of 16 March 2017
Pursuant to Article 12o(5) of Act No. 21/1992 Coll., on Banks, as amended by Act No. 375/2015 Coll., (hereinafter referred to as the “Act on Banks”), Article 8al(5) of Act No. 87/1995 Coll., on Credit Unions and Certain Related Measures and on the Amendment of Czech National Council Act No. 586/1992 Coll., on Income Taxes, as amended, as amended by Act No. 375/2015 Coll. (hereinafter referred to as the “Act on Credit Unions”) and Article 9al(5) of Act No. 256/2004 Coll., on Capital Market Undertakings, as amended by Act No. 375/2015 Coll. (hereinafter referred to as the “Capital Market Undertakings Act”), the Czech National Bank as a competent administrative body hereby issues the following provision of a general nature:
I. Pursuant to Article 12o(3) of the Act on Banks, Article 8al(3) of the Act on Credit Unions and Article 9al(3) of the Capital Market Undertakings Act, the countercyclical capital buffer rate for the Czech Republic shall be set at 0.5% of the total risk exposure amount pursuant to Article 92(3) of Regulation (EU) No. 575/2013 of the European Parliament and of the Council.
II. Banks, credit unions and investment firms pursuant to Article 9aj(1) of the Capital Market Undertakings Act shall apply the rate referred to in point I for the purposes of calculating the combined buffer requirement as from 1 April 2018.
- Pursuant to Article 12o(3) of the Act on Banks, Article 8al(3) of the Act on Credit Unions and Article 9al(3) of the Capital Market Undertakings Act, the Czech National Bank shall set the countercyclical capital buffer rate for the Czech Republic, taking into account the countercyclical capital buffer guide calculated pursuant to Article 12o(1) and (2) of the Act on Banks, Article 8al(1) and (2) of the Act on Credit Unions and Article 9al(1) and (2) of the Capital Market Undertakings Act, the recommendations issued by the European Systemic Risk Board (ESRB) and any indicators that can identify growth in systemic risk.
- Pursuant to Article 12o(1) of the Act on Banks, Article 8al(1) of the Act on Credit Unions and Article 9al(1) of the Capital Market Undertakings Act, the calculation of the buffer guide is based on the deviation of the credit-to-GDP ratio from its long-term trend – the credit-to-GDP gap. In accordance with the ESRB Recommendation,1 total credit means the value of all loans provided to the private sector (non-financial corporations, households and non-profit institutions serving households) plus the volume of bonds issued by the domestic private sector. The time series of 1995–2016 and – in accordance with the ESRB Recommendation – the Hodrick-Prescott filter with a smoothing parameter (λ) of 400,000 were used to calculate the long-term trend of the credit-to-GDP ratio. The standardised credit-to-GDP ratio was 90.3% and its deviation from the long-term trend 1.5 percentage points in 2016 Q3. If additional factors were not taken into account, these values would imply setting the benchmark countercyclical capital buffer rate pursuant to Article 12o(1) of the Act on Banks, Article 8al(1) of the Act on Credit Unions and Article 9al(1) of the Capital Market Undertakings Act at zero.
- Pursuant to Article 12o(2) of the Act on Banks, Article 8al(2) of the Act on Credit Unions and Article 9al(2) of the Capital Market Undertakings Act, when calculating the countercyclical capital buffer guide the Czech National Bank shall take into account in particular the credit cycle and growth in loans provided in the Czech Republic, changes in the credit-to-GDP ratio, the specificities of the Czech national economy and the recommendations issued by the ESRB.
- The specific features of the Czech economy include the limited length of the time series of the credit-to-GDP ratio, structural (non-cyclical) breaks caused by the banking crisis in the late 1990s2 and trends typical of converging economies. In reaction to the ESRB recommendation, the Czech National Bank has repeatedly emphasised in its publications (particularly the Financial Stability Report) that the method of calculation of the deviation of the credit-to-GDP ratio from its long-term trend is not entirely appropriate for the Czech economy in view of its specificities, and so the decision on the rate cannot be based fully upon it. For this reason, when setting the countercyclical capital buffer rate the Czech National Bank prefers to apply an approach encompassing a wider set of indicators and taking account of the specific features of converging economies.
