Provision of a general nature IV/2020

of 26 November 2020

on setting the countercyclical capital buffer rate for the Czech Republic No. IV/2020

Pursuant to Article 12o(5) of Act No. 21/1992 Coll., on Banks, as amended by Act No. 375/2015 Coll., (hereinafter referred to as the “Act on Banks”) and Article 8al(5) 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 by Act No. 375/2015 Coll. (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:

I. Pursuant to Article 12o(3) of the Act on Banks and Article 8al(3) of the Act on Credit Unions, the countercyclical capital buffer rate for the Czech Republic shall be set at 0.50% 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.

II. 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 January 2022.

Justification

1. Pursuant to Article 12o(3) of the Act on Banks and Article 8al(3) of the Act on Credit Unions, the Czech National Bank (hereinafter referred to as the “CNB”) shall set the countercyclical capital buffer rate for the Czech Republic, taking into account the countercyclical capital buffer guide calculated pursuant to Article 12o(1) and (2) of the Act on Banks and Article 8al(1) and (2) 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(1) 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 90.1% and the relevant deviation from the long-term trend -2.2 percentage points in 2020 Q2.^[1] This value pursuant to Article 12o(1) of the Act on Banks and Article 8al(1) 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 2.2 percentage points in 2020 Q2 and implies a benchmark rate of 0.25%.
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(3) of the Act on Banks and Article 8al(3) of the Act on Credit Unions.^[3]
4. The financial cycle indicator decreased in 2020 Q2 in both year-on-year and quarter-on-quarter terms. However, it remained above-average, due mainly to continued strong growth in loans to households for house purchase. Conversely, growth in consumer credit provided to households and loans to non-financial corporations recorded a gradual slowdown.^[4] The solid borrowing activity of households is fostering buoyant growth in residential property prices. By contrast, the ongoing economic downturn manifested itself in higher expected losses of banks, as evidenced by rising risk. Cyclically low risk weights on loan portfolios under the IRB approach, which have been affected by the long-running favourable economic conditions and whose likely return to higher levels in reaction to an economic downturn is slower than for other economic indicators,^[5] remain a source of systemic risk. A return of risk weights to the levels observed at the start of the strongly expansionary phase of the financial cycle^[6] would increase the absolute capital requirement and decrease the capital ratio. The aggregate estimate of the materialisation of unexpected credit losses and growth in risk weights implies an additional capital requirement of around CZK 57.9 billion. On the basis of the worse outlook and higher expected losses, the CNB decided in the first half of 2020 to lower the CCyB rate gradually from 1.75% to 0.50%. This forward-looking reaction sent out a signal to banks that capital regulation would not limit their room for covering the private sector’s higher need for operational financing and was enabled by a low likelihood of imprudent use of the resulting capital surplus. Given the high capital surpluses in the banking sector and continuing credit growth, it is not currently necessary to lower the CCyB rate further. At the same time, leaving the rate at 0.5% provides some room for a further easing of the capital requirement in the event of a rise in risk weights for IRB loan portfolios or credit losses and a decline in spare lending capacity.
5. Based on the above assessment, the CNB Bank Board has decided to set the countercyclical capital buffer rate at 0.50%. The CNB remains ready to release the buffer immediately and fully, in order to support banks’ ability to provide credit to non-financial corporations and households without interruption. The decisive signal for such a step would be cyclical risks accepted earlier materialising via credit losses and an increase in risk weights for IRB loan portfolios. Conversely, if the pandemic-related risks subside, economic activity recovers and risks continue to materialise to only a limited extent, it will be desirable to gradually increase the buffer rate again.
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.

Effect

This Provision shall take effect on 27 November 2020.

This provision of a general nature was published on 27 November 2020.

^[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 Q1–2020 Q2 and the Hodrick-Prescott filter with a smoothing parameter (?) 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 7.5% and 2.7% respectively in September 2020. Loans to non-financial corporations increased by 2.3% year on year in September 2020.

^[5] Cyclical factors are not the only factors affecting risk weights, so the latter may not always be fully in line with the latest economic developments. This applies particularly to changes in banks’ models for deriving risk weights or to regulatory changes.

^[6] According to the CNB’s estimate, the Czech economy entered the strongly expansionary phase of the financial cycle in 2015 H2.