The Banking Council of the Czech National Bank (CNB) reviewed the Financial Stability Report – Spring 2024. This document is crucial for defining macro prudential policy instruments, such as banks’ capital buffers and caps on mortgage lending ratios. In addition, the report assesses the health of the domestic financial sector and its ability to withstand economic disturbances.
It analysed the current approach of the Loan-to-Value (LTV) cap and the Debt-to-Income (DTI) and Debt Service-to-Income (DSTI) credit indicators. Considering the evolution of the financial cycle and the vulnerability of the banking sector, it decided to maintain the LTV cap at 80% with an exception of 90 % for applicants under 36 years of age, and to leave the DTI and DSTI credit indicators unchanged. This decision was based on an assessment of the systemic risks related to the mortgage market. In addition, the Council extended the provisions of the Risk Management Recommendation to all consumer housing loans. This measure aims to strengthen overall financial stability, reducing the risk of defaults and protecting both borrowers and financial institutions.
CNB Board member Karina Kubelková stated that, in a situation of gradual recovery of activity in the mortgage and real estate markets, the impact of the LTV indicator is crucial to maintain the long-term stability of mortgage institutions and households. It also highlighted the Board’s focus on the market’s interest in non-mortgage loans for home renovation or energy savings. Starting in October, the CNB will recommend that lenders exercise greater caution when assessing customers applying for these types of loans, ensuring that they are not taking excessive risks in relation to their income.
In parallel, the Board decided to reduce the countercyclical capital buffer rate (CCyB) to 1.25%, effective 1 July 2024. This decision takes into account the decreasing extent of cyclical risks in the banking sector’s balance sheet, and does not foresee any significant changes in the outlook for the spring forecast. In addition, the systemic risk buffer rate (SyRB) will be set at 0.5% as of 1 January 2025. According to Karina Kubelková, these decisions aim to ensure that Czech banks are better prepared for long-term risks related to economic, environmental and geopolitical changes. This additional capital buffer will help protect the banking sector and, consequently, the entire Czech economy from potential future crises.
The Financial Stability Report – Spring 2024 also includes the results of stress tests of the financial, corporate and household sectors. The core banking sector stress test assesses the potential impact of the materialisation of structural systemic risks on the national economy and the banking system. The results indicate that the banking sector as a whole would meet regulatory capital requirements in both the baseline economic scenario and in a hypothetical adverse scenario, thanks to the provisioning of a capital safety fund.
According to Libor Holub, Director of the CNB’s Financial Stability Department, the banking sector is in a favourable position to face the stress tests because the reduction of cyclical economic risks accumulated in banks’ balance sheets has allowed the CNB to gradually reduce the capital buffer, allowing banks to have more free capital to lend without compromising their financial strength. However, structural risks are increasing. If these risks were to materialise, they could reduce the availability of credit to households and non-financial corporations, requiring banks to draw on other capital buffers in addition to the crisis capital buffer. To date, stress tests have indicated that the Czech Republic’s financial sector remains resilient to economic crises, even with the capital buffers currently in place.
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