Provision of a general nature of 6 June 2024

on setting the systemic risk buffer rate

Pursuant to Article 12r(4) of Act No. 21/1992 Coll., on Banks, as amended (hereinafter referred to as the “Act on Banks”), the Czech National Bank as a competent administrative body hereby issues the following provision of a general nature:

1. Pursuant to Article 12r(3) of the Act on Banks, the systemic risk buffer rate shall be set at 0.5% 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 located in the Czech Republic under Article 12r(2)(a) of the Act on Banks.
2. Entities pursuant to Article 12m(1) of the Act on Banks shall apply the rate referred to in point I for the purposes of calculating the combined buffer requirement on an individual and consolidated basis according to Part One, Title I of Regulation (EU) No 575/2013 of the European Parliament and of the Council as from 1 January 2025.

Justification

1. In order to mitigate systemic or macroprudential risk, Article 12r(1) of the Act on Banks authorises the Czech National Bank (hereinafter referred to as the “CNB”) to provide that entities, a group of entities defined by type or a single entity pursuant to Article 12m(1) continuously maintain a systemic risk buffer (hereinafter referred to as the “SyRB”) for all exposures or a subset thereof.
2. In its decisions on setting the SyRB rate, the CNB assesses the extent of systemic risks concerning all exposures or a subset thereof under Article 12r(2) of the Act on Banks of entities pursuant to Article 12m(1) of the Act on Banks.
3. Based on this assessment, the CNB has identified a systemic risk of a structural nature connected with the Czech economy’s elevated sensitivity to developments abroad due to its high openness and foreign trade concentration. The economy’s relatively high openness and its strong international links expose the Czech economy, including its financial sector, to adverse cross-border effects. High foreign trade concentration in a single region also increases the risk of additional spillover of negative shocks from that region. The relevance of structural systemic risk in the Czech Republic is illustrated by a number of indicators. The total amount of goods imports and exports of 116% of GDP as of 31 December 2023 makes the Czech Republic one of the most open EU economies. The Czech Republic’s concentration of exports and imports in trading partner countries, as measured by the Herfindahl–Hirschmann Index (HHI),^[1] was, respectively, the second and third highest in the EU in 2023. The sensitivity of the Czech economy to developments abroad may be reflected not only in normal cyclical fluctuations, but also in adverse structural trends, which potentially include deglobalisation, global decarbonisation and other repercussions of the current geopolitical tensions.
4. According to the CNB’s assessment, the above-mentioned systemic risk is intensified by specific features of the domestic non-financial corporations sector. As regards the importance of the individual sectors as value added creators and employers, domestic non-financial corporations are concentrated in manufacturing, and retail and wholesale trade. This contributes to the risk of an downward spiral between the economic situation of these sectors and that of households.
5. The vulnerability of the domestic non-financial corporations sector is increased by transition climate risks. Czech industry is highly energy-intensive. The share of fossil fuels in Czech electricity production is above the European average (49.3% in 2022 compared to an EU average of 36.7%). In this sector and others, the importance of cyber risk in the Czech economy is rising, owing to persisting geopolitical risks and increasingly sophisticated cyber attacks.
6. The structural risks identified are broad-based and do not concern only selected institutions or specific segments of the economy. The materialisation of those risks at a time of highly adverse global economic developments, and with the level of stress exceeding the usual amplitude of the business cycle, would be reflected above all in a marked deterioration of the financial soundness of a wide range of households and non-financial corporations, which would disrupt their ability to repay bank loans. The banking sector’s related losses would have a highly negative effect on its capital position and therefore also on lending to the real economy. This would exacerbate the initial adverse economic shock.
7. The CNB regularly assesses structural risks. According to its analyses, the probability of these risks materialising has risen over time. The CNB has observed this increase since the start of the Covid pandemic, followed by the energy crisis and the relatively long period of strong inflation. Persistent geopolitical tensions and growing uncertainty regarding future economic developments abroad, especially in our main trading partner countries, has also had a relatively significant effect. Over the medium term, the probability of structural risks materialising may also be increased by still restrictive global financial conditions, ongoing deglobalisation and global decarbonisation and the impact of technological change connected with the arrival of artificial intelligence.
8. Based on an assessment of all the risks identified above, the CNB Bank Board has set the systemic risk buffer rate at 0.5% to ensure greater resilience of the banking sector. If the reasons for setting a general SyRB rate or the relevance of the risks covered by it change, the CNB will change the rate or fully release this buffer.
9. The CNB will review the reasons for keeping the SyRB rate at the set level at least once every two years.
10. Expert judgement was used to calibrate the rate, as the risks are of a longer-term nature and to some extent without historical experience, and such risks are usually hard to quantify. However, the results of stress tests, including an assessment of additional losses not considered in the adverse scenario, also played a significant role.
11. As the above systemic risks under point 3 and additional risk factors under points 4–6 pertain primarily to domestic entities, the rate is set for exposures located in the Czech Republic.
12. When setting the rate pursuant to Article 12r(3) of the Act on Banks, the CNB concluded that this rate level has no adverse effect on the financial market as a whole or a part thereof in other European Union Member States or in the European Union as a whole, and is not an obstacle to the functioning of the single market. The risks referred to in points 3–6 were also assessed with regard to the macroprudential and microprudential policy tools already applied, in order to minimise the risk of overlaps of the individual tools set by the CNB and by the macroprudential authorities of other EU countries.
13. Pursuant to Article 12x(1) of the Act on Banks, this provision of a general nature is announced only in a manner facilitating remote access and takes effect on the day of its publication.
14. The SyRB rate set by this provision of a general nature is a new rate. The previous SyRB rate set to mitigate risks associated with the systemic importance of individual banks applied until 1 October 2021.
15. The SyRB rate set by this provision of a general nature shall apply until another provision amending or cancelling this rate is issued.

Effect

This Provision shall take effect on 1 August 2024.

This provision of a general nature was published on 1 August 2024.

^[1] The HHI is defined as the sum of the squares of the shares (%) and takes values between 0 (zero concentration) and 10,000 (maximum concentration).