Provision of a general nature I/2024

of 7 March 2024

on setting the countercyclical capital buffer rate for the Czech Republic No. I/2024

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 1.75% 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. Entities pursuant to Article 12m(1) of the Act on 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) and (3) of the Act on Banks and Article 8al(2) and (3) of the Act on Credit Unions, 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 79.8% and the relevant deviation from the long-term trend -13.1 percentage points in 2023 Q3.^[1] This value 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 economy in the Czech Republic, was 0 percentage points in 2023 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 main indicators monitored include the financial cycle indicator (FCI). The FCI remained at a very low level in 2023 Q3, below the historical average. Overall, the FCI indicated that the extent of newly accepted cyclical risks in the domestic banking sector’s balance sheets remained significantly subdued. The low volume of newly negotiated loans to households continued to be the largest component of the indicator. It started to rise very slightly in Q3. The average monthly volume of genuinely new loans to households for house purchase was about CZK 12 billion in the second half of 2023 (as against CZK 10 billion in the first half). This represents 57% of the historical average for the period of 2017–2021. This was accompanied by declining year-on-year growth rates of the stock of loans to households.^[4] Relatively low growth in new loans to non-financial corporations also had a downward effect on the FCI in Q3. This growth accelerated at the end of 2023. However, this cannot yet be interpreted as a sustained recovery of the market. At the same time, credit growth is still lagging behind inflation in the economy in all of the main segments of the credit market. The debt ratios of households and non-financial corporations thus continue to decline.^[5] Growth in prices of residential property remained negative in Q3 (the year-on-year change in the transaction price index was -3.5%). The total amount of cyclical risks in banks’ balance sheets can still be viewed as elevated, including in relation to the actual level of provisioning and the ratio of provisions to total loans. The relevance of the accumulated risks is confirmed by an increase in non-performing loans in 2023 Q4. The three-month default rate was 0.96% for loans to households for consumption as of 30 September 2023 (the highest level since 2019), 0.19% for loans to households for house purchase (the highest level since 2020) and 0.36% for loans to non-financial corporations (the highest level since the start of 2021). According to the CNB’s estimate, the potential unexpected cyclical credit losses would be CZK 14.8 billion. Cyclically lowered risk weights in the loan portfolios of banks applying the IRB approach also remain a source of systemic risk. 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 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 30 billion according to the CNB’s estimates. The total additional capital needed to cover unexpected cyclical credit losses and the growth in risk weights thus amounts to CZK 44.8 billion, which corresponds to a countercyclical capital buffer rate of 1.75%.
5. Based on the above assessment, the CNB Bank Board has decided to set the countercyclical capital buffer rate at 1.75%, which is the level necessary to ensure that the banking sector is resilient to these risks. Should the cyclical risks continue to disappear naturally from the banking sector’s balance sheets, the CNB is ready to lower the countercyclical capital buffer rate gradually further. 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. Given the expected further evolution of the financial cycle in the quarters ahead and the related expected persisting downturn in newly accepted cyclical risks in the domestic banking sector’s balance sheets, the CNB does not expect the countercyclical capital buffer rate to increase over the next 12 months.
7. 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.
8. The previously issued provisions of a general nature on setting the countercyclical capital buffer rate for the Czech Republic shall lose legal effect upon the publication of this provision of a general nature.
9. 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 8 March 2024.

This provision of a general nature was published on 8 March 2024.

^[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 Q1–2023 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 rate of bank loans provided to households for house purchase was 2.8% as of 31 December 2023. The annual growth rate of bank loans to households for consumption was 6.3%. Bank loans to non-financial corporations increased by 8.7% year on year as of 31 December 2023.

^[5] The ratio of the stock of bank loans to households to gross disposable income was 52% as of 30 September 2023, about 3.5 pp lower than in 2021–2022. The ratio of the stock of bank loans to non-financial corporations to gross operating surplus was 64% as of 30 September 2023, more than 10 pp lower than in 2021–2022.