Minutes of the CNB Bank Board meeting on financial stability issues on 14 September 2023

Present at the meeting: Aleš Michl, Eva Zamrazilová, Jan Frait, 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 low. Based on its conditional projections, the Department expected the economy to stay close to the bottom of the financial cycle over the next few quarters. The accumulated cyclical systemic risks taken on during the preceding expansionary phase of the financial cycle were meanwhile slowly receding from banks’ balance sheets. This was reflected in a gradual decline in the estimated capital needed to cover unexpected credit losses and the potential growth in risk weights on credit exposures. The Department therefore recommended lowering the rate by 25 bp to 2%.

The board members agreed that, against the background of the economy switching to a significantly subdued phase of the financial cycle, credit losses were not materialising and that reducing the rate was consistent with the gradual decline in the accumulated cyclical systemic risks in banks’ balance sheets.

Karina Kubelková welcomed the refinements made to the methodological approaches used by the Department to determine the buffer rate and the fact that the results of quantitative methods were consistent with the Department’s proposal. Based on the Department’s recommendation, and having discussed the matter with the Supervision Department, she supported the proposed rate reduction. Jan Procházka viewed a rate cut as an appropriate response in a situation where the financial cycle was close to a trough and the cyclical risks were gradually decreasing without credit losses materialising significantly. He also mentioned the effect of restrictive monetary policy, which would probably continue to depress the financial cycle next year, thus creating enough time for the buffer to be increased if necessary. Jan Kubíček agreed with the proposal and discussed the reasons for growth in loans with elevated credit risk. Tomáš Holub considered a rate reduction to be a logical consequence of the position of the economy in the financial cycle, which he saw as key to determining the buffer rate. He noted the historically low level of the financial cycle indicator and the distance of the current buffer rate from the standard rate. In this context, he saw room for reducing the rate further in the future if the financial cycle were to remain subdued. He also drew attention to the complex nature of the factors affecting risk weights, which were currently a significant component in determining the rate using quantitative methods. In his opinion, the present relatively low risk weight level was not necessarily linked entirely with the past expansionary phase of the financial cycle but might also suggest an upward trend in loan portfolio quality. Eva Zamrazilová regarded the arguments made by the Department as convincing and discussed the possible risks to the property development sector signalled by a number of market participants. Jan Frait mentioned the absence of credit losses amid slowing economic activity. In his view, this contradicted the observed historical relationships, and he was convinced that credit losses could materialise later on. However, the banking sector was prepared for any losses, as he regarded the present capitalisation and profitability as conducive to the sector’s stability. He therefore saw a need to take the receding cyclical systemic risks into account and was in favour of the proposed rate cut. At the same time, in response to the persisting geopolitical risks and the related economic and financial risks, he pointed to the need to discuss the approach to setting the standard buffer rate at future meetings on financial stability.

After the discussion, all the board members present voted to lower the CCyB rate for exposures located in the Czech Republic by 25 bp to 2% with effect from 1 October 2023.

Author of the minutes: Milan Szabo, Financial Stability Department