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    CNB Assesses Financial Stability Risks, Maintains CCyB at 0.5%

    December 11, 2020

    CNB published a report assessing the soundness and stability risks of the financial sector in the country, based on the 2020 data available to date. On the basis of this analysis, the CNB Board decided to keep the countercyclical capital buffer (CCyB) rate for banks unchanged at 0.5%, in addition to keeping the loan-to-value (LTV) limit unchanged at 90%, with the option of applying a 5% volume exemption. However, if a much more adverse scenario materializes, CNB is ready to release the CCyB fully.

    The report on financial stability assessment highlights that results of the macro stress test of banks show that the capital surplus level can be very important in maintaining banking sector stability in highly adverse economic conditions. The report also reveals that a renewed spiral between credit financing of residential property purchases and rapidly rising residential property prices is a significant source of systemic risk in the Czech economy. The continued strong growth in property prices in the Czech Republic caused the affordability of housing to deteriorate and led to a rise in house price overvaluation. CNB states that, in their mortgage lending, financial institutions mostly comply with the recommended limits on mortgage ratios or respect the CNB indication of high-risk levels. Therefore, the Board has decided to keep the LTV limit unchanged and does not deem it necessary to set limits on the other two mortgage ratios—that is, debt-to-income (DTI) and debt-service-to-income (DSTI)—or to tighten the other parameters of the risk management recommendation associated with the provision of mortgages. However, some players on the mortgage market have taken on higher-than-recommended credit risk, especially in the second quarter of 2020. CNB supervisors will focus on these lenders in the period ahead, assessing whether they have sufficient buffers to cover the higher risk.

     

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    Keywords: Europe, Czech Republic, Banking, Financial Stability, CCyB, COVID-19, DSTI, Credit Risk, Macro-Prudential Policy, Mortgage Lending, Systemic Risk, Regulatory Capital, Basel, CNB

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