Provision of a general nature II/2019

on setting the countercyclical capital buffer rate for the Czech Republic No. II/2019

of 11 June 2019

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 2.00% 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 July 2020.

Justification 

  1. 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 (hereinafter referred to as the “CNB”) 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 (hereinafter referred to as the “ESRB”) and indicators which may imply growth in systemic risk.
  2. 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. The credit-to-GDP ratio was 89.3% and the relevant deviation from the long-term trend -2.4 percentage points in 2018 Q4.[1] This value 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 corresponds to a benchmark countercyclical capital buffer rate of 0%. The additional gap,[2] which is calculated in accordance with the ESRB Recommendation (section B, Article 2) and better reflects the specificities of the Czech economy, was 1.4 percentage points in 2018 Q4 and implies a benchmark rate of 0%.
  3. In reaction to the ESRB recommendation, the CNB has repeatedly emphasised in its publications (particularly the Financial Stability Report) that it does not regard the size of the gaps referred to in paragraph 2 as a reliable guide for setting the rate. The CNB prefers an approach based on a comprehensive assessment of indicators identifying growth in systemic risks under 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.[3]
  4. The domestic economy moved further into the growth phase of the financial cycle in 2018. It thus entered the fourth year of the expansionary phase at the end of the year. This is evidenced by persisting strong credit growth and continued growth in the aggregate financial cycle indicator. Persisting favourable financial conditions accompanied by strong wage growth were a major factor fostering a further move. The very low perceived real costs of debt[4] have triggered household optimism about debt servicing and contributed to robust credit growth. Growth rates of key credit aggregates for both households and non-financial corporations remain above average in long-term comparison.[5] Amid insufficient supply of apartments in cities, the high volume of house purchase loans provided has resulted in rapid growth in residential property prices. According to the CNB’s analyses, the overvaluation of apartment prices was around 15% in 2018 Q4.[6] The increase in cyclical risks described above may potentially result in high credit losses in the future. The prudential estimate of unexpected credit losses in the current phase of the financial cycle is CZK 26 billion (around 1% of total risk exposure according to Article 92(3) of the CRR at the end of 2018). Favourable economic developments have been echoed in the perceptions and pricing of credit risks by the banking sector. The ratio of asset impairment losses to total loans was around zero at the end of 2018 and the ratio of provisions to total loans is steadily decreasing. The capital requirements and derived risk weights of loans to the private non-financial sector in banks with the IRB approach have decreased year on year due to favourable cyclical developments. Their return to the levels observed at the start of the expansionary phase of the financial cycle would mean an increase in the capital requirement in absolute terms of around CZK 24 billion (about 1% of total risk exposure according to Article 92(3) of the CRR at the end of 2018). This might mean on the aggregate level that the banking sector’s assessment of credit risk is over-optimistic and fails to take its actual level sufficiently into account across the financial cycle. If these conditions were to last for an extended period, they would lead to a sharp decline in the banking sector’s resilience. One of the implications of the switch to the IFRS 9 accounting standard also remains an additional source of vulnerability. IFRS 9 is supposed to be beneficial to financial stability from the long-term perspective. Unlike the previous IAS 39 standard, IFRS 9 creates conditions for early and sufficient loan loss provisioning. However, the results of the macro stress tests of banks published in Financial Stability Report 2017/2018 support the view that IFRS 9 may have a significant effect in the form of a rapid and sharp pass-through of an adverse situation to capital in certain conditions. The overall assessment of the position of the economy in the financial cycle taking account of banking sector vulnerability indicators implies a need to create a countercyclical capital buffer for exposures located in the Czech Republic and, in accordance with the purpose of the legislation governing this buffer, requires a reaction in the form of an increase in the buffer rate.
  5. Based on the above assessment, the CNB Bank Board has decided to set the countercyclical capital buffer rate at 2.00%.[7] Given that the domestic economy is probably close to the peak of the financial cycle, the likelihood of a further increase in the countercyclical buffer rate has decreased significantly. The CNB stands ready to lower or completely zero the rate in the event of a sudden turnaround in the financial cycle.

Effect

This Provision shall take effect on 11 June 2019.

Tomáš Nidetzký
 Deputy Governor
Jan Frait
Executive Director, Financial Stability Department

This provision of a general nature was published on 11 June 2019.


[1] In accordance with ESRB Recommendation 2014/1 (Recommendation of the European Systemic Risk Board of 18 June 2014 on guidance for setting countercyclical buffer rates), 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 Q1–2018 Q4 and the Hodrick-Prescott filter with a smoothing parameter (λ) of 400,000 are used to calculate the long-term trend of the credit-to-GDP ratio.

[2] The additional gap – the expansionary credit gap – is calculated as the difference between the current ratio of bank loans to gross value added of the private non-financial sector and the minimum level of this ratio achieved in the past eight quarters.

[3] The detailed approach of the CNB to setting the countercyclical buffer rate is presented in the thematic article Hájek J., Frait J. and Plašil M. (2017): The Countercyclical Capital Buffer in the Czech Republic, Financial Stability Report 2016/2017.

[4] The perceived real costs of debt are nominal client rates adjusted for annual wage growth.

[5] The annual growth rates of bank loans provided to households for house purchase and for consumption were 8.0% and 6.2% respectively in March 2019. Loans to non-financial corporations increased by 6.2% year on year in March 2019.

[6] The CNB uses two approaches to assess the overvaluation of residential property: macroprudential and valuation (for details see the thematic article on financial stability 1/2019).

[7] Institutions shall apply a countercyclical capital buffer rate of 2.00% of the total risk exposure for the purposes of calculating the combined buffer requirement as from 1 July 2020. In line with provisions of a general nature issued earlier, institutions shall apply a buffer rate of 1.75% from 1 January 2020 to 30 June 2020. In line with the provisions of a general nature issued earlier, institutions shall apply a countercyclical capital buffer rate of 1.50% from 1 July 2019 to 31 December 2019. Institutions shall apply a buffer rate of 1.25% for the purposes of calculating the combined buffer requirement until 30 June 2019.