Minutes of the CNB Bank Board meeting on financial stability issues on 28 November 2019
Present at the meeting: Jiří Rusnok, Marek Mora, Tomáš Nidetzký, Vojtěch Benda, Oldřich Dědek, Tomáš Holub, Aleš Michl.
The meeting opened with a presentation of an update of Financial Stability Report 2018/2019. It focused on financial cycle indicators, the assessment of systemic risks and the evaluation of compliance with the CNB Recommendation concerning the provision of mortgage loans. Following the opening presentation, the Bank Board discussed the setting of the countercyclical capital buffer (CCyB) rate, minor changes to macroprudential measures targeted at risks connected with mortgage lending, risks associated with the financing of commercial property and the list of other systemically important institutions.
The presentation by the Financial Stability Department on CCyB issues emphasised that, according to the aggregate Financial Cycle Indicator as well as other indicators, the domestic economy had been close to the peak of the financial cycle during 2019. Credit growth had slowed and the cyclical risks newly taken on in the domestic economy had shrunk slightly. In this situation, there was no need to increase the CCyB rate further. Thinking along these lines would become relevant again in the event of a renewed acceleration in credit growth, for example due to a decrease in mortgage interest rates, a renewed upward shift in the financial cycle or growth in the vulnerability of the banking sector. According to the results of the analyses presented, sources of vulnerability to a potential adverse change in conditions persisted in the banking sector. These included relatively low risk weights for house purchase loans and cyclically conditional low provisioning, which may not be sustainable in the longer term.
In the discussion that followed the presentation, the board members agreed that the domestic banking sector was exposed to cyclical risks, to which, however, the CNB had already reacted preventively by setting a 2% CCyB rate. There was also a consensus that the financial cycle was probably close to its peak and the cyclical risks were now no longer increasing. In such a situation, it was possible to refrain from indicating a possible future increase in the CCyB rate and to communicate an outlook according to which the current CCyB rate could be expected to stay unchanged for the near future. The potential effects of the level of the CCyB rate on the cost and availability of credit was also discussed. The board members agreed that, with their existing capital surpluses and favourable profitability outlook, banks had substantial lending capacity and the 2% CCyB rate did not constitute a barrier to the supply of credit.
The Bank Board also agreed that considerations of lowering the CCyB rate were unjustified at the moment, as the credit risks accumulated in past years remained in banks’ balance sheets. Nonetheless, it was essential to deal conceptually with the issue of reducing the CCyB and to communicate it transparently. There was therefore an in-depth discussion of the conditions under which the CNB would lower the CCyB rate and the extent to which it was possible to reduce or release the CCyB in a forward-looking manner. The Financial Stability Department preferred an asymmetric approach where the CCyB rate would be increased on the basis of forward-looking analyses during the upward phase of the financial cycle, whereas decisions to lower the CCyB rate would be largely backward-looking during the downward phase of the cycle. The key signal for commencing a CCyB rate-reducing cycle would be risk materialisation manifesting itself in increased credit losses. In support of this approach, it was said that an approach of this type was provided for by the relevant legislation, according to which the CCyB rate can be raised one year after the decision at the earliest, while a reduction becomes applicable immediately after the decision is made. Some of the board members emphasised the need to maintain discretion for decisions on lowering the CCyB rate, as many situations could arise in which it would not be possible to follow simple formulas.
The second part of the meeting focused on risks connected with the provision of mortgage loans and with the residential property market. According to the analyses presented, apartment price overvaluation had grown further in the first half of 2019 and currently stood at around 15%–20% according to both methods used by the CNB. Despite strong demand for housing as an alternative to investing in financial assets, growth in residential property prices would tend to weaken in the quarters ahead. This was also indicated by asking prices of apartments, whose growth had slowed. Genuinely new housing loans were lower than in previous years but had nonetheless been very stable since the spring. Most banks had continued to be broadly compliant with the currently applicable CNB Recommendation as regards LTV limits in the first half of 2019. Overall, however, the share of loans with LTVs of over 80% had exceeded 15% in June 2019, indicating that some providers had not been compliant with the CNB Recommendation. Lenders had adjusted to the DTI and DSTI limits with a lag and had become compliant with them in the first half of this year.
