June 11, 2019

CNB published the financial stability report for 2018–19. The report discusses developments in the banking and non-banking financial sector. The report contains information on the overall risk assessment, the stress tests of individual segments of the financial sector, the macro-prudential instruments for risk mitigation, and the analysis of risks associated with regulatory developments. CNB discussed the report at it Board meeting on May 23, 2019. At the meeting, the Board decided to increase the countercyclical capital buffer (CCyB) rate to 2.0%, with effect from July 01, 2020.

The decision on the CCyB rate reflects an increase in risks associated with economic developments in the upward phase of the financial cycle and a slight increase in signals of vulnerability of the domestic banking sector to a potential adverse change in conditions. Keeping in mind the reasonable dividend policies, banks have sufficient space for a prospective increase in the CCyB and the growth in their credit portfolios on the aggregate level. With regard to estimates of house price overvaluation, CNB regards the current loan-to-value (LTV) limits as upper bounds, although the bank does not deem it necessary to tighten the LTV limits.

After the recommended debt-to-income (DTI) and debt-service-to-income (DSTI) limits entered into force in October 2018, the shares of loans in excess of the recommended levels of the two ratios started to head toward the 5% exemption. However, the adjustment process has not yet been completed and banks were non-compliant with the recommended limits overall in the fourth quarter of 2018. CNB expects banks to comply with the limits in the first half of this year. Despite a small reduction of the room for interest rates on mortgage loans to rise sharply, the Board decided to leave the recommended cap on the DSTI ratio at 45%. Meanwhile, CNB expects lenders to continue to be highly prudent in providing loans with DSTI ratios of between 40% and 45%, as the conclusions of its analyses and stress tests demonstrate that loans with DSTI ratios of over 40% can be regarded as highly risky.

Overall, banks have strengthened their capital adequacy in the previous period and have high liquidity. Insurance companies maintained their capitalization and profitability despite the financial market developments that unfavorably affected the value of their assets and liabilities. Pension management companies and investment funds were adversely affected by changes in asset prices at the end of 2018, but this did not result in an outflow of clients or in systemically important losses. CNB will publish additional detailed analyses of risks to financial stability and information about the macro-prudential policy settings in December in its regular document "Risks to financial stability and their indicators – December 2019," which will be the underlying document for the autumn Board meeting on financial stability issues.

 

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Effective Date: July 01, 2020 (CCyB Rate)

Keywords: Europe, Czech Republic, Banking, Insurance, Securities, Financial Stability, CCyB, Stress Testing, LTV, Mortgage Lending, Capital Adequacy, Macro-Prudential Policy, Credit Risk, CNB

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