Provision of a general nature I/2023

of 9 March 2023

on setting the countercyclical capital buffer rate for the Czech Republic No. I/2023

Pursuant to Article 12o(6) of Act No. 21/1992 Coll., on Banks, as amended (hereinafter referred to as the “Act on Banks”) and Article 8al(6) of Act No. 87/1995 Coll., on Credit Unions and Certain Related Measures and on the Amendment of Czech National Council Act No. 586/1992 Coll., on Income Taxes, as amended, as amended (hereinafter referred to as the “Act on Credit Unions”), the Czech National Bank as a competent administrative body hereby issues the following provision of a general nature:

1. Pursuant to Article 12o(4) of the Act on Banks and Article 8al(4) of the Act on Credit Unions, the countercyclical capital buffer rate for the Czech Republic shall be set at 2.50% of the total risk exposure amount pursuant to Article 92(3) of Regulation (EU) No. 575/2013 of the European Parliament and of the Council.
2. Banks and credit unions shall apply the rate referred to in point I for the purposes of calculating the combined buffer requirement as from 1 April 2024.

Justification

1. Pursuant to Article 12o(4) of the Act on Banks and Article 8al(4) of the Act on Credit Unions, the Czech National Bank (hereinafter referred to as the “CNB”) shall assess the degree of cyclical systemic risk, based on which it may set or amend the countercyclical capital buffer rate for the Czech Republic, taking into account the countercyclical capital buffer guide calculated pursuant to Article 12o(2) and (3) of the Act on Banks and Article 8al(2) and (3) of the Act on Credit Unions, the recommendations issued by the European Systemic Risk Board (hereinafter referred to as the “ESRB”) and indicators which may imply growth in systemic risk.
2. Pursuant to Article 12o(2) of the Act on Banks, Article 8al(1) of the Act on Credit Unions and Article 9al(1) of the Capital Market Undertakings Act, the calculation of the buffer guide is based on the deviation of the credit-to-GDP ratio from its long-term trend – the credit-to-GDP gap. The credit-to-GDP ratio was 85.8% and the relevant deviation from the long-term trend -6.1 percentage points in 2022 Q3.^[1] This value pursuant to Article 12o(2) of the Act on Banks and Article 8al(2) of the Act on Credit Unions corresponds to a benchmark countercyclical capital buffer rate of 0%. The additional gap,^[2] which is based on the ESRB Recommendation (section B, Article 2) and better reflects the specificities of the Czech economy, was 0 percentage points in 2022 Q3 and implies a benchmark rate of 0%.
3. In reaction to the ESRB recommendation, the CNB has repeatedly emphasised in its publications (particularly the Financial Stability Report) that it does not regard the size of the gaps referred to in paragraph 2 as a reliable guide for determining the position of the domestic economy in the financial cycle and setting the rate. The CNB prefers an approach based on a comprehensive assessment of indicators identifying growth in systemic risks under Article 12o(4) of the Act on Banks and Article 8al(4) of the Act on Credit Unions.^[3]
4. The financial cycle indicator (FCI) increased in 2022 Q3, thus interrupting a gradual decline of the indicator from the local peak reached at the end of 2021. The increase in the indicator was due mainly to developments on the loans to non-financial corporations market accompanied by a rise in the share of foreign-currency loans. Conversely, the contribution of developments on the loans to households market decreased, due mainly to a downturn in the housing loans segment. Overall, the IFC reflects incoming mixed signals regarding the future evolution of cyclical systemic risks in a situation where the economy has just passed the peak of the financial cycle. Overvaluation of apartment prices for the median household remains significant at around 60%, despite some cooling of growth in prices of residential property. Net new loans to households for house purchase slowed significantly, dropping in volume by around 80% year on year in 2022 Q4. This was accompanied by declining year-on-year growth in the stock of loans to households for house purchase, which was below the long-term average at the end of 2022 following a period of significantly above-average growth. By contrast, year-on-year growth in loans to households for consumption and to non-financial corporations was still above the long-term average.^[4] The CNB continues to view the total amount of cyclical risks accumulated in banks’ balance sheets as high. Low provisioning and the level of the ratio of provisions to total loans may meanwhile indicate that the banking sector may not be sufficiently prudent in assessing credit risks. Cyclically lowered risk weights in the loan portfolios of banks applying the IRB approach also remain a source of systemic risk. However, a deterioration in risk parameters as a result of significantly adverse cyclical effects would lead to a rise in risk weights and indirectly also in the capital requirement in absolute terms. This rise, coupled with unexpected cyclical credit losses, should also be covered by the countercyclical capital buffer. The capital needed to cover the fall in the capital ratio as a result of the potential cyclical rise in risk weights amounts to around CZK 18.5 billion according to the CNB’s estimates and, together with the volume of unexpected cyclical credit losses of CZK 10.9 billion, implies a need for additional capital of CZK 29.4 billion. This need would be fully covered by a countercyclical buffer rate of 1.25%. However, the persisting geopolitical and economic uncertainty associated with future developments is creating potential for faster and more substantial materialisation of cyclical risks than the baseline estimate assumes. For these reasons, the CNB continues to apply a higher degree of prudence in its approach to setting the buffer rate.
5. Based on the above assessment, and taking into account the potential impacts of geopolitical uncertainties on the extent and speed of materialisation of cyclical risks, the CNB Bank Board has decided to set the countercyclical capital buffer rate at 2.50%, which is the level necessary to ensure that the banking sector is resilient to these risks. Should these uncertainties decrease, the CNB is ready to start gradually lowering the countercyclical capital buffer rate if it concludes that the size of the cyclical credit risks in banks’ balance sheets covered by the countercyclical capital buffer rate is decreasing. Should the economic situation worsen significantly and significant unexpected credit losses form in the domestic banking sector, the CNB is ready to lower the buffer rate more significantly or release the buffer fully in order to foster smooth lending to the real economy.
6. Pursuant to Article 12x(1) of the Act on Bank and Article 8au(1) of the Act on Credit Unions, this provision of a general nature is announced only in a manner facilitating remote access and takes effect on the day of its publication.
7. The countercyclical capital buffer rate set by this provision of a general nature shall apply until another provision amending this rate is issued.

Effect

This Provision shall take effect on 10 March 2023.

This provision of a general nature was published on 10 March 2023.

^[1] In accordance with ESRB Recommendation 2014/1 (Recommendation of the European Systemic Risk Board of 18 June 2014 on guidance for setting countercyclical buffer rates), total credit means the value of all loans provided to the private sector (non-financial corporations, households and non-profit institutions serving households) plus the volume of bonds issued by the domestic private sector. The time series of 1995 Q1–2022 Q3 and the Hodrick-Prescott filter with a smoothing parameter (λ) of 400,000 are used to calculate the long-term trend of the credit-to-GDP ratio.

^[2] The additional gap – the expansionary credit gap – is calculated as the difference between the current ratio of bank loans to gross value added of the private non-financial sector and the minimum level of this ratio achieved in the past eight quarters.

^[3] The methodological framework of the Czech National Bank for setting the countercyclical buffer rate is presented in the document The CNB’s approach to setting the countercyclical capital buffer.

^[4] The annual growth rates of bank loans provided to households for house purchase and for consumption were 6.5% and 9.7% respectively as of 31 December 2022. Bank loans to non-financial corporations increased by 5.4% year on year as of 31 December 2022.