CNB Assesses Financial Stability and Sets CCyB Rate at 2.5%
The Czech National Bank (CNB) Board decided to retain the countercyclical capital buffer (CCyB) rate at 2.5% and published its financial stability report, assessing the health of the domestic financial sector and its resistance to adverse shocks. The report findings show that the banking sector in the Czech Republic remains highly resilient and is sufficiently capitalized to absorb shocks even in the event of prolonged economic difficulties. The non-banking financial sector (for example, insurance companies, pension funds) also remains resilient.
The CNB Board decided to keep the upper limits of the loan-to-value (LTV), debt-to-income (DTI), and debt service-to-income (DSTI) indicators for mortgage loans at the level valid since April 01, 2022. The decision was based on an assessment of financial cycle development indicators, the vulnerability of the banking sector, and other factors that affect its resilience. The limit of the DTI indicator (the loan applicant's total debt expressed in multiples of his net annual income) will continue to be 8.5 (9.5 for applicants under 36). The limit of the DSTI indicator (the ratio between the total amount of the loan applicant's monthly debt repayments and his net monthly income) remains at 45% (50% for applicants under 36). The upper limit of the LTV indicator (the ratio of the loan to the value of the mortgaged property) will remain at 80% (90% for applicants under 36). The limits for applicants under the age of 36 apply only to loans for the purchase of their own housing. CNB, by means of a by-law standard called Recommendation, continues to regulate other conditions for the provision of mortgage loans, including the maximum maturity of loans, testing the ability of loan applicants to withstand a possible increase in interest rates, or not providing loans with a non-standard repayment schedule, which would lead to the transfer of the applicant's burden to a later period.
The CNB Board also decided to keep the CCyB rate at 2.5%, which banks will be required to comply with from April 01, 2023. The decision was made by taking into account the high volume of previously accepted risks in the balance sheet of the banking sector as well as the acceptance of additional risks through rapid credit dynamics. The Board also took into account the current geopolitical and macroeconomic uncertainties, which create room for the sudden and strong materialization of previously accepted risks. Additionally, the financial stability report summarizes the results of stress tests of individual segments of the domestic financial sector and sectors of the real economy. The results demonstrate the ability to withstand a longer period of strongly negative development. However, the report suggests that there would be a significant increase in credit defaults and losses from financial assets, which would require partial replenishment of capital, financial resources, or assets for some financial institutions.
Related Links (in Czech)
Keywords: Europe, Czech Republic, Banking, Financial Stability Report, CCyB, Credit Risk, Basel, Regulatory Capital, Mortgage Lending, Macro Prudential Policy, LTV, DTI, DSTI, Stress Testing, CNB
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