Text: Czech central bank: June 6 financial stability meeting minutes

Moneta Money Bank, A.s

24/06/2024 08:04

PRAGUE, June 24 (Reuters) - Following is the full text
of the minutes from the Czech National Bank's (CNB) meeting on
financial stability issues on June 6, released on Monday:
    
    The meeting opened with a presentation given by the
Financial Stability Department summarising the main conclusions
of Financial Stability Report – Spring 2024. The key areas
covered were an assessment of the cyclical risks in the domestic
economy in the current phase of the financial cycle, the
identification of structural risks arising from the long-term
characteristics of the Czech economy and the evolution of risks
associated with the debt financing of residential property.
Besides these topics, the Department presented the results of
stress tests of selected segments of the financial and
non-financial sector. Based on the material presented, the Bank
Board comprehensively evaluated the latest financial stability
developments and then discussed the countercyclical buffer rate
and the introduction of a systemic risk buffer and assessed the
appropriateness of the current settings of the upper limits on
the LTV, DTI and DSTI ratios.
    In a discussion about the overall configuration and future
course of macroprudential policy, Governor Aleš Michl said he
generally preferred macroprudential instruments to be on the
tight side, but a compromise had to found between making the
financial sector sufficiently resilient and maintaining capital
buffers at a prudent level. The majority of the other board
members shared this view. Given the observed decline in cyclical
risks and the potential growth in some structural risks, it did
not seem necessary to increase the overall capital requirements
in the banking sector at present. In this regard, Deputy
Governor Eva Zamrazilová emphasised that the macroprudential
instrument settings should also be seen in the context of the
future course of monetary policy, which was likely to be eased
gradually in the period ahead. The two policies should therefore
not counteract or restrict each other.
    The Board went on to discuss the costs associated with the
overall configuration of the macroprudential capital
requirements. It was said that increasing the macroprudential
buffers could imply an increase in the cost of financing for
banks (Tomáš Holub). This could ultimately be reflected in
growth in client loan rates and generally limit the
effectiveness of bank intermediation. Against this, it was said
(Deputy Governor Jan Frait) that the overall cost of financing
always derives from the cost of own funds and external funds,
with the capitalisation of banks generally being inversely
proportional to the cost of external funds. On the one hand,
therefore, higher equity implies a higher cost of own funds. On
the other hand, it can improve investors’ and rating agencies’
perception of a bank’s resilience and hence reduce the cost of
debt financing. Deputy Governor Jan Frait added that the
aggregate capital ratio of the domestic banking sector was now
near the European average, unlike in previous years.
    
    The countercyclical buffer (CCyB) rate
    In the part of its presentation dealing with the CCyB rate,
the Financial Stability Department said that the domestic
economy was in an initial recovery phase close to the bottom of
the financial cycle. The taking on of new risks remained subdued
for now and previously assumed cyclical risks were continuing to
recede from banks’ balance sheets. The total accumulated
cyclical risks were therefore low and were not expected to
change greatly over the year ahead despite a moderate rise in
lending and the switch to an expansionary phase of the financial
cycle.
    The board members agreed with this assessment. There was a
consensus that in these conditions, the appropriate
macroprudential response was to lower the CCyB rate further. A
majority of the board members felt that, given the incipient
turnaround in the financial cycle, this would probably be the
last rate cut in the current process of easing the CCyB and the
CCyB rate could be expected to be stable in the period ahead.
    In a discussion of the optimal size of the current CCyB rate
cut, Karina Kubelková noted that the quantitative methods used
were indicating a reduction of 0.25 pp to 1.5% and in her view
still provided suitable initial guidance for setting the CCyB
rate. On the other hand, the opinion was expressed (Tomáš Holub,
Jan Kubíček) that this instrument should already be close to the
level regarded as neutral, i.e. close to or just below 1%, in
the present phase of the financial cycle. This would equate to a
reduction of at least 0.5 pp. In the following discussion,
Deputy Governor Jan Frait said that easing the CCyB rate by this
much might also send a signal in the direction of a slight
recovery in credit and investment activity among non-financial
corporations, although the strength of this effect should not be
overestimated.
    After the discussion, the Board decided to lower the CCyB
rate to 1.25% with effect from 1 July 2024. All seven board
members (Aleš Michl, Eva Zamrazilová, Jan Frait, Karina
Kubelková, Tomáš Holub, Jan Kubíček, Jan Procházka) voted in
favour of this reduction.
    
