Press releases
6. 6. 2024
  • Financial stability

CNB keeps mortgage lending rules unchanged and reacts to developments in nature of systemic risks by changing structure of capital buffers while maintaining their overall level

  • The CNB Bank Board discussed the risks related to mortgage lending and decided:
    • to leave the upper limit on the LTV ratio at 80% (90% for applicants under 36 years) and keep the upper DSTI and DTI limits deactivated,
    • to expand the applicability of the Recommendation on the management of risks to all consumer credit for housing.
  • The Bank Board also assessed the configuration of banks’ capital buffers and decided:
    • to reduce the countercyclical capital buffer (CCyB) rate to 1.25% with effect from 1 July 2024,
    • to set the systemic risk buffer (SyRB) rate at 0.5% with effect from 1 January 2025. This is aimed at strengthening the banking sector’s resilience to systemic risks associated with some structural features of the Czech economy and the domestic banking sector.
  • Stress tests have indicated that the Czech financial sector remains resilient to adverse economic developments, thanks partly to the capital buffers applied.

The Bank Board of the Czech National Bank (CNB) today discussed Financial Stability Report – Spring 2024, which forms the foundation for configuring macroprudential policy tools, in particular banks’ capital buffers and upper limits on mortgage lending ratios. It also assesses the soundness of the domestic financial sector and its resilience to adverse shocks. 

At its meeting today, the Bank Board left the upper limit on the LTV ratio unchanged and kept the DTI and DSTI limits deactivated. It based this decision on an assessment of systemic risks associated with the mortgage market, taking into account the financial cycle, the vulnerability of the banking sector and other factors affecting the sector’s resilience. In addition, the Bank Board decided to expand the applicability of the Recommendation on the management of risks to all consumer credit for housing.

“In a situation of gradually recovering mortgage lending and property market activity, the LTV ratio is important for maintaining the long-term stability of mortgage lenders and households,” said CNB Bank Board member Karina Kubelková following the Bank Board meeting on financial stability issues today. “We can also see demand on the market for non-mortgage housing loans for reconstruction and energy-saving measures. With effect from October, we will recommend that lenders assess with increased caution whether clients with these loans are taking on excessive risks relative to their income,” added Karina Kubelková.

The Bank Board decided today to reduce the countercyclical capital buffer (CCyB) rate to 1.25% with effect from 1 July 2024. In this decision, it took into account the decline in the extent of cyclical risks in the banking sector’s balance sheet. It does not expect these risks to change significantly over the outlook of the spring forecast. This is one reason why the buffer rate can be expected to remain stable if this forecast materialises.

Financial Stability Report – Autumn 2024 also contains the results of the stress tests of the financial sector, corporations and households. The stress test of the key banking sector assesses the potential impacts of the materialisation of structural systemic risks in the domestic economy and banking system. Thanks partly to the capital buffers applied, the banking sector as a whole would comply with the regulatory capital requirements in both the Baseline Scenario and the hypothetical Adverse Scenario. However, the impact of the Adverse Scenario on banks’ capitalisation would be significant. A marked increase in credit defaults and a sharp deterioration in profitability would necessitate the use of additional capital buffers by banks on top of the countercyclical capital buffer.

The starting position of the banking sector in the stress tests is favourable. “A decrease in previously accumulated cyclical risks in banks’ balance sheets has enabled the CNB to gradually lower the countercyclical capital buffer rate. However, structural risks are on the rise. Their materialisation in the Adverse Scenario could reduce the availability of credit to households and non-financial corporations,” said Libor Holub, Executive Director of the CNB’s Financial Stability Department.

The Bank Board also decided today to set the systemic risk buffer (SyRB) rate at 0.5%. Banks will be required to maintain the SyRB with effect from 1 January 2025. The Bank Board concluded that the domestic banking sector is facing a range of systemic risks of a structural nature to an increased extent. These risks have become more likely to materialise against the backdrop of ongoing deglobalisation and decarbonisation and rising geopolitical tensions. The Bank Board’s decision took into account the potential extent of the additional losses the banking sector would incur due to the Czech economy’s high openness and the concentration of its foreign trade and key economic sectors in the event of shocks. “The buffer will make the banking sector more resilient to the potential manifestations of longer-term structural risks. These may be intensified by the potential cost of the transition of the domestic economy from energy-intensive to low-carbon and by growing cyber attacks,” said Karina Kubelková.

The CNB will publish the full Financial Stability Report – Autumn 2024 on 24 June 2024. The minutes of today’s Bank Board meeting on financial stability issues, including the votes cast by the individual Bank Board members on macroprudential policy measures and also attributed arguments, will be published the same day.

Jakub Holas
Director, Communications Division

Notes for journalists:

Financial stability has been a key objective of the Czech National Bank alongside price stability since 2013. Maintaining financial stability is defined in Act No 61993 Coll., on the Czech National Bank. The Act requires the CNB to set macroprudential policy by identifying, monitoring and assessing risks jeopardising the stability of the financial system and, in order to prevent or mitigate these risks, to contribute by means of its powers to the resilience of the financial system and the maintenance of financial stability. Since the second half of 2021, the CNB has had the statutory power to set upper limits on the LTV, DTI and DSTI ratios. Compliance with the limits must be legally binding in order to ensure a level playing field on the market.

The Bank Board discusses financial stability issues twice a year – in the spring in May or June, and in the autumn in November. The aim of this report is to identify the risks to the financial stability of the Czech Republic in the near future on the basis of previous and expected developments in the real economy and the financial system.

The main macroprudential policy tools applied in the Czech Republic are the countercyclical capital buffer (CCyB), the capital conservation buffer (CCoB) set for all banks, the capital buffer for other systemically important institutions (O-SIIs) set for systemically important banks, the systemic risk buffer, the upper limits on the LTV, DTI and DSTI credit ratios set for all mortgage lenders, and the Recommendation on the management of risks associated with the provision of consumer loans secured by residential property.

Countercyclical capital buffer (CCyB) – This instrument is aimed at increasing the resilience of the banking sector to risks associated with fluctuations in lending activity. The CCyB should enable banks to lend to households and firms even at a time of recession or financial instability.

Systemic risk buffer (SyRB) – This buffer is intended to mitigate the potential impacts of systemic risks identified on the financial system and the real economy. If their level poses a risk to financial stability, the application of the SyRB enhances the capitalisation of the banking sector and increases its resilience to adverse shocks. At the same time, it may help reduce the growth or concentration of the relevant exposures in banks’ balance sheets, although this is not its primary purpose.

Combined capital buffer – the sum of the capital conservation buffer (CCoB), the countercyclical capital buffer (CCyB), the systemic risk buffer (SyRB) and the capital buffer for other systemically important institutions (O-SII).

LTV (loan-to-value) – the ratio of the value of a mortgage loan to the value of collateral.

DTI (debt-to-income) – the ratio of the applicant’s total debt to their net annual income.

DSTI (debt-service-to-income) – the ratio of the sum of an applicant’s monthly repayments to their net monthly income.