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Czech central bank increases countercyclical capital buffer

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Czech central bank increases countercyclical capital buffer

The Czech central bank increased the countercyclical capital buffer rate for local lenders by 25 basis points to 2% from July 1, 2020, citing growing risks associated with the upward phase of the financial cycle of the Czech economy and a slight increase in vulnerability of the local banking sector to a potential adverse change in economic conditions.

This is the sixth increase since the rate was introduced in 2015, the regulator noted. The buffer rate is set to rise to 1.5% from 1.25% in July 2019, then again to 1.75% in January 2020 before reaching the 2% level in July 2020.

Local banks continue to have sufficient space for lending growth even after the latest capital buffer hike, assuming reasonable dividend policies, Ceská národní banka noted in its May 23 filing, adding that the domestic economy is nearing the peak of the financial cycle. This means the likelihood of a further countercyclical capital buffer hike has dropped significantly.

The central bank also said it maintained its existing limits on mortgage issuance, including the loan-to-value ratio, debt-to-income ratio and debt-service-to-income ratio, pointing to a continued overvaluation of apartment prices, which amounted to around 15% at the end of 2018. The maximum LTV ratio is set at 90%, and up to 15% of mortgage loans issued by banks can have an LTV ratio of between 80% and 90%.

Also, since October 2018, the total debt of a mortgage applicant cannot exceed 9x their net annual income, and households with mortgages should spend no more than 45% of their net monthly income on servicing their debt.

The regulator continues to seek statutory powers for setting legally binding upper limits on the mortgage ratios to ensure a level playing field on the market and to prevent unfair competition between lenders in the future if new, especially non-bank and foreign, players enter the market segment, it said.

The Czech central bank also said the country's financial sector remains stable, with banks having high liquidity and insurance companies maintaining their capitalization and profitability despite financial market developments that negatively affected the value of their assets and liabilities. Pension management companies and investment funds were adversely affected by changes in asset prices at the end of 2018, but this did not result in an outflow of clients or in systemically important losses, the central bank noted.