- In accordance with the ESRB recommendation,3 the Czech National Bank therefore calculates the additional deviation of the credit-to-GDP ratio from its long-term trend based on a shorter time series which does not include periods with write-offs of non-performing loans (i.e. on the time series starting in 2004). The deviation from the trend calculated in this way was -8.1 percentage points in 2016 Q3 and implies a zero countercyclical capital buffer rate. As the countercyclical capital buffer is an instrument focused on banking sector resilience, the Czech National Bank deems it necessary also to monitor indicators aimed only at the ratio of bank loans to GDP. Two of the three calculated deviations4 based on bank loans imply a non-zero countercyclical buffer rate. The picture presented by all the types of indicators mentioned in the paragraphs above is largely affected by the acceleration of nominal GDP growth recorded in the last two years. Given the opposite signals sent out by the credit-to-GDP ratio, the CNB deems it necessary to base the overall assessment of credit dynamics on a broader range of indicators capturing shifts of the economy in the financial cycle and changes in the level of systemic risk.
- Credit growth is an important guide for setting the countercyclical capital buffer. The situation on the Czech bank loan market is characterised by increased activity, and credit growth is accelerating further in specific segments of the financial system. In 2016 Q4, the annual growth rate of bank loans to non-financial corporations was 6.0% and that to households was 7.3%, the highest absolute year-on-year increases since 2009 Q2. The annual growth rate of new bank loans to non-financial corporations (as measured by the three-month moving average) stood at -7.6% in 2016 Q4. Data on genuinely new loans to non-financial corporations show that the negative growth was due mainly to a drop in short-term operating loans (‑49.7%), while long-term investment loans continued to rise (12.3%). By contrast, households recorded a year-on-year increase in new bank loans (as measured by the three-month moving average) of 22.0%, which is significantly above the ten-year average. Very high lending activity is being observed for household loans secured by residential property. Genuinely new loans (net of refixed and refinanced loans) in this segment grew by 24.1% year on year in 2016 Q4. Growth in genuinely new consumer credit also increased (to 15.2% in 2016 Q4).
- To assess the current position in the financial cycle, the Czech National Bank uses an aggregate financial cycle indicator (FCI) combining signals about the evolution of cyclical risks from various segments of the economy. The aggregate FCI increased gradually after bottoming out in 2010 and has accelerated significantly since 2015 Q1. The reasons for the faster rise in the aggregate indicator include a recovery in components characterised by moderate activity as well as an increase in the correlation between the individual components. This points to rising interconnectedness of supply and demand factors and a possibility of feedback emerging between them. Cyclical risks are increasing particularly in the household sector. The contribution of new loans to households to the aggregate FCI was close to an all-time high during 2016 Q3 and the speed of borrowing (relative to income) has been rising continuously since the end of 2014. Despite a lower volume of new loans to non-financial corporations in 2016 Q3, the sector’s rate of borrowing (relative to surpluses generated) is now above the level of the ten-year average. The intensifying growth in cyclical risks is also being fostered by residential property prices, whose annual growth rate reached 7.8% in 2016 Q3 and is significantly above the ten-year average (4.5%). Credit standards for loans to households for house purchase and consumption tightened across the board due to legislative and regulatory changes, while those for loans to non-financial corporations eased further.5
- Overall, the assessment of the above indicators is that the Czech economy is in the growth phase of the financial cycle. This is characterised by rapid growth in loans in a number of credit segments. In particular, the strong growth in loans to households is increasing the vulnerability of the sector to sudden economic swings. The credit market conditions continue to foster growth in prices of residential and commercial property above levels consistent with fundamental factors. These developments imply a need to create a countercyclical capital buffer. Although there have been changes in cyclical risks indicating a moderate increase in systemic risk since the last increase in the countercyclical buffer rate, the CNB is leaving the countercyclical capital buffer rate for exposures located in the Czech Republic at the current level of 0.5% for the time being. However, if credit growth remains high, credit standards ease further and systemic risk continues to grow, the CNB will stand ready to increase this buffer rate further.
- The institutions shall apply this rate as from 1 April 2018 (see statement II).
This Provision shall take effect on 24 March 2017.
Financial Stability Department
This Provision of a General Nature was published on 24 March 2017.
1 Recommendation of the European Systemic Risk Board of 18 June 2014 on guidance for setting countercyclical buffer rates (ESRB/2014/1).
2 A decrease in the stock of credit in the late 1990s and early 2000s, due to write-offs of non-performing loans from banks’ balance sheets, had a significant effect on the estimate of the long-term trend of the credit-to-GDP ratio used for the calculation of the buffer guide.
3 Recommendation B(1).
4 Two of them are based on the ESRB methodology and the third – the expansionary credit gap – is introduced in more detail in Financial Stability Report 2015/2016, p. 83.
5 CNB (2017): Bank Lending Survey, January 2017.