The central bank remains cautious. It has increased the countercyclical capital buffer to 1.5 percent.
The Bank Board of the Czech National Bank has decided that from July, the countercyclical capital buffer rate will increase from the original 1.25 to 1.5 percent. The reason is mainly strong credit activity and the growth of household and corporate indebtedness. What does this mean for the domestic economy?
Due to certain structural characteristics of the Czech economy, as claimed by the central bank, any adverse developments in the global economy and disruptions in international trade could lead to a worsening situation for non-financial enterprises and households. Therefore, according to bankers, it remains appropriate to maintain a higher resilience of the domestic banking sector.
"Despite persistent global uncertainties, a further increase in cyclical risks in the domestic financial sector has been confirmed. This development was mainly due to widespread lending activity, which, according to the latest forecast, is expected to continue in the coming period. In such an environment, we consider it necessary to slightly increase the countercyclical capital buffer rate to maintain high resilience of the domestic banking sector."
said Jakub Seidler, a member of the bank board, after the meeting on financial stability, confirming that the rate is increasing from 1.25 to the current 1.5 percent.
Interest in mortgages is increasing
The bank board also discussed the situation in the mortgage and real estate market. According to available data, the number and volume of mortgages provided exceeded long-term averages in the first quarter of this year. The bank board therefore considers it desirable to maintain the upper limit of the LTV indicator at the current level of 80 percent and at 90 percent for applicants under 36.
Household debt in the Czech Republic with banks increased by 236 billion year-on-year in April alone. The majority of household debt consists of housing loans, which represented 77 percent in April. According to the central bank's commentary, the volume of mortgages and other housing loans increased by 16 billion compared to March, reaching 2.044 trillion crowns. The volume of loans for non-financial enterprises then rose by approximately 111 billion crowns.
Future Challenges
"The risk for the coming months is the macroeconomic impact of a prolonged conflict in the Middle East. The domestic risk in terms of higher inflation is the potential acceleration of money supply growth in the economy driven by household and government institution lending. Any additional growth in overall public sector spending would lead to the risk of even greater inflationary effects of fiscal policy."
stated in his comment some time ago by Zdeněk Pikhart, who is the director of the Monetary Policy and Fiscal Analyses Department of the Czech National Bank.
"This year, the Czech economy will slightly slow its growth due to the impacts of a supply shock; however, next year it should continue in the upward phase of the economic cycle and exceed its potential slightly. Growth in the coming quarters will mainly be driven by household consumption, boosted by an increase in real wages and mildly relaxed fiscal policy."
added Pikhart.
Why is the countercyclical capital buffer so important?
The aim of setting the optimal level of the reserve is primarily to prevent the transmission of problems from financial institutions to the economy. This is crucial during times of credit growth, when there is a risk of overheating the entire economy and an increased proportion of unpaid loans. An example is the rising property prices, which can pose a problem for households. This then threatens increased indebtedness, which can subsequently impact the banking sector that is unable to repay loans. Therefore, if the pace of lending increases, banks should create reserves.
Countercyclical capital buffers are also useful when economic activities decline and banks need to be able to cover potential loan losses. This was particularly evident after the Covid-19 pandemic crippled economies worldwide. While before the coronavirus crisis, the countercyclical capital buffer rate was set at 2 percent, it then dropped to 0.5 percent. This worked and contributed to supporting the domestic economy. How, you ask? It prevented a deeper decline, thereby maintaining the stability of the entire system.
The introduction of increased regulation was initially prompted by the financial crisis of 2008, when macroeconomics began to focus more on enhancing the resilience of the financial system. This allowed for greater regulation not only of the financial sector but also of economic entities that engage with banks and other financial institutions.
Sources: author's text, CNB, CTK
