Minutes of the CNB Bank Board meeting on financial stability issues on 15 September 2022

Present at the meeting: Aleš Michl, Eva Zamrazilová, Marek Mora, Karina Kubelková, Oldřich Dědek, Tomáš Holub, Jan Frait.

The countercyclical buffer (CCyB) rate

The meeting opened with a presentation given by the Financial Stability Department on the countercyclical buffer (CCyB) rate. According to the aggregate financial cycle indicator and other indicators, by the end of 2022 Q1 the domestic economy had moved slightly down from the peak of the financial cycle reached in 2021. It had probably declined further in the following months of this year. However, the volume of previously accepted cyclical risks in the banking sector’s balance sheet remained elevated, while the present macroeconomic environment and exceptionally high future economic uncertainty was creating potential for those risks to materialise extensively. In addition to substantial credit losses, this would lead to a rise in risk weights in loan portfolios, which in turn would give rise to a further fall in the capital ratio. The Financial Stability Department therefore recommended to leave the CCyB rate at 2.5% and communicate that should the economic situation worsen significantly and significant unexpected credit losses form in the domestic banking sector, the CNB was ready to lower the rate or release the buffer fully in order to support banks’ ability to provide credit to the real economy without interruption.

In their discussion, the board members agreed that, in light of the future economic uncertainty, the geopolitical risks and the persisting low credit losses in the banking sector’s balance sheet, it was appropriate to leave the CCyB rate at 2.5%. There was also a consensus that the Czech economy was now slightly past the peak of the financial cycle and would probably continue to descend from it, especially in the area of the mortgage market and house prices. Some of the board members pointed to potential systemic risks to financial stability arising from the increasing ratio of foreign currency loans of non-financial corporations in banks’ balance sheets. They recommended to further monitor these risks and react to them where necessary with macroprudential as well as microprudential instruments.

According to Aleš Michl, it was necessary for banks to maintain strong capitalisation in the current situation. In his opinion, the CCyB rate should only be lowered in the future in the event of significant bank credit loss materialisation. He said that the CNB would carefully monitor and assess the risks arising from the current growth in the ratio of foreign currency loans to total loans to non-financial corporations. Oldřich Dědek emphasised that despite the existing macro-financial uncertainties, the CCyB rate largely reflected the results of quantitative approaches and he discussed the response of banks to CCyB rate increases. Tomáš Holub said that in this phase of the financial cycle, monetary and macroprudential policy were acting in unison to reduce the risks in the area of mortgages and house prices. However, he saw risks associated with the growth in the ratio of foreign currency loans to total loans to non-financial corporations resulting from the rise in domestic monetary policy rates. Karina Kubelková said that we were close to the peak of the financial cycle and it would thus be hasty to revise the CCyB rate. For the next steps it would be crucial to assess the new data for the next quarter. Jan Frait stated that we were observing globally a prolongation of the financial cycle and long-term accumulation of credit risks in banking sector balance sheets, which were not materialising primarily because of strongly supportive macroeconomic policies in many countries. He mentioned the need to consider the environment of high inflation and macrofinancial shocks, which were not leading to credit losses in the CCyB conceptual framework applied by the CNB because the architects of the original international CCyB regulatory framework had not foreseen these factors. He emphasised the importance of timely and sufficient CCyB creation to safeguard the banking sector’s resilience. He also saw potential risks in the growth of the ratio of foreign currency loans, mainly for the real effectiveness of currency risk hedging. According to Eva Zamrazilová, besides foreign currency financing, there was a need to analyse the structure of new loans to non-financial corporations in more detail and to monitor their need for operating loans, which could become a source of risks to financial stability due to inflation and the worsening macroeconomic environment. Marek Mora agreed that monetary policy was contributing to dampening the financial cycle at present. Like Jan Frait, he emphasised the non-linear relationship between the business cycle and credit risk materialisation and the need to take these non-linearities into account in macroprudential decision-making. In the CCyB formation phase it was necessary to react in adequate time to the accumulation of risks, whereas in the release phase it was appropriate to wait until risks were clearly materialising before responding.

After discussing the cyclical and selected structural sources of systemic risk, all the board members present voted to leave the CCyB rate for exposures located in the Czech Republic unchanged at 2.5%.

Author of the minutes: Libor Holub, Deputy Executive Director and Acting Executive Director, Financial Stability Department