Minutes of the CNB Bank Board meeting on financial stability issues on 27 November 2024

Present at the meeting: Aleš Michl, Eva Zamrazilová, Jan Frait, Karina Kubelková, Tomáš Holub, Jan Kubíček, Jan Procházka

The meeting opened with a presentation given by the Financial Stability Department summarising the main conclusions of Financial Stability Report – Autumn 2024. The key areas covered were an assessment of the position of the domestic economy in the financial cycle, the mortgage and housing market situation, and the results of a stress test of the domestic banking sector’s resilience to the materialisation of climate risks.

The Bank Board then comprehensively evaluated the current risks to domestic financial stability and assessed the appropriateness of the current macroprudential policy instrument settings. In a general discussion, Governor Aleš Michl emphasised the need to remain cautious when making policy decisions, due in part to the potential implications of mortgage market developments for price stability and the total quantity of money in the economy.

The countercyclical buffer (CCyB) rate

In the part of its presentation dealing with the CCyB rate, the Financial Stability Department said that the domestic economy had entered an expansionary phase of the financial cycle. The available data and analyses were indicating that the upward movement would continue, while the taking on of new cyclical risks was concentrated mainly in renewed growth in mortgage loans and house prices. However, the extent of the risks remained moderate for now, partly because of the above-average income levels of loan applicants. In the opinion of the Financial Stability Department, therefore, the current CCyB rate still covered the current risks accumulated in the banking sector’s balance sheet.

In its assessment, the Board agreed with the Financial Stability Department that the domestic economy had moved distinctly into an expansionary phase of the financial cycle, with the recovery having been faster than expected in recent quarters. In this situation, some caution was in order and the assessment also had to take into account the one-year time gap between any increase in the CCyB rate and its subsequent applicability (Jan Kubíček). Nonetheless, the prevailing view in the Board was that the economy was still in the part of the financial cycle in which newly accepted risks were not excessive and were not building up rapidly in banking sector balance sheets. The main uncertainty going forward was the pace of further recovery of the housing and mortgage markets (Tomáš Holub). This required careful monitoring of these markets.

In the discussion of the financial cycle, Deputy Governor Eva Zamrazilová noted that the mortgage market had been affected by an amendment to the Consumer Credit Act regulating the early repayment fee, which had taken effect in September. The seasonally unusually high level of new housing loans in August might therefore have reflected efforts by households to arrange loans before the amendment took effect, and a longer-term trend could not yet be derived from them. It would only be possible to evaluate the robustness of the shift to higher mortgage growth rates in the longer term based on new incoming data. The other board members agreed with this “frontloading” effect connected with the amendment coming into force (Karina Kubelková, Jan Procházka).

Deputy Governor Jan Frait then said that the situation in trading partner countries – especially Germany – was also making it difficult to assess the cyclical risks in the longer term. Their gradual loss of competitiveness and the exhaustion of their previously successful economic model could make the domestic economy more sensitive to negative shocks in the future. This process could potentially manifest itself as more extensive materialisation of cyclical risks than in the past. Going forward, it would therefore be necessary to discuss how to react to this situation and whether to follow the lead of some other European countries and set the standard CCyB rate above 1%.

After discussing the current cyclical risk levels, the Board decided to leave the CCyB rate at 1.25%. All seven board members (Aleš Michl, Eva Zamrazilová, Jan Frait, Karina Kubelková, Tomáš Holub, Jan Kubíček, Jan Procházka) voted in favour of this decision.

Upper limits on credit ratios

In the following part of the meeting, the Board assessed the risks associated with mortgage loans. In the Financial Stability Department’s presentation, it was said that their volumes had reached the pre-Covid level, although the actual number of loans was only just returning to the long-term average. At the aggregate level, the riskiness of the loans had remained low, despite an increase in the share of loans with high debt service-to-income (DSTI) ratios. It reflected the provision of loans primarily to high-income customers with a sufficient debt-servicing buffer to cope with any future rise in interest rates or the cost of living. Volumes of new loans, which potentially carry a higher risk of non-repayment, had not yet reached a systemically important level relative to the total size of banking portfolios.

There was a consensus across the Board that the mortgage market had recovered significantly in recent quarters, although the conditions on the market did not yet correspond to a situation of broadly, substantially relaxed credit standards and of households becoming overindebted.

In the discussion, a majority of the board members felt that future developments were subject to uncertainty tilted towards a potentially faster mortgage market recovery, which could require a macroprudential policy response. Some of the board members therefore expressed a preference for a clearer definition of the conditions under which limits on the income-oriented DTI and DSTI ratios would be reintroduced in the future (Eva Zamrazilová, Jan Kubíček, Jan Procházka). Deputy Governor Jan Frait said this debate was necessary but emphasised that there was no consensus on these conditions in the international context either, since approaches varied depending on the actual understanding of the purpose of these instruments. He said that he himself preferred not to reintroduce upper limits until credit standards had been significantly relaxed across the banking sector and there was persisting pressure to ease them further. Karina Kubelková agreed with this approach. Tomáš Holub added that he viewed the use of DTI and DSTI limits as a natural step in the event of continued rapid growth in mortgage loans and the emergence of a price bubble in the housing market, because the use of other instruments, especially interest rates, could be suboptimal in many cases. At the end of the discussion, Deputy Governor Eva Zamrazilová emphasised the need to assess retrospectively what benefits and real impacts the introduction of DTI and DSTI limits had had on the market in the past, and said that this analysis would be an important input for making informed decisions in the future.

After the discussion, the Board decided to leave the upper limit on the LTV ratio at 80% (90% for applicants under 36 years purchasing owner-occupied housing). All seven board members (Aleš Michl, Eva Zamrazilová, Jan Frait, Karina Kubelková, Jan Holub, Jan Kubíček, Jan Procházka) voted to leave the upper limit on the LTV ratio unchanged. The upper DSTI and DTI limits remain deactivated.

Author of the minutes: Miroslav Plašil, Financial Stability Department