IMF published its staff report and selected issues report under the 2018 Article IV consultation with Czech Republic. The banking system is well-capitalized, liquid, and profitable. However, household lending is growing more quickly and some households have become highly leveraged. To address risks, the Czech National Bank (CNB) has further tightened the macro-prudential stance by announcing recommended limits to debt-to-income and debt-service-to-income ratios. Directors recommended that CNB be given binding powers over loan-to-value, debt-to-income, and debt-servicing-to-income ratios to ensure the enforceability of these prudential measures.
The staff report establishes that the banking system is well-capitalized, with stable funding. The banking sector maintains capital above the required levels. As of the fourth quarter of 2017, the regulatory capital ratio was 18%, compared with a required ratio of 14.8%, which is made up of Pillar 1 capital (8%), additional Pillar 2 capital (1.9%), the systemic risk buffer (1.9%), the countercyclical capital buffer (0.5%), and the capital conservation buffer (2.5%). Average risk-weights for banks using the internal ratings-based approach have been declining somewhat, but are not especially low. The leverage ratio decreased over the previous year, but mostly because of a sharp increase in holdings of central bank reserves and government bonds through the period of the koruna floor that increased total assets; tier 1 capital continued to increase. The share of liquid assets remains relatively high and banks are funded largely by deposits.
Credit risk continues to decline. Nonperforming loans for non-financial corporations (NFCs) and households have continued to decline and those for secured consumer loans are lower than the average. Default rates are also falling, both for NFCs and households. The main risk could arise from growing real estate market exposures. Recent stress tests by CNB indicate that the banking sector is resilient overall, but risks to the banking system would increase if the share of real estate loans in total loans were to increase further and risk-weights were to fall. CNB has appropriately tightened its prudential stance; it has increased the capital buffer for three systemically important banks from January 2017. The countercyclical capital buffer will increase to 1% in July 2018 and to 1.25% in January 2019. Progress has been made on the implementation of the Bank Recovery and Resolution Directive (BRRD). A Resolution Fund has been set up. A “single point of entry” approach has been agreed by CNB and Single Resolution Board (SRB) for three banking groups. Decisions on MREL, including deadlines, have been made at the consolidated level, but the exact composition is not yet clear with respect to the types of instruments, subordination, and cross-holdings—decisions over “internal” MREL will follow, pending policy from the SRB.
The authorities noted the importance of access to detailed loan-by-loan data. They did not favor changing risk-weights, as they regarded procedures as burdensome, but had pointed to discretion under Pillar 2 to raise capital requirements. Better access to data would help the financial supervisor. Access to more granular data on real estate, individual loans, and household debt would help in financial supervision. The Czech Republic has been implementing anti-money laundering and combating the financing of terrorism (AML/CFT) measures, in line with the Financial Action Task Force recommendations and the EU legislation; from April 2018, supervision has been fully in line with the Joint Guidelines on Risk-Based Approach to AML/CFT Supervision, which was issued by the European supervisory authorities in November 2016. An amendment to the AML Act, implementing the fourth EU AML Directive, was enacted in January 2017, ahead of the implementation deadline. A Registry of Beneficial Owners and a Central Register of Accounts has been operational from January this year. Preparations are underway for the implementation of the fifth EU AML/CFT Directive.
The selected issues report analyzes the recent developments in labor force participation, along with sectoral and factor contributions to labor productivity, and assesses perspectives for labor supply and policies that could affect it.
Keywords: Europe, Czech Republic, Banking, Article IV, CCyB, BRRD, AML/CFT Directive, IMF
PRA, via the consultation paper CP12/20, proposed changes to its rules, supervisory statements, and statements of policy to implement certain elements of the Capital Requirements Directive (CRD5).
EIOPA published the financial stability report that provides detailed quantitative and qualitative assessment of the key risks identified for the insurance and occupational pensions sectors in the European Economic Area.
EBA published its risk dashboard for the first quarter of 2020 together with the results of the risk assessment questionnaire.
EBA announced that the next stress testing exercise is expected to be launched at the end of January 2021 and its results are to be published at the end of July 2021.
PRA published the consultation paper CP11/20 that sets out its expectations and guidance related to auditors’ work on the matching adjustment under Solvency II.
MAS published a statement guidance on dividend distribution by banks.
APRA updated its capital management guidance for banks, particularly easing restrictions around paying dividends as institutions continue to manage the disruption caused by COVID-19 pandemic.
FSB published a report that reviews the progress on data collection for macro-prudential analysis and the availability and use of macro-prudential tools in Germany.
EBA issued a statement reminding financial institutions that the transition period between EU and UK will expire on December 31, 2020; this will end the possibility for the UK-based financial institutions to offer financial services to EU customers on a cross-border basis via passporting.
SRB published guidance on operational continuity in resolution and financial market infrastructure (FMI) contingency plans.