In the Bank Board’s discussion, it was said repeatedly that the fact that some banks were exceeding the 15% aggregate limit for loans with LTVs of over 80% confirmed the need to set limits on LTV and other credit ratios in a legally binding manner. The Bank Board agreed that given the aforementioned estimate of house price overvaluation, the present upper LTV limits could be regarded as satisfactory boundary values. In view of the slowing pace of growth of house prices, though, there was no need to reduce those limits for the time being. However, continued growth in house price overvaluation could necessitate a reassessment of the sufficiency of the current limits. The fact that banks had restricted the provision of loans simultaneously exceeding the limits on all three credit ratios monitored (LTV, DTI and DSTI) and had reflected the higher riskiness of some loans in their interest rates on those loans to a greater extent than in the past, was identified as positive. There was a consensus that it was not relevant to discuss possibly raising the DSTI limit at the moment given the decline in mortgage interest rates this year.
The Bank Board discussed in detail the riskiness of mortgage loans that can be used to purchase housing as an investment. The discussion was prompted by the finding that new mortgage loans provided to clients who already have a mortgage loan account for almost a third of the total. It was said repeatedly that it was not desirable to apply across-the-board restrictions to such loans, as they were used for various purposes and many of them were not necessarily of an investment nature. The Bank Board agreed to an amendment of the CNB Recommendation under which lenders would now have to monitor loans for the purchase of additional residential property (loans provided to clients who already have one or more mortgage loans when submitting the application and for whom the expected rental income is not included in net income) in addition to loans for the purchase of buy-to-let residential property (loans where expected income from renting out the residential property is included in net income for the assessment of the DTI and DSTI ratios). They should also use all available information to assess the purpose of such loans. They should act with increased caution where they find that a loan is in all probability of an investment nature.
The Bank Board agreed to a clarification of the definition of “higher risk level of indicators of the client’s ability to service the loan from their own resources” in respect of loans for the purchase of buy-to-let residential property. The Bank Board decided that values exceeding 9 for the DTI ratio or 45% for the DSTI ratio would now be defined as signs of a higher risk level. The upper LTV limit remains at 60% in these cases. The Bank Board also supported the incorporation into the CNB Recommendation of a provision allowing compliance with exemptions at the lender group level. Other potential adjustments to the CNB Recommendation would be discussed at the next Bank Board meeting on financial stability issues on 21 May 2020, depending on market developments and the outcome of the discussion of the amendment to the Act on the CNB.
The Bank Board also paid attention to the risks undertaken by banks in financing the purchase and construction of commercial property. According to analyses, neither the volume nor the risk parameters of such loans were increasing. There were undoubtedly risks on the domestic commercial property market, but they were being largely exported, as the bulk of the investors were from other countries. However, it was still necessary to pay increased attention to this segment, which is characterised by strong cyclicality.
Developments in the non-banking financial institutions sector were also discussed. The insurance sector remained resilient to risks, and the capitalisation of transformed pension funds had stabilised. The assets of investment and pension funds were gradually starting to take on a systemic dimension owing to their dynamic growth. In an environment of low returns and reduced risk premia, riskier allocation was occurring primarily in investment funds for the time being.
The Bank Board then noted the shortening of the list of other systemically important institutions (O-SIIs) by one institution to six. Specifically, according to the CNB’s new assessment based fully on the methodology of the European Banking Authority, the consolidated group Jakabovič & Tkáč, whose systemic importance score has been falling over the long term to levels below the threshold of systemic importance, will be excluded from the O-SIIs list. The change has no impact on the capital requirements of the relevant institutions on the old or new list.
Following the presentation of the update of the Financial Stability Report and the subsequent discussion, the Bank Board decided to leave the countercyclical capital buffer (CCyB) rate for exposures located in the Czech Republic at 2.0%. At the same time, it agreed that the CCyB rate could be expected to stay unchanged for the near future.
Author of the minutes: Jan Frait, Executive Director, Financial Stability Department