General provision on setting the countercyclical capital buffer rate for the Czech Republic N ° II / 2021

28. 5. 2021

of 27 May 2021

on the setting of the countercyclical capital buffer rate for the Czech Republic n ° II / 2021

In accordance with Article 12o (5) of Law No. 21/1992 Coll., On Banks, as amended by Law No. 375/2015 Coll., (Hereinafter referred to as ‘Banking Law’ ‘) and Article 8al (5) of Act No. 87/1995 Coll., on credit unions and certain related measures and on the amendment of Act No. 586/1992 Coll. of the Czech National Council on Income Taxes, as amended, as amended by Law No. 375/2015 Coll. (hereinafter referred to as the “ Law on Credit Unions ”), the Czech National Bank, as the competent administrative body, hereby enacts the following general provision:

I. Pursuant to Article 12o, paragraph 3, of the Banking Law and Article 8al, paragraph 3, of the Law on Credit Unions, the countercyclical capital buffer rate for the Czech Republic is set at 00% of the total amount of risk exposure in accordance with Article 92 (3) of Regulation (EU) No 575/2013 of the European Parliament and of the Council.

II. Banks and credit unions apply the rate referred to in point I for the purpose of calculating the combined cushion requirement from July 1, 2022.

Justification

  1. In accordance with Article 12o, paragraph 3, of the Banking Law and Article 8 al, paragraph 3, of the Law on Credit Unions, the Czech National Bank (hereinafter referred to as “ CNB ” ) sets the countercyclical capital buffer rate for the Czech Republic, taking into account the countercyclical capital buffer guide calculated in accordance with Article 12o, paragraphs 1 and 2 of the Banking Act and Article 8al, paragraphs 1 and 2, of the Law on Credit Unions, the recommendations issued by the European Systemic Risk Committee (hereinafter referred to as the “ESRB”) and the indicators that may imply an increase in systemic risk.

  2. Under Article 12o (1) of the Banking Law, Article 8al (1) of the Credit Cooperatives Law and Article 9al (1) of the Market Enterprises Law capital, the cushion guide calculation is based on the credit-to-GDP ratio against its long-term trend – the credit-to-GDP gap. The credit-to-GDP ratio was 91.3% and the relevant deviation from the long-term trend was -1.3 percentage point in the fourth quarter of 2020.[1] This value within the meaning of Article 12o (1) of the Banking Law and Article 8al (1) of the Credit Cooperatives Law corresponds to a benchmark counter-cyclical capital buffer rate of 0%. . The additional gap,[2] which is based on the recommendation of the ESRB (section B, article 2) and better reflects the specificities of the Czech economy, was 4.7 percentage points in the fourth quarter of 2020 and implies a benchmark rate of 1.00%.

  3. In response to the recommendation of the ESRB, the CNB has repeatedly stressed in its publications (in particular the Financial Stability Report) that it does not consider the magnitude of the deviations referred to in paragraph 2 as a reliable guide to determining the position of the national economy in the financial cycle and rate fixing. The CNB prefers an approach based on an overall assessment of indicators identifying the growth of systemic risks within the meaning of Article 12o (3) of the Banking Law and Article 8al (3) of the Law on Cooperatives of credit.[3]

