CNB to reintroduce LTV, DTI and DSTI limits on mortgage loans and increase countercyclical capital buffer rate to 2%
- On the basis of new statutory powers, the CNB Bank Board has decided to set limits on credit ratios for the provision of mortgage loans.
- With effect from 1 April 2022, mortgage lenders will again be required to comply with DTI and DSTI limits.
- The limit on the DTI (debt-to-income) ratio will be 8.5 (9.5 for applicants under 36 years).
- The limit on the DSTI (debt service-to-income) ratio will be 45% (50% for applicants under 36 years).
- The CNB is lowering the upper limit on the LTV (loan-to-value) ratio to 80% (90% for applicants under 36 years).
- These measures take into account the across-the-board easing of credit standards by banks and the increasing overvaluation of apartment prices in the Czech Republic, which, by the CNB’s estimation, reached almost 25% – and for investment apartments more than 30% – in the second quarter of 2021.
- However, lenders may apply an exemption not exceeding 5% of the total volume of mortgage loans provided in the previous quarter to specific cases in the current calendar quarter.
- The CNB Bank Board also decided to increase the countercyclical capital buffer (CCyB) rate by 0.5 percentage point to 2% with effect from 1 January 2023.
- The Czech financial sector maintained high resilience to adverse shocks in 2021. The level of uncertainty regarding the future course of the pandemic and the economy remains high and requires great prudence in the management of balance sheets, risks and capital and in dividend policies.
The Bank Board of the Czech National Bank today discussed the autumn update of Financial Stability Report 2020/2021, which assesses the soundness of the Czech financial sector and its resilience to adverse shocks. The update formed the foundation for configuring macroprudential policy, the main instruments of which are the countercyclical capital buffer of banks and limits on mortgage lending ratios.
Following an assessment of financial cycle indicators, banking sector vulnerability and other factors affecting resilience, the CNB Bank Board decided to reintroduce upper limits on the DTI and DSTI ratios for mortgage loans. These limits applied until spring 2020, before the economy was hit by the coronavirus crisis. The Bank Board also changed the LTV limit.
With effect from 1 April 2022, banks will not be allowed to provide loans with an LTV of more than 80%, i.e. with a loan amount exceeding 80% of the value of the pledged property (90% for applicants under 36 years). At the same time, banks will be required to comply with upper limits on the DTI (debt-to-income) ratio of 8.5 and on the DSTI (debt service-to-income) ratio of 45% (9.5 and 50% respectively for applicants under 36 years). The limits for applicants under 36 years apply only to loans for the purchase of owner-occupied housing). All the limits have been set in accordance with the amended Act on the CNB, which since August 2021 authorises the central bank to set binding limits on the three ratios.
“In the course of this year, the banking sector as a whole has returned to highly relaxed mortgage lending standards. We last saw such relaxed standards in 2018 before limits on the income ratios were first introduced. In view of this fact and the persisting overvaluation of housing prices, we consider it necessary to set tighter parameters for mortgage lending, that is, to set limits on the LTV, DTI and DSTI ratios at levels similar to those seen before the onset of the pandemic. The aim is to prevent the vulnerability of the banking sector from rising,” said CNB Governor Jiří Rusnok.
The new legislation states that 5% of newly provided mortgages need not comply with the recommended DTI and DSTI limits if the mortgage lender is convinced that the applicant will repay the loan without problems in the future.
“The provision of loans with very high DTI and DSTI levels was not observed in all banks. However, there was a risk that the currently more cautious banks would react to a potential loss of their market share by easing standards like their more aggressive competitors,” said Jan Frait Executive Director of the CNB’s Financial Stability Department.
Since 2015, the CNB has been applying a set of rules in the form of a Recommendation to mitigate risks associated with mortgage lending. The LTV, DSTI and DTI mortgage ratios are the most visible part of these rules. In 2021, the Czech Parliament approved an amendment to the Act on the CNB allowing the CNB to set binding upper limits on these credit ratios for all mortgage lenders. The CNB is now making use of this authorisation for the first time. The specific levels of the upper limits on the credit ratios will be set in a provision of a general nature with effect from 1 April 2022. The CNB will continue to use the Recommendation to set certain conditions related to mortgage lending which are not governed by the Act on the CNB, such as maximum loan maturity and testing of whether applicants are able to withstand a rise in interest rates of 2 percentage points.
According to the CNB, the Czech economy is now in an expansionary phase of the financial cycle. Potentially significant risks entered banks’ balance sheets during 2021, primarily through new loans for house purchase. At the same time, banks’ balance sheets still contain risks taken on in previous years which might have materialised already had it not been for the economic policies adopted during the pandemic. Growth in costs (such as the sharp rise in energy prices) in the private non-financial sector has increased the likelihood of these risks materialising in the near future, as stated in the update of the Financial Stability Report discussed today.
The CNB is also increasing the countercyclical capital buffer (CCyB) rate by 0.5 percentage point to 2% with effect from 1 January 2023. The postponed effect of this step gives the CNB room to take a flexible approach should adverse shocks arise unexpectedly. In the event of a further acceleration of credit growth in the private non-financial sector, increased taking on of risks in the banking sector’s balance sheet, and rising vulnerability of the banking sector, the Bank Board is ready to increase this rate further. By contrast, should the economic situation worsen substantially and risks materialise, it is ready to gradually lower the CCyB rate or release the buffer fully.
“This increase takes the countercyclical capital buffer rate back to the level applied before the onset of the pandemic. It is our reaction to the fact that banks’ balance sheets contain quite large numbers of loans that could prove loss-making over time,” explained Governor Rusnok.
The CNB will publish the full Risks to financial stability and their indicators report on 10 December 2021. The minutes of today’s Bank Board meeting on financial stability issues will be published the same day.
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, and in the autumn in November. 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, 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 (SRB) 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.