Provision of a general nature IV/2017
on setting the countercyclical capital buffer rate for the Czech Republic No. IV/2017
of 6 December 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 1.25% 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 2019.
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 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 and the recommendations issued by the European Systemic Risk Board (ESRB).
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 89.2% and the relevant deviation from the long-term trend -0.4 percentage point in 2017 Q2.1 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 (CCyB) rate of 0%. The additional gap2, which is calculated in accordance with the ESRB Recommendation (section B, Article 2) and better reflects the specificities of the Czech economy, was 3.3 percentage points in 2017 Q2 and implies a benchmark rate of 0.5%.
In reaction to the ESRB recommendation, the Czech National Bank 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
The upward movement of the domestic economy in the growth phase of the financial cycle has slowed somewhat, but the economy is still moving upwards. Rapid growth in loans can still be observed in a number of credit segments.4 Real interest rates on new loans for house purchase (accounting for wage inflation) are significantly more negative. This is being reflected in household optimism about how easy these loans will be to repay and is contributing to growth in residential property prices above levels consistent with fundamentals. Conditions for the development of a spiral between property prices and property purchase loans persist further. The growth rate of loans to non-financial corporations has fallen slightly, but expected growth in corporate demand for loans will contribute to an increase rather than a further decrease in their rate of growth. Strong credit growth persists in certain sectors, including firms in the property segment. In view of the high concentration of loans in this segment, debt financing of property purchases is a source of increasing systemic risks. This is being reflected in growing potential for sharp swings in economic activity in the future. The cost of risk is currently at a very low level that is unsustainable from the long-term perspective. The risk mark-ups in interest rate margins, and also provisioning, are very low relative to the interest income generated by the banking sector. The observed decline in risk weights is also fostering greater vulnerability. These developments imply 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, require a reaction in the form of an increase in the buffer rate.
In line with the above assessment, the CNB Bank Board has decided to set the countercyclical capital buffer rate at 1.25%. The CNB stands ready to increase the CCyB rate further in the event of continued rapid credit growth, increasing risks connected with property purchase financing, a strengthening of other cyclical sources of systemic risk and a rise in the vulnerability of the banking sector.
This Provision shall take effect on 18 December 2017.
Financial Stability Department
This Provision of a General Nature was published on 18 December 2017.
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 Q1–2017 Q2 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 Czech National Bank 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 annual growth rates of bank loans provided to households for house purchase and consumer credit were 9.3% and 4.0% respectively in September 2017. Loans to non-financial corporations increased by 4.4% year on year in September 2017.