of 25 November 2021

on the setting of the countercyclical capital buffer rate for the Czech Republic n ° IV / 2021

In accordance with Article 12o (5) of Law No. 21/1992 Coll., On Banks, as amended by Law No. 375/2015 Coll., (Hereinafter referred to as the “Law on Banks” ) and section 8al (5) of Act No. 87/1995 Coll., on credit unions and certain related measures and on the amendment of Act No. 586/1992 Coll. of the Czech National Council, on income taxes, as amended, as amended by Law No. 375/2015 Coll. (hereinafter referred to as “Law on Credit Unions”), the Czech National Bank, as the competent administrative body, hereby issues the following general provision:

1. In accordance with Article 12o, paragraph 3, of the Banking Law and Article 8al, paragraph 3, of the Law on Credit Unions, the countercyclical capital buffer rate for the Czech Republic is set at 2.00% of the total amount of the risk exposure in accordance with Article 92 (3) of Regulation (EU) No 575/2013 of the European Parliament and of the Council.
2. Banks and credit unions apply the rate referred to in point I for the purpose of calculating the combined cushion requirement from 1 January 2023.

Justification

1. In accordance with Article 12o, paragraph 3, of the Banking Law and Article 8al, paragraph 3, of the Law on Credit Unions, the Czech National Bank (hereinafter referred to as “BNC”) fixes the counter-cyclical capital buffer rate for the Czech Republic, taking into account the counter-cyclical capital buffer guide calculated in application of article 12o, paragraphs 1 and 2 of the Banking Act and article 8al, paragraphs 1 and 2 of the Law on Credit Unions, the recommendations issued by the European Systemic Risk Board (hereinafter referred to as the “ESRB”) and the indicators that may imply an increase in systemic risk.

2. In accordance with Article 12o, paragraph 1, of the Banking Law, Article 8al, paragraph 1, of the Law on Credit Unions and Article 9al, paragraph 1, of the Enterprise Law capital markets, the cushion guide calculation 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 88.2% and the relevant deviation from the long-term trend was -4.0 percentage points in the second quarter of 2021.^[1] This value within the meaning of Article 12o, paragraph 1, of the Banking Law and Article 8al, paragraph 1, of the Law on Credit Unions corresponds to a benchmark countercyclical capital buffer rate of 0%. The additional gap,^[2] which is based on the recommendation of the ESRB (section B, article 2) and better reflects the specificities of the Czech economy, was 4.4 percentage points in the second quarter of 2021 and implies a benchmark rate of 1.00% .

3. In response to the recommendation of the ESRB, the NCB has repeatedly stressed in its publications (notably the Financial Stability Report) that it does not consider the magnitude of the deviations referred to in paragraph 2 as a reliable guide to determine the position of the national economy in the financial cycle and rate fixing. The CNB favors an approach based on a global assessment of indicators identifying the growth of systemic risks under article 12o (3) of the banking law and article 8al (3) of the law on cooperatives of credit.^[3]

4. The value of the financial cycle indicator increased significantly on an annual basis in the second quarter of 2021, mainly due to the increase in debt financing of residential real estate purchases. According to CNB estimates, apartment prices were overvalued by 25% to 30% in Q2 2021. The growth rates of both stock and actually new loans to households for the purchase of housing were very high and well above their long-term averages. The growth rates of loans to non-financial corporations and consumer households also rebounded. Overall lending growth to the non-financial sector thus increased by more than 3 pp in Q2 and Q3 2021, leading to a significant increase in cyclical risks on banks’ balance sheets.^[4] In line with current CNB forecasts, new risk taking is expected to remain above average in the course of 2022. In view of the current economic outlook, the likelihood of at least partial materialization of risks in the near future has begun. time increased. Provisioning has returned to exceptionally low levels since early 2021. This may indicate that the banking sector is underestimating the accumulated risks. Cyclically reduced risk weights in the loan portfolios of banks applying the IRB approach also remain a source of systemic risk. A return of risk weights to levels observed at the start of the last highly expansionary phase of the financial cycle^[5] would lead to a decrease in the capital ratio due to an increase in risk-weighted exposures (the denominator of the capital ratio). Cyclical factors are not the only factors affecting risk weights, and the estimated increase in risk weights resulting from cyclical economic developments may therefore be overestimated.^[6] Nevertheless, it remains prudent to allocate part of the cushion to a possible reversal in credit characteristics accompanied by an increase in risk weightings. The estimated size of the unexpected credit losses as well as the upper bound of the estimated cyclical increase in risk weights imply an additional capital requirement of around CZK 56 billion, which would be fully covered by a buffer rate of 2.25 %. This estimate confirms the need to continue to create a counter-cyclical capital buffer.

5. Based on the above assessment and taking into account the potential overestimation of the cyclical growth of risk weights, the board of directors of CNB Bank has decided to set the counter-cyclical capital buffer rate at 2.00 %, which is the level necessary to ensure sufficient resilience of the system to these risks.^[7] In the event of a further acceleration in credit growth in the non-financial private sector, increased risk-taking in the banking sector’s balance sheet and increasing vulnerability of the banking sector, the Bank Board stands ready to further increase this rate. On the other hand, if the economic situation deteriorates significantly and risks materialize, it is ready to gradually lower the CCyB rate or fully release the cushion in order to support the capacity of banks to extend loans to non-financial corporations and households. without interruption.

6. In accordance with Article 12x (1) of the Banking Law and Article 8au (1) of the Credit Cooperatives Law, this general provision is only announced in a manner facilitating access to distance and takes effect on the day of its publication.

Effect

This provision will take effect on November 26, 2021.

This general provision was published on November 26, 2021.

^[1] In accordance with recommendation 2014/1 of the ESRB (Recommendation of the European Systemic Risk Board of 18 June 2014 concerning guidelines for setting countercyclical buffer rates), total credit refers to the value of all loans 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 1995 Q1-2021 Q2 time series and the Hodrick-Prescott filter with a smoothing parameter (λ) of 400,000 are used to calculate the long-term trend in the credit-to-GDP ratio.

^[2] The additional spread – the expansionary credit spread – is calculated as the difference between the current ratio of bank lending to gross value added of the non-financial private sector and the minimum level of this ratio reached in the last 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 to households for housing and consumption were 10.5% and 4.1%, respectively, in September 2021. Bank loans to non-financial corporations increased by 1.9% on a quarterly basis. year in September 2021.

^[5] According to the CNB estimate, the Czech economy entered the last strongly expansionary phase of the financial cycle in the second half of 2015.

^[6] This applies in particular to changes in banks’ models for calculating risk weights or to regulatory changes. The risk weights on the exposures of non-financial corporations have been adjusted to take into account a regulatory change of a non-cyclical nature. In the second quarter, this change widened the range of corporate exposures to which the risk-lowering small and medium-sized support factor can be applied.

^[7] The institutions concerned apply a counter-cyclical capital buffer rate of 2.00% of the total risk exposure for the purpose of calculating the combined buffer requirement from January 1, 2023. They apply a rate of 1.50 % for the purpose of calculating the combined capital buffer from October 1 to December 31, 2022. They apply a rate of 1.00% for the purpose of calculating the combined capital buffer from July 1, 2022 to September 30, 2022. They apply a rate 0.50% for the purpose of calculating the combined buffer capital until June 30, 2022.