Ceska Narodni Banka

11/30/2022 | Press release | Distributed by Public on 11/30/2022 08:47

CNB confirms mortgage limits and leaves countercyclical capital buffer rate at 2.5%

30. 11. 2022
  • Financial stability

CNB confirms mortgage limits and leaves countercyclical capital buffer rate at 2.5%

  • The CNB Bank Board kept unchanged the binding limits on credit ratios for the provision of mortgage loans applicable since 1 April 2022.
  • The limit on the DTI (debt-to-income) ratio will remain 8.5 (9.5 for applicants under 36 years).
  • The limit on the DSTI (debt service-to-income) ratio will be kept at 45% (50% for applicants under 36 years).
  • The upper limit on the LTV (loan-to-value) ratio will stay at 80% (90% for applicants under 36 years).
  • Lenders may continue to apply an exemption not exceeding 5% of the total volume of mortgage loans provided.
  • Lenders were essentially compliant with the credit ratio limits.
  • Apartment prices in the Czech Republic, which have started to descend from their cyclical peak, were roughly 60% higher in mid-2022 than the level consistent with the income of the median household and roughly 40% higher than the level consistent with minimum required rental yields.
  • The Bank Board also decided today to leave the countercyclical capital buffer rate unchanged at 2.5%; banks will be required to maintain the buffer at this level from 1 April 2023.
  • The Czech financial sector remains highly resilient to adverse economic developments.
  • The banking sector has enough capital to absorb shocks even in the event of longer-lasting economic problems and climate shocks.
  • The non-bank financial sector (insurance companies, pension funds etc.) also remains resilient.

The Bank Board of the Czech National Bank today discussed Financial Stability Report - Autumn 2022, which assesses the soundness of the domestic financial sector and its resilience to adverse shocks. This document formed the foundation for the Bank Board for configuring macroprudential policy, the main instruments of which are the countercyclical capital buffer of banks and limits on mortgage lending ratios.

"At a time when our primary objective is to reduce inflation substantially, we have to be very firm and unrelenting in requiring banks and their clients to create less debt," said CNB Governor Aleš Michl.

The CNB Bank Board decided today to leave the upper limits on the LTV, DTI and DSTI mortgage lending ratios at the level applicable since April 2022. This decision was based on an assessment of the financial cycle, the vulnerability of the banking sector and other factors affecting the sector's resilience.

"Overvalued property prices, higher mortgage loan rates, the impact of inflation and energy prices on households' living costs, the expected slowdown in economic activity and significant economic and geopolitical uncertainties are factors that are now increasing the risks associated with mortgage lending. Despite the current decline in mortgage lending activity, further application of the LTV, DSTI and DTI limits is important for maintaining the long-term stability of banks and households," said Karina Kubelková, the CNB Bank Board member responsible for overseeing the Financial Stability Department, after today's Bank Board meeting. The LTV ratio reduces risks arising from a drop in collateral value. The DSTI and DTI ratios help to enhance banks' credit portfolio quality and households' stability and prevent potential swings on the mortgage and property markets.

Financial Stability Report - Autumn 2022 also contains the results of a stress test of the banking sector taking into account climate risks. The results confirm that the sector is able to withstand longer-lasting highly adverse developments, including the impacts of climate risks and policies responding to them. However, credit defaults would increase markedly and profitability would weaken sharply.

"The initial position of the banking sector is favourable. The future evolution of credit portfolio quality nonetheless remains a key risk to the sector. We can see signals of a slight deterioration in credit portfolio quality, but so far they have not been accompanied by increased credit losses, whose conservative and timely identification the CNB regards as essential," said Libor Holub, Executive Director of the CNB's Financial Stability Department.

"The banking sector as a whole would comply with the regulatory capital limits in both the Baseline Scenario and the hypothetical Adverse Scenario incorporating climate risks. However, the impact of the Adverse Scenario on banks' capitalisation would be very significant and would underscore the importance of having capital buffers. The great uncertainty regarding the future course of the domestic and global economy and the combination of numerous risks require banks to act very prudently in the management of balance sheets, risks and capital, and in their dividend policies," he added.

The Bank Board also decided today to leave the countercyclical capital buffer rate unchanged at 2.5%. Banks will be required to maintain the buffer at this level from 1 April 2023. Until then, the countercyclical capital buffer rate will rise gradually from the current level of 1.5% in accordance with earlier decisions. In this decision, the Bank Board took into account the high volume of previously accepted risks in the banking sector's balance sheet, the absence of material credit losses, the worse economic outlook and rapid credit growth, especially as regards foreign currency loans to non-financial corporations. The Bank Board also took into account the current geopolitical and macroeconomic uncertainties, which create room for sudden and strong materialisation of previously accepted risks.

The CNB is ready to react flexibly in the event of unexpected and strong adverse shocks.

"Should the economic situation worsen and the domestic banking sector incur significant credit losses, the CNB is ready to lower the rate or release the buffer fully to cover the losses and support banks' ability to lend to the real economy without interruption," emphasised Bank Board member Karina Kubelková.

The CNB will publish the full Financial Stability Report - Autumn 2022 on 16 December 2022. The minutes of today's Bank Board meeting on financial stability issues, including the votes cast by the individual Bank Board members on macroprudential policy measures and also attributed arguments, will be published the same day.

Petra Krmelová
Director of the Communications Division and CNB Spokesperson

Notes for journalists:

Financial stabilityhas been a key objective of the Czech National Bank alongside price stability since 2013.

The CNB Bank Board discusses financial stability issues twice a year - in the spring in May, and in the autumn in November. The aim of the Financial Stability Report is to identify the risks to the financial stability of the Czech Republic in the near future on the basis of previous and expected developments in the real economy and the financial system.

The main macroprudential policy tools applied in the Czech Republic are the countercyclical capital buffer (CCyB), the capital conservation buffer (CCoB) set for all banks, the capital buffer for other systemically important institutions (O-SIIs) set for systemically important banks, the upper limits on the LTV, DTI and DSTI credit ratios set for all mortgage lenders, and the Recommendation on the management of risks associated with the provision of consumer credit secured by residential property.

Countercyclical capital buffer (CCyB) - This instrument is aimed at increasing the resilience of the banking sector to risks associated with fluctuations in lending activity. The CCyB should enable banks to lend to households and firms even at a time of recession or financial instability.

Combined capital buffer - the sum of the capital conservation buffer (CCoB), the countercyclical capital buffer (CCyB), the systemic risk buffer (SRB) and the capital buffer for other systemically important institutions.

LTV (loan-to-value) - the ratio of the value of a mortgage loan to the value of collateral.

DTI (debt-to-income) - the ratio of the applicant's total debt to their net annual income.

DSTI (debt-service-to-income) - the ratio of the sum of an applicant's monthly repayments to their net monthly income.

Maintaining financial stability is defined in the Act on the CNB as one of the CNB's primary objectives. The Act requires the CNB to set macroprudential policy by identifying, monitoring and assessing risks jeopardising the stability of the financial system and, in order to prevent or mitigate these risks, to contribute by means of its powers to the resilience of the financial system and the maintenance of financial stability.

The CNB long sought the statutory power to set upper limits on the LTV, DTI and DSTI ratios. It was granted this power in the second half of 2021 through an amendment of the Act on the CNB. Compliance with the limits must be legally binding in order to ensure a level playing field on the market.