June 13, 2019

IMF published its staff report and selected issues report under the 2019 Article IV consultation with Czech Republic. IMF Directors highlighted that the banking system is stable, well-capitalized, and well-placed to direct credit toward investment. Macro-prudential measures can help ensure that households do not take on too much debt. However, these measures should be complemented with measures to enhance housing supply.

The staff report highlights that banks hold over three quarters of financial-sector assets, with the rest mostly held by insurance, pensions, and funds companies. There are seven other significant institutions in the banking sector and five that are assessed to be systemically important. The three largest lenders are subsidiaries of EU banks. Across the system, banks are funded mostly by deposits; bank assets are mostly in loans, of which about half is directed to households. Capital ratios are well above the regulatory minima. The overall capital ratio increased by about 0.2 percentage points in 2018 to 18.3%, comfortably above the minimum level of regulatory capital of 15.4% for the system as a whole, while the tier 1 capital ratio increased by 0.3 percentage points to 17.8%.

Nonetheless, the continuing decline in risk-weights could be increasing financial-sector vulnerability. Because of favorable economic conditions and low impairments, banks’ internal risk-based models are leading to decreasing risk-weights across categories. Risk-weights for housing loans have fallen by one-third over the past three years, to 21.9%—not yet low by international comparison, but nonetheless making issuing housing loans relatively “cheap” for banks in terms of the required capital. The leverage ratio has also increased and, at 6.5%, remains at a comparatively high level. Banks are highly profitable, owing to high net interest margins and low impairments. Non-performing loans (NPLs) declined further to 3.1% of the total gross loans in 2018. The authorities have appropriately responded with increasing capital requirements. The countercyclical capital buffer, currently at 1.25%, will increase to 1.5% in July 2019 and to 1.75% in January 2020. The systemic risk buffers applying to the five domestic systemically important banks remain unchanged.

Macro-prudential recommendations that appropriately target household leverage have been announced, although the overall household debt is relatively low. Macro-prudential limits should be given some time to have effect but might yet need to be tightened. The number of new mortgages has decreased but house prices continue to increase, suggesting that the leverage might still be elevated for some borrowers. Hence, more tightening might yet be required. Since the underlying concern is household leverage, attention should be focused on the debt-based measures. 

 

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Keywords: Europe, Czech Republic, Banking, NPLs, Macro-Prudential Measures, Regulatory Capital, Systemic Risk, CCyB, IMF, EU

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