Provision of a general nature II/2024

of 6 June 2024

on setting the countercyclical capital buffer rate for the Czech Republic No. II/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 1.25% 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 July 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 80.1% and the relevant deviation from the long-term trend -10.2 percentage points in 2023 Q4.^[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 Q4 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 bottomed out and started rising gradually in the second half of 2023 but remained at a generally low level in 2023 Q4. The volume of newly negotiated loans to households was the largest component of the indicator. It continued to rise gradually in Q4. The average monthly volume of pure new loans to households for house purchase was about CZK 13.3 billion in 2023 Q4 (as against CZK 10 billion in the first half of the year). This represents 62% 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] Growth in new loans to non-financial corporations still had a subdued effect on the gradual growth in the FCI in Q4. The debt ratio of households continued to decline and that of non-financial corporations was broadly flat.^[5] The decline in prices of residential property slowed but remained negative in Q4 (the year-on-year change in the transaction price index was -1%). The total amount of cyclical risks in banks’ balance sheets can still be viewed as relevant, including in relation to the actual level of provisioning and the ratio of provisions to total loans. The persisting relevance of the accumulated risks is confirmed by increases in default rates observed at the end of 2023 and in the first months of 2024, especially in some segments of the non-financial corporations sector. According to the CNB’s estimate, the potential unexpected cyclical credit losses would be CZK 15.4 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 CZK 28.6 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 43.9 billion, which corresponds to a countercyclical capital buffer rate of 1.5%.
5. Based on the above assessment, the CNB Bank Board has decided to set the countercyclical capital buffer rate at 1.25%, which is the level necessary to ensure that the banking sector is resilient to these risks. In its decision to set the rate slightly below the level indicated by quantitative methods, it took into account the decline in the extent of cyclical risks in the banking sector’s balance sheet, as well as the outlook, according to which the risks are not expected to change significantly.
6. The CNB therefore expects the CCyB rate to be stable in the next few months. Should the economic situation worsen markedly 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.
7. Given the circumstances mentioned in paragraphs 5 and 6, the CNB does not expect the countercyclical capital buffer rate to increase over the next 12 months.
8. 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.
9. 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.
10. 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 7 June 2024.

This provision of a general nature was published on 7 June 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 Q4 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 2.9% as of 31 March 2024. The annual growth rate of bank loans to households for consumption was 7.1%. Bank loans to non-financial corporations increased by 9.9% year on year as of 31 March 2024.

^[5] The ratio of the stock of bank loans to households to gross disposable income was 56% as of 31 December 2023, about 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 31 December 2023, more than 10.3 pp lower than in 2021–2022.