate. It is intended to protect the banking sector against risks arising from its behaviour over the financial cycle, in particular excessive growth in lending, which contributes to the build-up of systemic risks and increases the potential for sharp fluctuations in economic activity.

• More information about the countercyclical capital buffer on the CNB website
• Information about the setting of the countercyclical capital buffer in other European countries on the website of the European Systemic Risk Board (external link)