CNB leaves binding mortgage limits except for DSTI unchanged and lowers countercyclical capital buffer rate to 2.25%

  • The CNB Bank Board left the upper limit on the LTV ratio at 80%/90% and that on the DTI ratio at 8.5/9.5.
  • The Bank Board deactivated the upper limit on the DSTI ratio with effect from 1 July 2023.
  • Apartment selling prices in the Czech Republic declined on average but were nonetheless 57% higher at the end of 2023 Q1 than the level consistent with the income of the median household buying owner-occupied housing. From the perspective of buy-to-let property, the estimated overvaluation was approximately 23%.
  • The Bank Board also decided today to lower the countercyclical capital buffer rate by 25 basis points to 2.25%; banks will be required to maintain the buffer at this level from 1 July 2023.
  • The Czech financial sector remains highly resilient to adverse economic developments.
  • The banking sector has enough capital and liquidity to withstand shocks even in the event of longer-lasting economic problems.

The Bank Board of the Czech National Bank today discussed Financial Stability Report – Spring 2023, which assesses the soundness of the domestic financial sector and its resilience to adverse shocks. This document formed the foundation for the Bank Board for configuring macroprudential policy, the main instruments of which are capital buffers of banks and upper limits on credit ratios for the provision of consumer credit secured by residential property.

The CNB Bank Board today decided to leave the upper limits on the LTV and DTI ratios unchanged and deactivated the DSTI limit. The decision is based on an assessment of current and expected systemic risks in the area of loans for house purchase and the property market, the vulnerability of the banking sector and households, and other factors affecting the resilience of the two sectors.

"At a time when we are fighting elevated inflation, it is essential to keep mortgage-lending conditions tight. At higher interest rates, however, the DSTI limit is not necessary,” said CNB Governor Aleš Michl.

In view of the persisting overvaluation of residential property prices, the upper limit on the LTV ratio remains in effect at 80% of the value of the property and the DTI limit at 8.5 times net annual income (or 90% and 9.5 respectively for applicants under 36 years).

In the case of the deactivated limit on the DSTI, a cap of 45% (or 50%) of the applicant’s net monthly income had been in effect since 1 April 2022.

The banking sector remains resilient

Financial Stability Report – Spring 2023 also contains the results of stress tests of all segments of the financial sector. The results confirm that those segments are able to withstand highly adverse developments.

“The banking sector has long been in good shape. Although credit portfolio quality remains a risk going forward, its gradual deterioration observed last year came to a halt at the start of this year. That is a positive signal. Credit losses remain subdued and the CNB is therefore paying great attention to whether they are captured in banks’ financial results in a timely and conservative way,” said Libor Holub, Executive Director of the CNB’s Financial Stability Department.

“The stress test results showed that the banking sector as a whole would comply with the capital requirements in both the Baseline Scenario and the hypothetical Adverse Scenario,” he added.

The results of the stress tests of other parts of the financial sector, households, non-financial corporations and public finances confirmed the stability of the financial system.

The Bank Board also decided today to lower the countercyclical capital buffer rate to 2.25%; banks will be required to maintain the buffer at this level from 1 July 2023. In this decision, it took into account the position of the economy in the downward phase of the financial cycle, the extent of previously accepted cyclical risks in the banking sector’s balance sheet, and the current level of economic and geopolitical uncertainties.

“The Bank Board is ready to lower the buffer rate gradually further if we see a continuation of the trend of cyclical risks naturally fading out of the banking sector’s balance sheet. Should the scenario of a significant deterioration of the domestic economic situation and the occurrence of unexpected credit losses in the domestic banking sector materialise, the Bank Board is even ready to fully release the buffer. That would enable banks to cover their losses and ensure sufficient capital capacity for lending to the real economy,” emphasised CNB Bank Board member Karina Kubelková.

The CNB will publish the full Financial Stability Report – Spring 2023 on 19 June 2023. The minutes of today’s Bank Board meeting on financial stability issues, including the votes cast by the individual Bank Board members on macroprudential policy measures and also attributed arguments, will be published the same day.

Petra Krmelová
Director of the Communications Division and CNB Spokesperson

Notes for journalists:

Financial stability has been a key objective of the Czech National Bank alongside price stability since 2013.

The CNB Bank Board discusses financial stability issues twice a year – in the spring in May or June, and in the autumn in November or December. The aim of this report is to identify the risks to the financial stability of the Czech Republic in the near future on the basis of previous and expected developments in the real economy and the financial system.

The main macroprudential policy tools applied in the Czech Republic are the countercyclical capital buffer (CCyB), the capital conservation buffer (CCoB) set for all banks, the capital buffer for other systemically important institutions (O-SIIs) set for systemically important banks, the upper limits on the LTV, DTI and DSTI credit ratios set for all mortgage lenders, and the Recommendation on the management of risks associated with the provision of consumer credit secured by residential property.

Countercyclical capital buffer (CCyB) – this instrument is aimed at increasing the resilience of the banking sector to risks associated with fluctuations in lending activity. The CCyB should enable banks to lend to households and firms even at a time of recession or financial instability.

Combined capital buffer – the sum of the capital conservation buffer (CCoB), the countercyclical capital buffer (CCyB), the systemic risk buffer and the capital buffer for other systemically important institutions.

LTV (loan-to-value) – the ratio of the value of a mortgage loan to the value of collateral.

DTI (debt-to-income) – the ratio of the applicant’s total debt to their net annual income.

DSTI (debt-service-to-income) – the ratio of the sum of an applicant’s monthly repayments to their net monthly income.

Maintaining financial stability is defined in the Act on the CNB as one of the CNB’s primary objectives. The Act requires the CNB to 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, to contribute by means of its powers to the resilience of the financial system and the maintenance of financial stability.

The CNB long sought the statutory power to set upper limits on the LTV, DTI and DSTI ratios. It was granted this power in the second half of 2021 through an amendment to the Act on the CNB. Compliance with the limits must be legally binding in order to ensure a level playing field on the market.