12. 6. 2018

Provision of a general nature II/2018

on setting the countercyclical capital buffer rate for the Czech Republic No. II/2018

of 17 May 2018

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:

  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 countercyclical capital buffer rate for the Czech Republic shall be set at 1.50% 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. 
  2. 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 2019.

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 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 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 89.6% and the relevant deviation from the long-term trend -1.3 percentage point in 2017 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 (CCyB) 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 1.8 percentage points in 2017 Q4 and also implies a benchmark rate of 0%.
  3. 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]
  4. According to the CNB’s assessment, the Czech economy remains in a growth phase of the financial cycle. However, its upward movement in the growth phase has slowed. Credit growth in the household sector remains strong and is fluctuating above its medium-term and long-term average, while growth in the non-financial corporations sector has slowed slightly and is below both its medium and long-term average.[4] Nevertheless, non-financial corporations are indicating growth in investment spending and loans for 2018, which should contribute to a renewed acceleration in credit growth in this sector. Optimistic expectations regarding income and future housing prices, negative real interest rates on new loans for house purchase (taking into account wage inflation) and an undersupply of new apartments in cities are being reflected in a rise in residential property prices. Their degree of overvaluation increased further during 2017.[5] Asset impairment losses are still very low in this environment. The risk mark-ups in interest rate margins are also low. However, risk perceptions and risk pricing by the banking sector in the growth phase of the financial and business cycle may be overly optimistic from the long-term perspective and imply an increased level of systemic risks and vulnerability of the sector. One of the implications of the switch to the IFRS 9 standard is now becoming an additional source of vulnerability. IFRS 9 is supposed to be beneficial to financial stability from the long-term perspective, because unlike the previous IAS 39 standard it creates conditions for early and sufficient provisioning against losses. However, the results of the current round of macro stress tests of banks support the view that IFRS 9 may have a significant procyclical effect in certain conditions. In the Adverse Scenario, the application of the expected credit loss concept under IFRS 9 leads to temporarily stronger impacts on capital than under the previously applied IAS 39 methodology. Following a sudden change in economic conditions leading to a marked reassessment of macroeconomic fundamentals, banks need to create a large amount of new provisions. This sharp increase may in turn cause sizeable losses and a fall in capital, and contribute to a credit crunch. 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 1.50%.[6] 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.

Effect

This Provision shall take effect on 12 June 2018.

Vladimír Tomšík
Vice-Governor

Jan Frait 
Executive Director, 
Financial Stability Department

This Provision of a General Nature was published on 12 June 2018.

[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 Q4 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 detailed approach of the Czech National Bank 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 annual growth rates of bank loans provided to households for house purchase and consumer credit were 8.6% and 4.6% respectively in March 2018. Loans to non-financial corporations increased by 2.5% year on year in March 2018.

[5] According to the CNB’s model-based approach, residential property was around 14% overvalued as of the end of 2017.

[6] Institutions shall apply a countercyclical capital buffer rate of 1.50% of the total risk exposure for the purposes of calculating the combined buffer requirement as from 1 January 2019. In line with the Provisions of a general nature issued earlier, institutions shall apply a countercyclical capital buffer rate of 1.0% from 1 July 2018 to 31 December 2018 and of 1.25% from 1 January 2019 to 30 June 2019. Institutions shall apply a rate of 0.5% for the purposes of calculating the combined capital buffer until 30 June 2018.