  4. The financial cycle value indicator has increased year over year in Q4 2020, mainly due to the increase in debt financing of residential property purchases. The sectoral nature of the new risks is evidenced by the growth rate of loans to households for housing, which has increased year on year. This has helped accelerate the growth of residential real estate prices, especially apartment prices, which, according to the CNB estimate, were 18% -25% overvalued at the end of 2020. Conversely , a slowdown in the growth rate into negative territory was observed in 2021 Q1 for consumer loans granted to households and loans to non-financial corporations.[4] Due to low interest rates on home loans (which are negative after adjusting for inflation) and investment-motivated real estate purchases by some households, new risk-taking on banks’ balance sheets has increased. It can be expected to remain high in the coming quarters. Coupled with the low materialization of risks taken in the past accompanied by a drop in provisioning at the start of 2021, the aggregate risks in bank balance sheets therefore also remain high. Cyclical reduction of risk weights in the loan portfolios of banks applying the IRB approach[5] also remain a source of systemic risk. A return of risk weights to levels observed at the start of the last highly expansionary phase of the financial cycle[6] would lead to a decrease in the capital ratio due to an increase in risk-weighted exposures (denominator of the capital ratio). It would then be necessary to increase the volume of capital in absolute value to maintain the capital ratio. The estimated size of unanticipated credit losses as well as the potential increase in risk weights imply an additional capital requirement of approximately CZK 45.4 billion, which would be fully covered by a cushion rate of 1.75%. This estimate may be overstated as it is affected by factors other than purely cyclical. However, it confirms the need to continue to create a counter-cyclical capital buffer and indicates the need to bring its rate back to the standard level covering the usual level of cyclical risks (considered by the CNB to be 1%).

  5. Based on the above assessment, the Board of Directors of CNB Bank has decided to set the rate of the countercyclical capital buffer at 1.00%.[7] In the event of continued and rapid credit growth in the household sector, a resumption of positive growth in loans to non-financial corporations, and more rapid assumption of risks in the banking sector’s balance sheet, the Bank Council is ready. to further increase this rate. On the other hand, should the economic situation deteriorate again due to, for example, a new wave of pandemic, the Bank Board will be ready to immediately and fully release the buffer, in order to support the ability of banks to provide loans to non-financial corporations. and households without interruption. The decisive signal for such a move would be a significant deterioration in the economic situation, with cyclical risks accepted earlier materializing through credit losses and increased risk weights for IRB loan portfolios.

  6. In accordance with Article 12x, paragraph 1, of the Banking Law and Article 8a, paragraph 1, of the Law on Credit Unions, this general provision is only announced in such a way as to facilitate the ‘remote access and takes effect on the day of its publication.

Effect

This provision will come into force on May 28, 2021.

Tomáš Nidetzký
Deputy Governor

Jan Frait
Executive director,
Department of Financial Stability

This general provision was published on May 28, 2021.

[1] In accordance with recommendation 2014/1 of the ESRB (Recommendation of the European Systemic Risk Board of June 18, 2014 on guidelines for setting countercyclical buffer rates), total credit refers to the value of all loans 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 from Q1-2020 Q4 1995 and the Hodrick-Prescott filter with a smoothing parameter (λ) of 400,000 are used to calculate the long-term trend in the credit-to-GDP ratio.

[2] The additional spread – the expansive credit spread – is calculated as the difference between the current ratio of bank loans to gross value added of the non-financial private sector and the minimum level of this ratio reached in the last eight quarters.

[3] The methodological framework of the Czech National Bank for setting the countercyclical buffer rate is presented in the document The CNB’s approach to fixing the countercyclical capital buffer.

[4] The annual growth rates of bank loans to households for home purchase and consumption were 8.6% and 0.1% respectively in March 2021. Bank loans to non-financial corporations decreased by 2 , 4% over one year in March 2021.

[5] Cyclical factors are not the only factors affecting risk weights, so risk weights do not always reflect the latest economic developments only. This applies in particular to changes in banks’ models for calculating risk weights or to regulatory changes. The risk weights on the exposures of non-financial corporations have been adjusted to take into account a regulatory change of a non-cyclical nature. In the second quarter, this change widened the range of corporate exposures to which the support factor for small and medium-sized enterprises, lowering the risk weight, can be applied.

[6] According to the CNB estimate, the Czech economy entered the last strongly expansionary phase of the financial cycle in H2 2015.

[7] Institutions apply a counter-cyclical capital buffer rate of 1.00% of the total risk exposure for the purpose of calculating the combined buffer requirement from July 1, 2022. They apply a rate of 0.50% for the purpose of calculating the combined capital buffer until June 30, 2022.


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