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    CNB Assesses Financial Sector Stability, Sets CCyB & Loan Ratio Limits

    December 10, 2021

    The CNB Board published a report assessing the stability of the financial sector in the Czech Republic and noted that capitalization of the domestic banking sector is at record-high levels and state guarantee schemes are reducing the credit risks of the small and medium enterprise (SME) segment. CNB also published a new version of the recommendation on the management of risks associated with the provision of consumer credit secured by residential property. Additionally, post the financial stability assessment, the CNB Board decided to reintroduce the loan-to-value (LTV), debt-to-income (DTI), and debt service-to-income (DSTI) limits on mortgage loans and increase the countercyclical capital buffer (CCyB) rate. CNB is increasing the CCyB rate by 0.5 percentage point to 2%, with effect from January 01, 2023.

    On the basis of new statutory powers, the CNB Bank Board decided to set limits on credit ratios for the provision of mortgage loans. With effect from April 01, 2022, mortgage lenders will again be required to comply with DTI and DSTI limits. The limit on the DTI ratio will be 8.5 (9.5 for applicants under 36 years) and the limit on the DSTI ratio will be 45% (50% for applicants under 36 years), while CNB is lowering the upper limit on the LTV ratio to 80% (90% for applicants under 36 years). The limits for applicants under 36 years apply only to loans for the purchase of owner-occupied housing). All the limits have been set in accordance with the amended Act on the CNB, which since August 2021 authorizes the central bank to set binding limits on the three ratios. These measures take into account the across-the-board easing of credit standards by banks and the increasing overvaluation of apartment prices in the Czech Republic, which, by the CNB’s estimation, reached almost 25%—and for investment apartments more than 30%—in the second quarter of 2021. However, lenders may apply an exemption not exceeding 5% of the total volume of mortgage loans provided in the previous quarter to specific cases in the current calendar quarter.

    The new version of the recommendation on the management of risks associated with the provision of consumer credit secured by residential property will still contain a set of quantitative and qualitative parameters for prudent mortgage lending:

    • The LTV ratio should not exceed 100% for any loan.
    • The term of a loan should not exceed the horizon of economic activity of the client or the lifetime of the property (as a rule, it should not exceed 30 years).
    • The term of unsecured consumer credit should not exceed 8 years.
    • When refinancing a mortgage loan whose credit ratio levels they are not required to assess, lenders should not extend the final maturity of the loan beyond that agreed with the original provider.
    • Lenders should stress test the applicant’s ability to repay the loan in the event of an increase in interest rates and under worse economic conditions, and conversely should not provide loans with a non-standard repayment schedule leading to a shift of the applicant’s commitments to a later period.

    Moreover, in 2021, CNB changed its approach to mitigating risks associated with the systemic importance of institutions due to the transposition of the Capital Requirement Directive (CRD) V directive into Czech law. Since October 01, 2021, CNB has been mitigating these risks using the capital buffer for other systemically important institutions (the O-SII buffer) instead of the systemic risk buffer (SRB). To calibrate the O-SII buffer, the CNB is required to apply a methodology based on the bucketing approach with supervisory assessments, which uses systemic importance scores calculated at the consolidated level according to EBA guidelines. Five institutions are required to maintain an O-SII buffer of 0.5%–2.5%. The list of O-SIIs for 2022 will remain the same as in 2021.

     

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    Keywords: Europe, Czech Republic, Banking, CCyB, Credit Risk, Macro-Prudential Policy, Systemic Risk, Regulatory Capital, Basel, Mortgage Lending, DSTI, DTI, LTV, Financial Stability Report, CNB

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