Press releases
29. 11. 2023

CNB retains binding LTV limit for mortgage loans, deactivates binding DTI limit and leaves countercyclical capital buffer rate at 2%

  • The CNB Bank Board left the upper limits on the LTV ratio at 80% and 90% and deactivated the upper limit on the DTI ratio with effect from 1 January 2024.
  • The Bank Board also decided today to leave the countercyclical capital buffer (CCyB) rate at 2%.
  • The Bank Board discussed structural systemic risks and the systemic risk buffer.
  • Stress tests have demonstrated that the Czech financial sector remains resilient to adverse economic developments.

The Bank Board of the Czech National Bank today discussed Financial Stability Report – Autumn 2023, which assesses the soundness of the domestic financial sector and its resilience to adverse shocks. This document formed the foundation for the Bank Board for configuring macroprudential policy tools, in particular banks’ capital buffers and upper limits on mortgage lending ratios.

The CNB Bank Board decided today to retain the upper limits on the LTV ratio and deactivated the upper limits on the DTI ratio with effect from 1 January 2024. This decision was based on an assessment of the financial cycle and the vulnerability of the banking sector and other factors affecting the sector’s resilience.

“In an environment of significant macro-financial uncertainties, the risk of a major decline in property prices persists, necessitating continued application of the LTV ratio. Higher interest rates and subdued mortgage lending are significantly limiting the risks associated with applicants’ income levels, and we are leaving it entirely up to lenders to manage those risks,” said Bank Board member Karina Kubelková following the Bank Board meeting on financial stability issues today.

Financial Stability Report – Autumn 2023 also contains the results of a stress test of the banking sector with a five-year horizon. 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 Adverse Scenario would have an appreciable impact on banks’ capitalisation. A marked increase in credit defaults and a sharp deterioration in profitability would lead to the release of the countercyclical capital buffer.

“The starting position of the banking sector is favourable. We consider the quality of the loan portfolio to be the key factor. We can see signals of a slight deterioration in loans to non-financial corporations and households, so we are monitoring the situation closely, but the banking sector as a whole has not seen an increase in credit losses so far and remains in very good shape. However, firms and households will face difficult economic conditions again in 2024. We will continue to assess the potential impacts on their financial soundness and closely monitor the situation in the banking sector,” said Libor Holub, Executive Director of the CNB’s Financial Stability Department.

The Bank Board also decided today to leave the countercyclical capital buffer (CCyB) rate at 2%. In this decision, the Bank Board took into account the volume of previously accepted risks in the banking sector’s balance sheet, the absence of material credit losses, and the uncertainties and risks related to the economic outlook. “If the cyclical risks continue to disappear naturally from the banking sector’s balance sheets, we will gradually lower the buffer rate. Should the economic situation worsen substantially and significant unexpected credit losses arise, we are ready to lower the buffer rate more significantly or release the buffer fully and thus support smooth lending to the real economy,” emphasised Karina Kubelková.

In addition, the Bank Board today discussed structural risks of a systemic nature. “The Bank Board agreed in its discussion that the structural risks identified were relevant, but it currently does not deem it necessary to react to them by deploying macroprudential capital instruments,” said Karina Kubelková.

The CNB will publish the full Financial Stability Report – Autumn 2023 on 15 December 2023. 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.

Petra Krmelová
Director of the Communications Division and CNB Spokesperson

Notes for journalists:

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

The Bank Board discusses financial stability issues twice a year. The main reference document for the Bank Board’s meeting on financial stability issues is the Financial Stability Report. 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-SIIs).

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.

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 has long sought the statutory power to set upper limits on the LTV, DTI and DSTI ratios. It was granted this power in the second half of 2021 through an amendment to the Act on the CNB. Compliance with the limits must be legally binding in order to ensure a level playing field on the market.