Provision of a general nature III/2017

on setting the countercyclical capital buffer rate for the Czech Republic No. III/2017

of 31 August 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 1.0% 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 October 2018.

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 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).
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 92.5% and the relevant deviation from the long-term trend 0.3 percentage points in 2017 Q1.¹ 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 gap², which is calculated in accordance with the ESRB Recommendation (section B, Article 2) and better reflects the specificities of the Czech economy, was 2.6 percentage points in 2017 Q1 and implies a benchmark rate of 0.25%.
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. Despite the decision to further increase the countercyclical buffer rate announced in the previous quarter, rapid growth in loans can be observed in a number of credit segments.⁴ The faster growth in loans is reflected in growth in property prices, which the CNB currently regards as being overvalued. The introduction of macroprudential measures aimed at mitigating risks relating to the residential property market did not significantly affect credit growth in this segment. Conditions for the development of a spiral between growth in property prices and growth in property purchase loans thus remain in place. High growth in loans to non-financial corporations operating in the real estate segment is increasing the vulnerability of the entire economy to adverse developments in this market. These developments point to an elevated level of systemic risks. This assessment implies a need to create a countercyclical capital buffer for exposures located in the Czech Republic. However, it is not necessary for the time being to respond to the recent developments by increasing the countercyclical capital buffer rate. Quantitative approaches to setting the rate based on financial cycle indicator values, the duration of the expansionary phase of the financial cycle and the results of a macro stress test of banks are also in line with this assessment.
5. The CNB stands ready to respond to continued high credit growth in an environment of eased credit standards and growth in systemic risks relating mainly to the credit financing of property purchases by raising the countercyclical capital buffer rate further.

Effect

This Provision shall take effect on 22 September 2017.

This Provision of a General Nature was published on 22 September 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 Q1 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 (containing all the factors taken into account when setting the countercyclical capital 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 9.6% and 4.7% respectively in June 2017. Loans to non-financial corporations increased by 5.8% year on year in June 2017.