Provision of a general nature I/2021

of 4 March 2021

on setting the countercyclical capital buffer rate for the Czech Republic No. I/2021

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”) and 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”), 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 and Article 8al(3) of the Act on Credit Unions, the countercyclical capital buffer rate for the Czech Republic shall be set at 0.50% 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 and credit unions shall apply the rate referred to in point I for the purposes of calculating the combined buffer requirement as from 1 April 2022.

Justification

1. Pursuant to Article 12o(3) of the Act on Banks and Article 8al(3) of the Act on Credit Unions, 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 and Article 8al(1) and (2) of the Act on Credit Unions, 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 91.0% and the relevant deviation from the long-term trend -1.6 percentage points in 2020 Q3.^[1] This value pursuant to Article 12o(1) of the Act on Banks and Article 8al(1) of the Act on Credit Unions corresponds to a benchmark countercyclical capital buffer rate of 0%. The additional gap,^[2] which is based on the ESRB Recommendation (section B, Article 2) and better reflects the specificities of the Czech economy, was 3.2 percentage points in 2020 Q3 and implies a benchmark rate of 0.75%.
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 determining the position of the domestic economy in the financial cycle and 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 and Article 8al(3) of the Act on Credit Unions.^[3]
4. The financial cycle indicator increased in 2020 Q3 in both year-on-year and quarter-on-quarter terms. This increase was due to record volumes of new housing loans provided to households and related rapid growth in residential property prices, which may generate new risks in the banking sector’s balance sheets. Conversely, a gradual slowdown in credit growth was observed during the year for consumer credit provided to households and loans to non-financial corporations.^[4] Due to the flexible adjustment of part of the economy to the current anti-epidemic measures and the implementation of support programmes, there has been no large-scale materialisation of previously accepted credit risks so far. Nonetheless, the ongoing economic decline was reflected in an increase in the expected losses of banks, as evidenced by a rising cost of risk and growth in the ratio of client loans provisions to total client loans. Cyclically low risk weights on bank loan portfolios under the IRB approach, which can be expected to return to higher levels in reaction to an economic downturn, albeit more slowly than other economic indicators,^[5] also remain a source of systemic risk. A return of risk weights to the levels observed at the start of the strongly expansionary phase of the financial cycle^[6] would increase the absolute capital requirement and decrease the capital ratio. The estimate of the size of unexpected credit losses along with the potential rise in risk weights implies an additional capital requirement of around CZK 55 billion, which would be fully covered by a buffer rate of 2.25%. This estimate may be overvalued, as it is affected by factors other than purely cyclical ones.^[7] Nonetheless, it confirms the necessity to continue to create a CCyB and indicates the need for a gradual return of the CCyB rate to the level covering the usual level of risks (considered by the CNB to be 1%). This approach is in line with the CNB Bank Board’s previous communication of June 2020, according to which the CCyB rate was unlikely to be increased over the next 12 months (i.e. until June 2021) due to the economic impacts of the coronavirus crisis.
5. Based on the above assessment, the CNB Bank Board has decided to set the countercyclical capital buffer rate at 0.50%. Given the relatively slow build-up of new risks in the banking sector’s balance sheet, and given continuing limited materialisation of risks taken on in the past, the CNB Bank Board expects a gradual rise in the CCyB rate to the level covering the usual level of risks. The timing of this step will depend on clear signals of an economy recovery. By contrast, should the economic situation worsen, the CNB remains ready to release the buffer immediately and fully, in order to support banks’ ability to provide credit to non-financial corporations and households without interruption. The decisive signal for such a step would be cyclical risks accepted earlier materialising via credit losses and an increase in risk weights for IRB loan portfolios.
6. Pursuant to Article 12x(1) of the Act on Bank and Article 8au(1) of the Act on Credit Unions, this provision of a general nature is announced only in a manner facilitating remote access and takes effect on the day of its publication.

Effect

This Provision shall take effect on 5 March 2021.

This provision of a general nature was published on 5 March 2021.

^[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 Q1–2020 Q3 and the Hodrick-Prescott filter with a smoothing parameter (?) 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 methodological framework of the Czech National Bank for setting the countercyclical buffer rate is presented in the document The CNB’s approach to setting the countercyclical capital buffer.

^[4] The annual growth rates of bank loans provided to households for house purchase and for consumption were 8.0% and 0.8% respectively in December 2020. Bank loans to non-financial corporations increased by 0.3% year on year in December 2020.

^[5] Cyclical factors are not the only factors affecting risk weights, so the latter may not always solely reflect the latest economic developments. This applies particularly to changes in banks’ models for deriving risk weights or to regulatory changes.

^[6] According to the CNB’s estimate, the Czech economy entered the last strongly expansionary phase of the financial cycle in 2015 H2.

^[7] For example, regulatory changes concerning the calculation of capital requirements (implicit risk weights).