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CNB > Media service > Press releases of the CNB > 2017 > CNB increases countercyclical capital buffer to 1%. Domestic financial sector remains stable and resilient.

CNB increases countercyclical capital buffer to 1%. Domestic financial sector remains stable and resilient.

13 Jun 2017

  • The Czech National Bank is increasing the countercyclical capital buffer rate for domestic exposures from 0.5% to 1% with effect from 1 July 2018, due to continued rapid credit growth and a need to create buffers for “worse times”.
  • The domestic financial sector remains stable and is still highly resilient to potential  adverse shocks, as shown in Financial Stability Report 2016/2017.
  • Systemic risks remain only potential in all areas. In the area of property purchase financing, however, they are no longer purely hypothetical. The main risk is the continuation of a spiral between property prices and property purchase loans.
  • The CNB is extending the scope of application of its Recommendation to other loans provided following the provision of a mortgage loan and to all credit providers. The LTV limits in force are unchanged and no upper DTI or DSTI limits have been set for the time being.

In the past twelve months, the Czech financial sector remained stable and resilient to potential shocks. This is shown by the results of the CNB’s stress tests and assessments in the new Financial Stability Report. However, to ensure sufficient capital buffers to cover losses the banking sector may face in the future, the CNB Bank Board decided to increase the countercyclical capital buffer (CCyB) rate to 1% with effect from 1 July 2018. This rate has been 0.5% since 1 January 2017.

“The domestic economy has shifted further into a growth phase of the financial cycle, characterised by rapid growth in loans. It is necessary to use good times to create buffers, as buffers enable the banking sector to operate smoothly in worse times,” said CNB Governor Jiří Rusnok.

The CNB does not expect this decision to lead to credit constraints. Assuming reasonable dividend policies, banks have sufficient space for an increase in the countercyclical capital buffer and growth in their loan portfolios. However, if tendencies to underestimate financial risks increase, credit growth remains high, lending standards ease and systemic risks relating to the financing of property purchases grow, the CNB stands ready to increase the CCyB rate further. Conversely, if the risk of excessive credit growth decreases, the CNB will lower this rate immediately.

The new Financial Stability Report contains a detailed analysis of the property market and the provision of property purchase loans. The CNB considers residential property in the Czech Republic to be moderately overvalued and lending standards for the provision of mortgage loans to be highly relaxed. Last year the CNB tightened its Recommendation on the management of risks associated with the provision of retail loans secured by residential property (the “Recommendation”) by gradually lowering the maximum LTV (the ratio of the loan amount to the value of collateral). The CNB does not currently consider it necessary to further lower the LTV limits (an upper limit of 90% and an aggregate limit of 15% for loans with an LTV of 80%–90%). By December 2017, the CNB will assess to what extent providers are complying with the stricter limits and whether their current settings are appropriate.

“Credit providers should abide by the CNB’s recommendations just like skiers follow the ten golden rules for keeping safe on the slopes – you cannot just plunge headlong down the slope thinking things will somehow work out,” said Governor Rusnok.

The CNB has decided not to set upper DTI (debt-to-income) or DSTI (debt service-to-income) limits for the time being. The results of household stress tests and an assessment of loan riskiness in terms of borrowers’ ability to service loans in a less favourable economic situation have prompted the CNB to extend the scope of application of its Recommendation. The Recommendation now also applies to other loans provided to clients who already have a mortgage loan. The CNB is simultaneously extending the scope of application of the Recommendation to all credit providers, given the possibility of future transmission of risks to non-bank financial institutions.

“To maintain a sound mortgage market, it is essential to abide by the rule that applicants for house purchase loans should at least partly use their own savings and have a financial reserve to repay their loans should their income fall or interest rates increase,” said Governor Rusnok, explaining the logic underlying the central bank’s measures in the mortgage area.

Stress tests performed by the CNB proved that the domestic banking sector has a high capital buffer which would enable it to withstand strong negative shocks and maintain its overall capital adequacy above the regulatory threshold of 8% even if a very unlikely adverse scenario were to materialise.

According to the results of the public finance stress tests, the current fiscal situation does not pose a threat to the stability of the banking sector either. In the next three years, therefore, the CNB will not apply additional capital requirements related to the fiscal situation to credit institutions, which hold a large part of Czech government debt.

Marek Zeman
Director, CNB Communications Division

Every year, the Financial Stability Report provides an assessment of past developments in individual areas of the Czech financial sector and analyses risks to the stability of the financial system as a whole.

The resilience of the domestic financial sector is assessed by means of macro stress tests using alternative scenarios of economic developments. This year the Baseline Scenario is based on the CNB’s forecast published in Inflation Report I/2017. The Adverse Scenario, whose probability is very low, assumes a strong recession accompanied by deflationary pressures and a rise in unemployment. The stress tests were newly supplemented with a new type of test at the five-year horizon, which aims to assess the resilience of the banking sector to a longer-running accumulation of risks in the growth phase of the economic and financial cycle.