    The systemic risk buffer (SyRB) rate
    The following part of the Board’s meeting was focused on
assessing structural systemic risks. In the Financial Stability
Department’s presentation, it was said that the sensitivity of
the domestic economy to adverse shocks from abroad had increased
substantially in an environment of geopolitical tensions,
deglobalisation and ongoing transition to a zero-emission
economy. This increase was due, among other things, to the
domestic economy’s high foreign trade concentration, with close
links to Germany, and to its production focus on a relatively
small number of industries with relatively high emission
intensity. Other unfavourable trends included growing cyber risk
against the backdrop of the war in Ukraine and the need for
technological change, with potential impacts on labour
productivity. These risks are longer term in nature and could
ultimately give rise to higher default rates. According to the
Financial Stability Department, the systemic risk buffer (SyRB)
was the most appropriate tool for increasing the banking
sector’s resilience to these risks, owing to their low direct
link to the financial cycle.
    The Board agreed that the said risks could be systemic and
had the potential to foster higher default rates in the long
term. Given the tail-end nature of the risks and lack of
historical experience, however, the impacts were difficult to
quantify exactly. In the debate, Jan Kubíček pointed to the
absence of exact criteria for setting the specific SyRB rate
level and for deciding when the underlying risks had receded. In
this connection, however, Jan Procházka noted that despite the
uncertainty and difficulties with quantification, it was clear
that major structural shocks were becoming more frequent and
more likely to occur in the future. Karina Kubelková agreed,
pointing out that this type of risk was virtually impossible to
model based on historical experience in the Czech economy and
expert judgement would always have to be relied on to some
extent. The results of the banking sector stress tests could
offer some guide. They were indicating a need for higher
releasable buffers in case a strongly adverse scenario were to
materialise. In this regard, she considered it reasonable to set
the SyRB rate at 1%.
    Deputy Governor Eva Zamrazilová agreed that the post-Covid
period had brought with it some structural changes that could
amplify common sorts of shocks. However, she said that banks
were well aware of these changes and were carefully assessing
the relevant risks and maintaining sufficiently large voluntary
buffers with regard to the ongoing changes. The conversion of
voluntary buffers into mandatory ones might send a signal that
the risks identified were in fact worse than market participants
were expecting. Likewise, Tomáš Holub noted that macroprudential
policy should react mainly where there was a danger of market
failure. Given banks’ current behaviour and sufficiently large
voluntary buffers, however, we were not currently observing
this. In this regard, therefore, the existence of structural
risks should not currently lead to an increase in the total
macroprudential capital requirements.
    The Board then discussed the relationship between structural
and cyclical risks. It was said in the discussion that
macroprudential decision-making was particularly complicated in
this area, because the two sorts of risks were hard to
disentangle (Deputy Governor Eva Zamrazilová). This was
especially true of the risks associated with high foreign trade
and industry concentration, the materialisation of which would
give rise to a cyclical contraction. It might therefore be more
natural to cover part of these risks with the countercyclical
buffer, while the introduction of the SyRB should be motivated
primarily by risks of a purely structural nature, such as cyber
risk and climate transition risk (Tomáš Holub).
    Deputy Governor Jan Frait conceded that there was
uncertainty surrounding the exact categorisation of some types
of risk in practice, but described the split into cyclical and
structural risks itself as useful and quite easy to communicate.
Any uncertainty with quantification and classification could be
dealt with by means of expert judgement, subject to the
prudential principle. In the debate, he also emphasised that
differentiating between the cyclical and structural elements of
systemic risk was becoming standard practice in the contemporary
European regulatory environment, and we should not deviate from
that. He also said that the CNB had good past experience with
the approach of setting new types of instrument initially at a
less tight level and then reacting flexibly based on an
assessment of the intensity of risks. Jan Procházka was also in
favour of differentiating between the two sorts of risks and
covering them with different sorts of buffers, owing to the
greater flexibility and economic validity of this approach. He
also noted that besides potential overlaps between the cyclical
(CCyB) and structural (SyRB) macroprudential buffers, it had
also been necessary to check for overlaps with the
microprudential requirements applied under Pillar II. The
proposed approach to the SyRB would virtually rule out such
overlaps. Jan Kubíček agreed that the SyRB would increase the
room for macroprudential policy manoeuvre but expressed his
belief that there was no need to apply it at the moment, not
least because we had already opted for a highly prudential
approach in the case of the CCyB, where the main quantitative
methods had originally implied a lower rate. He would regard it
as more logical to apply a sectoral SyRB, as it can mitigate
systemic risk in the area or sector where the regulator sees it,
whereas a general SyRB cannot.
    After discussing the structural risks, the Board decided to
introduce the SyRB. Five board members (Aleš Michl, Jan Frait,
Karina Kubelková, Tomáš Holub, Jan Procházka) voted in favour of
doing so, while two board members (Eva Zamrazilová, Jan Kubíček)
voted against. In the subsequent vote on the rate level, six
board members (Aleš Michl, Jan Frait, Karina Kubelková, Jan
Kubíček, Tomáš Holub, Jan Procházka) voted to set the rate at
0.5% with effect from 1 January 2025. One board member (Eva
Zamrazilová) voted against this level.
    
