CNB confirms countercyclical capital buffer rate and mortgage limits

The CNB Bank Board today confirmed the countercyclical capital buffer rate for banks at 0.5% and the LTV limit for mortgage loans at 90%.
The banking sector is stable and maintaining its resilience even in the adverse scenario. Banks remain resilient to the potential adverse impacts of the coronavirus crisis.
Rising property prices and the tendency of some banks to grant larger amounts of highly risky mortgage loans (with DSTI above 40% and DTI above eight times net income) are risks to the financial stability of the Czech banking sector.
The CNB estimates the overvaluation of property prices at 17% on average. In selected localities with a high share of investment apartments, it is as high as 25%.

The CNB Bank Board today discussed the autumn report Risks to financial stability and their indicators, which assesses the soundness of the Czech financial sector and the risks to its stability according to the 2020 data so far. On the basis of this report, the Bank Board confirmed the parameters of all the macroprudential instruments, including the LTV limit for mortgage loans and the countercyclical capital buffer rate for banks.

The Czech financial sector maintained high resilience to adverse shocks even during the COVID‑19 pandemic, partly thanks to the government’s stabilisation and support programmes, which provided liquidity to the real economy and prevented a precipitous wave of credit defaults. The capital position of the domestic banking sector remains robust.

“Our expectations regarding the domestic financial sector’s high resilience to the impacts of the coronavirus crisis are being confirmed. Thanks to the buffers and reserves created in good times, our banking sector is still able to lend to firms and households,” said CNB Governor Jiří Rusnok during the discussion of the report.

“Not only have domestic banks not become a source of additional economic problems, but they are, on the contrary, part of the solution to the problems. Even though credit losses will still materialise, they will not put the financial stability of this country at risk. However, this is conditional on banks continuing to take a very prudent approach, including in the area of dividend payouts,” added the Governor.

Following an assessment of financial cycle indicators, banking sector vulnerability and other factors affecting resilience, the Bank Board decided to keep the countercyclical capital buffer rate for banks unchanged at 0.5%. If a much more adverse scenario materialises, the CNB is ready to release this buffer fully. Conversely, if the pandemic-related risks subside, economic activity recovers and risks continue to materialise to only a limited extent, it will be desirable to gradually increase the buffer rate again.

A renewed spiral between credit financing of residential property purchases and rapidly rising residential property prices is a significant source of systemic risk in the Czech economy, according to this year’s autumn report Risks to financial stability and their indicators. The continued strong growth in property prices in the Czech Republic caused the affordability of housing to deteriorate and led to a rise in house price overvaluation. The CNB estimates house price overvaluation at 17% on average, rising as high as 25% in selected localities with a high share of investment apartments.

The downturn in economic activity and gradually worsening labour market situation have yet to be reflected in the mortgage market. On the contrary, the volume of genuinely new housing loans and mortgage loans was at a record high in the first nine months of 2020. The CNB nonetheless expects the impacts of the coronavirus pandemic to materialise gradually and growth in housing loans to weaken, similarly to growth in property prices.

The CNB states that, in their mortgage lending, financial institutions mostly comply with the recommended limits on mortgage ratios or respect the CNB’s indication of highly risky levels.

The Bank Board therefore decided to keep the LTV limit unchanged at 90%, with the option of applying a 5% volume exemption. At the moment, it does not deem it necessary to set limits on the other two mortgage ratios, namely DTI (debt-to-income) and DSTI (debt service-to-income), or to tighten the other parameters of the current Recommendation on the management of risks associated with the provision of mortgages.

However, some players on the mortgage market have taken on higher-than-recommended credit risk, especially in the second quarter of 2020. CNB supervisors will focus on these lenders in the period ahead, assessing whether they have sufficient buffers to cover the higher risk.

“Unfortunately, we are witnessing a renewed spiral between credit financing of property purchases and expectations of further growth in property prices. However, we assume that mortgage lenders will continue to act in a mostly prudent way given the unfavourable and highly uncertain economic situation,” said Jan Frait, Executive Director of the CNB’s Financial Stability Department.

“At the moment, therefore, there is no need to re-introduce the ratio limits abolished in the spring or tighten other mortgage lending conditions. However, we do feel a need to warn again that above certain debt thresholds – eight times net annual income and 40% of net monthly income – we regard mortgage loans as highly risky,” added Jan Frait.

The CNB will publish the full Risks to financial stability and their indicators report on 11 December 2020. The minutes of today’s Bank Board meeting on financial stability issues will be published at 9 a.m. the same day.

Markéta Fišerová
Director of the Communications Division and CNB Spokesperson

Highlights of the Report

(Full report to be published on 11 December 2020)

The economic situation and the financial sector are being fundamentally affected this year by the COVID-19 pandemic
The low-yield environment and decreasing availability of high-quality assets are supporting search for yield
While the COVID-19 pandemic has already hit the domestic non-financial corporations sector hard, a stronger impact of the coronavirus shock is yet to be expected in the household sector
Credit risk materialisation in the private non-financial sector remains muted, but a rise in non-performing loans can be expected in 2021
The domestic banking sector is maintaining a robust capital and liquidity position, but its profitability is falling
The domestic non-bank financial sector remains stable, with the persisting low-yield environment posing a risk for the years ahead
The domestic economy is probably in the recessionary phase of the financial cycle
The cyclical risks in banks’ balance sheets remain elevated and are beginning to materialise
Maintaining the CCyB rate at 0.5% is currently consistent with the assessment of cyclical risks, the degree of vulnerability of the banking sector and the uncertainties connected with the coronavirus pandemic. In setting the CCyB rate, the CNB will react flexibly to changes in the economic and financial conditions
The banking sector remains resilient even in the Adverse Scenario, but needs a relatively high level of capital surpluses to maintain its resilience
The affordability of housing has deteriorated further in 2020 due to rapid growth in residential property prices
The volumes of genuinely new mortgage loans have been increasing in the course of this year
Mortgage lenders have mostly been complying with the recommended LTV limits
As regards the DTI and DSTI ratios, lenders have also mostly respected the CNB’s Recommendation or its indication of highly risky levels. However, some of them have taken on increased risk, especially in 2020 Q2
For the period ahead, the CNB confirms the LTV limit of 90%, does not set upper limits on the DTI and DSTI ratios and keeps the other parameters of its Recommendation unchanged