of 8 December 2016
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 January 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 89.5%2 and its deviation from the long-term trend 0.9 percentage point in 2016 Q2. 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 1990s3 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,4 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 -9.3 percentage points in 2016 Q2 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 deviations5 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 assessment of credit dynamics is based 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 Q3, the annual growth rate of bank loans to non-financial corporations was 5.9% and that to households was 6.9%, the highest absolute year-on-year increases since 2009 Q2. The annual growth rate of new bank loans stood at 16.6% for households and 12.8% for non-financial corporations in September 2016. For both households and non-financial corporations, these levels are above the five-year average, which is 13.7% and 0.1% respectively. As regards the volume of new loans, a long-running increase has been observed for loans to households for house purchase, but the volume of consumer credit has also risen over recent quarters. The evolution of genuinely new loans (net of refinanced and refixed loans) has also been in line with that of new loans. In September 2016, the biggest year-on-year increases were recorded for consumer credit (25.8%) and to a lesser extent for loans for house purchase (17.7%). As regards non-financial corporations, the year-on-year growth in genuinely new loans (14.9%) was due mainly to financial and investment loans, while operating loans acted in the opposite direction.
- 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 so far 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 strongly in the household sector. The contribution of new loans to households to the aggregate FCI was close to an all-time high during 2016 Q2 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 Q2, the sector’s rate of borrowing (relative to surpluses generated) is at 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 7.6% in 2016 Q2 and is significantly above the ten-year average (4.5%). Credit standards are also having a procyclical effect. They have been easing in most of the sector since 2014, although the most recent survey points to a slight slowdown in the current trend.6
- Overall, the assessment of the above indicators is that the Czech economy has shifted further into 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 are fostering 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. As there have been changes in cyclical risks indicating only partial growth 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 January 2018 (see statement II).
This Provision shall take effect on 12 December 2016.
Financial Stability Department
This Provision of a General Nature was published on 12 December 2016.
1 Recommendation of the European Systemic Risk Board of 18 June 2014 on guidance for setting countercyclical buffer rates (ESRB/2014/1).
2Owing to a revision of the quarterly financial accounts time series due to a switch to the ESA 2010 methodology and the new BPM6 balance of payments manual, the initial volume of total loans to the private sector increased by about CZK 500 billion. The main reason is different reporting of cross-border loans (net vs gross reporting). The credit-to-GDP ratio increased by around 13 percentage points in 2016 Q2 as a result of the change in methodology. A comparable increase occurred across the entire time series.
3A 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.
4 Recommendation B(1).
5 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.
6 CNB (2016): Bank Lending Survey, October 2016.