CNB partially relaxes mortgage limits and lowers countercyclical capital buffer rate

• The Bank Board of the Czech National Bank today confirmed the LTV (loan-to-value) limit of 90% and abolished the DSTI (debt-service-to-income) limit.
• The CNB Bank Board lowered the countercyclical capital buffer rate to 0.5% with effect from 1 July 2020 (from the current level of 1%). The partial release of the countercyclical capital buffer will support banks’ ability to lend to non-financial corporations and households without interruption.
• The capital position of the domestic banking sector is robust thanks to capital buffers and voluntary capital surpluses. Most banks currently meet the overall capital requirement and have sufficient spare lending capacity.
• The CNB is ready to release the countercyclical capital buffer fully were banks’ credit losses to rise markedly, in order to support their ability to provide credit to non-financial corporations and households without interruption.
• By the CNB’s estimation, the overvaluation of apartment prices stood at 15–25% at the end of 2019 and had risen slightly further compared with the estimate as of mid-2019 (15–20%).
• The coronavirus crisis has not had a significant effect on property prices so far. Given the adverse developments in the real economy, however, there is potential for property prices to decrease in the quarters ahead.

The Bank Board of the Czech National Bank today discussed Financial Stability Report 2019/2020, which assesses the soundness of the domestic financial sector. The report is the foundation for the choice of macroprudential policy instruments, which above all include limits on mortgage lending indicators and the countercyclical capital buffer of banks.

On the basis of the report, the CNB Bank Board today decided it does not deem it desirable to change the current recommended LTV (loan-to-value) limit. Given the persisting overvaluation of house prices, the LTV limit remains at 90% (with the option of applying a 5% exemption). In the current economic situation, however, the Bank Board does not consider it necessary to continue setting a DSTI (debt service-to-income) limit. The CNB abolished the DTI (debt-to-income) limit in April 2020. No later than at its November meeting, the Bank Board will re-assess whether it is necessary to amend its Recommendation to banks regarding mortgage lending depending on market developments.

“Our decision today to abolish the DSTI limit should not come as a surprise to anyone. We have always said that we would apply limits at times of increasing risks to the stability of the financial system in the Czech Republic, but that we would soften or even abolish them in bad times. We did that today for the DSTI limit, because in the current difficult economic situation caused by the measures to counter the COVID-19 pandemic, banks and their clients are very well aware of the risks and are acting in a very conservative way. Bearing in mind the continued overvaluation of residential property prices, we have left the LTV limit in place for now,” said CNB Governor Jiří Rusnok, commenting on today’s decision.

The CNB has been applying a set of instruments to mitigate risks associated with mortgage lending (the “Recommendation”) since 2015. The LTV, DSTI and DTI limits are the most visible part of these rules. The Recommendation also covers other parameters of mortgage loan risk, such as loan maturity. The Recommendation is of crucial importance at times when a spiral is developing between debt financing of residential property purchases and rapidly rising residential property prices.

According to Financial Stability Report 2019/2020, by the CNB’s estimation the overvaluation of apartment prices stood at 15–25% as of the end of 2019 and had risen slightly further compared with the previous (November) estimate (15–20%). Available unofficial data for the initial months of 2020 suggest that the measures to counter the COVID-19 pandemic have not had a significant effect on residential property prices so far. Given the adverse developments in the real economy, however, there is potential for property prices to decrease in the quarters ahead.

The Financial Stability Report goes on to say that the situation in the domestic financial sector changed radically following the outbreak of the COVID-19 pandemic. The domestic financial sector, which had recorded growth in most segments in 2019, entered the coronavirus crisis in good shape. The main task of microprudential and macroprudential policy now is to ensure sufficient resilience of the banking sector to the impacts of the coronavirus crisis. The capitalisation of the Czech banking sector is still robust. Besides the combined capital buffer, meanwhile, a capital surplus and earnings retained in conformity with a CNB recommendation form a significant part of the capital buffer in excess of the regulatory minimum. The CNB stands ready to use all its supervisory and regulatory instruments to maintain this situation.

“The government’s stabilisation and support programmes are providing liquidity to the real economy and preventing a precipitous wave of credit defaults. The CNB’s monetary policy measures are stabilising the debt service of firms and households and supporting the liquidity of financial institutions in a preventive manner thanks to the introduction of new instruments. Nevertheless, it must be expected that the income of many households and firms will fall markedly. This may have a sizeable effect on their solvency. The risks will increase in particular after the loan moratorium ends this autumn,” said Jan Frait, Executive Director of the CNB’s Financial Stability Department.

Based on this assessment, the CNB Bank Board lowered the countercyclical capital buffer rate from the current level of 1% to 0.5% with effect from 1 July 2020. By taking this step, the CNB is confirming that it will implement macroprudential policy in such a way that banks have sufficient room to cover the expected increase in the business sector’s need for financing.

At the same time, the CNB considers it natural that, following the potential release of the countercyclical capital buffer, banks will also use the capital conservation buffer and possibly also the systemic risk buffer in order to be able to continue providing services to their clients amid strongly adverse developments in the domestic economy.

The CNB will publish the full Financial Stability Report 2019/2020 and a new Recommendation on the management of risks associated with the provision of retail loans secured by residential property on 8 July 2020. The minutes of today’s CNB Bank Board meeting on financial stability issues will be published the same day.

Markéta Fišerová
Director of the Communications Division and CNB Spokesperson

• Presentation (pdf, 492 kB)
• Audio, video (in Czech only)

Notes for journalists:

Financial stability has been a key objective of the Czech National Bank alongside price stability since 2013.

The CNB Bank Board discusses financial stability issues twice a year – in the spring, usually in May (this year, these issues were discussed in June because of the coronavirus crisis), and in the autumn. 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 autumn report, Risks to financial stability, will be discussed on 26 November 2020.

The main macroprudential policy tools applied in the Czech Republic are the countercyclical capital buffer (CCyB) and the Recommendation on the management of risks associated with the provision of retail 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. The current rate is 1%.

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

LTV (loan-to-value) – the ratio of the value of a mortgage loan to the value of collateral. The CNB recommends that this ratio does not exceed 90% for more than 5% of the volume of new loans. Banks providing loans should take this recommendation of the CNB into account.

DTI (debt-to-income) – the ratio of the applicant’s total debt to their net annual income. The CNB currently does not set an upper limit for this ratio at which the loan should not be provided. At the same time, however, the CNB has long pointed out that the risk of non-repayment of the loan is higher if the applicant’s total debt exceeds eight times 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. The CNB recommends that this ratio does not exceed 50% for more than 5% of the volume of new loans. Banks providing loans should take this recommendation of the CNB into account.

Maintaining financial stability is defined in the Act on the CNB as one of the CNB’s primary objectives. 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.

The CNB is seeking the statutory power to set upper limits on the LTV, DTI and DSTI ratios. An amendment to the Act on the CNB is currently being debated in the Chamber of Deputies. However, compliance with the limits must be legally binding in order to ensure a level playing field on the market and to prevent unfair competition in the future if new (especially non-bank and foreign) players enter this market segment. Enforcement of the rules set out in the Recommendation would not be as effective for them as it is for banks.