    Upper limits on credit ratios
    In the final part of the meeting, the Board discussed the
risks connected with the provision of consumer loans secured by
residential property. In the Financial Stability Department’s
presentation, it was said that elevated interest rates were
still suppressing lending, so the mortgage market had been
recovering only slowly thus far. The overall systemic risks
arising from the housing loan market remained low and were
unlikely to increase significantly over the outlook, despite
some growth in loans with higher risk parameters in an
environment of deactivated binding upper DSTI and DTI limits.
    The board members agreed with the Financial Stability
Department’s assessment. They concurred that the current
settings of the upper limits on the ratios were still consistent
with the conditions observed on the mortgage and residential
property market, and the developments in recent months did not
give cause to change macroprudential policy in this area. In the
following debate, Karina Kubelková said that the subdued
systemic risk made it possible now also to consider changing the
binding LTV limits into recommended ones. This option was
supported by the prudent approach taken by banks themselves to
LTV and by the incomplete take-up of the statutory volume
exemption. In response, Tomáš Holub said that the binding upper
LTV limit acted as a safeguard against an acceleration of the
mortgage cycle. Although the current situation did not warrant
any change to the upper limits for the time being, he personally
now saw some risk of a faster recovery on the mortgage market
and related faster growth in house prices. Deputy Governor Jan
Frait agreed, emphasising that in view of the incipient
expansionary phase of the cycle, he no longer felt it was
appropriate to ease macroprudential policy further in the area
of borrower-based measures.
    After the discussion, the Board decided to leave the upper
limit on the LTV ratio at 80% (90% for applicants under 36 years
purchasing owner-occupied housing). All seven board members
(Aleš Michl, Eva Zamrazilová, Jan Frait, Karina Kubelková, Jan
Holub, Jan Kubíček, Jan Procházka) voted to leave the upper
limit on the LTV ratio unchanged. The Board also unanimously
approved a new version of the Recommendation on the management
of risks associated with the provision of consumer credit
secured by residential property expanding the applicability of
the Recommendation to housing loans not secured by residential
property.
    

 (Reporting by Jason Hovet)
 ((prague.newsroom@thomsonreuters.com; +420 234 721 615))