The Czechs owe a total of over two and a half trillion, in the quarter the debts increased by 179 billion. The volume grew the fastest in the first quarter for people aged 30 to 34, who are trying to secure their own housing even in times of burnt prices.
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However, the era of cheap mortgages is slowly coming to an end, it is practically impossible to get a housing loan with an interest rate below two percent, and faster competition between banks is preventing faster growth. Bankers are also counting on the central bank to raise its rates higher this year. And he may consider further mortgage restrictions.
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According to stress tests, the banking sector is highly resilient also due to capital surpluses. This was stated by the Governor of the Czech National Bank, Jiří Rusnok.
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The limit of the mortgage indicator LTV (ratio of loan and value of mortgaged real estate) remains at the level of 90 percent with the possibility of applying a five percent exception. At the moment, the CNB does not consider it “urgently necessary” to set limits on DTI and DSTI indicators or to tighten other parameters.
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DTI and DSTI
– The DTI (debt-to-income) ratio is the ratio of the amount of the borrower’s total debt to the amount of his net annual income. The CNB does not currently set an upper limit for this indicator, at which the loan should not be provided. At the same time, however, the CNB has long warned that there is an increased risk of loan default even if the loan applicant’s total indebtedness exceeds eight times his net annual income.
– DSTI (debt-service-to-income) indicator – the amount of the monthly debt payment in relation to the applicant’s net monthly income – the ratio between the total amount of all monthly payments and the net monthly income of the loan applicant. The CNB does not currently set an upper limit for this indicator, at which the loan should not be provided, however, it has long pointed out that this indicator should not exceed 40%.
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However, the CNB considers the credit standards of banks and other mortgage providers to be marginally relaxed. “There is a significant easing of credit standards,” Rusnok said. “For DTI and DSTI indicators, banks did not follow our recommendations very much, which means increased risk. It is a potential source of systemic risk, “he added. According to Rusnok, the share of subprime mortgages is close to the levels from the second half of 2018, when the CNB first introduced DTI and DSTI limits.
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For the time being, the CNB will respond to the risks associated with supervisory instruments, such as an additional capital requirement for individual banks. However, the CNB would already have to respond to macroprudential policy instruments for the further general easing of credit standards and the acceptance of additional risks in banks’ balance sheets.
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“According to the CNB’s estimate, flats in the Czech Republic remain overvalued by up to 25 percent in selected localities with a high share of investment flats. The cost of credit risk is one of the smallest in the Czech Republic in the European context, “said Rusnok.
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According to him, however, from the overall point of view of financial stability, the risk in the mortgage market has not increased significantly. “Banks must take action and acquire only clients who are able to repay without difficulty,” Rusnok said.
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The Bank Board of the Czech National Bank discussed the Financial Stability Report 2020/2021, which assesses the health of the domestic financial sector and its resilience to adverse shocks. This report is the starting point for the choice of the instruments of the so-called macroprudential policy, which are in particular the countercyclical capital reserve of banks and the limits of indicators for the provision of mortgage loans.
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After assessing indicators of the development of the financial cycle, the vulnerability of the banking sector and other factors influencing its resilience, the CNB Board decided to increase the bank’s countercyclical capital buffer rate to 1% (from the current 0.5%). According to the CNB, the rate at this level covers the current level of risk.
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According to the CNB, the Czech economy has already undergone an acute phase of economic downturn. Thanks to support measures such as compensation for income shortfalls or last year’s moratorium on loan repayments, previously accepted risks did not have a significant effect on the banking sector’s balance sheets during the pandemic. At the same time, banks began to provide riskier loans to a greater extent, the Report states.
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Return to normal
“The increase in the countercyclical capital buffer is a logical step resulting from the fading of the acute phase of the economic downturn. In such a situation, the CNB’s strategy is to return the reserve rate to a level of 1%, which covers normal cyclical risks in the banking sector. The decision is also a natural reaction to the fact that, thanks to support measures, previously accepted risks have had only a limited effect on banks’ balance sheets and that new risks have entered these balance sheets in recent months, “said Jiří Rusnok, Governor of the Czech National Bank.
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The effectiveness of the increase in this countercyclical rate is at the one-year horizon, ie from 1 July 2022, which gives the CNB room for a flexible approach in the event of unexpected adverse shocks. Should the economic situation deteriorate again, for example due to another wave of a pandemic, the Bank Board will be prepared to revise the announced increase in the countercyclical capital buffer rate or to release the reserve immediately and fully. On the other hand, if the rapid dynamics of lending to households, resuming growth in loans to non-financial corporations and increasing risks in the banking sector’s balance sheets continues, the CNB is ready to increase this rate further.
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At the same time, the CNB Board decided to reduce the frequency of two-week supply repo operations for credit institutions to once a week with effect from 28 May 2021 and to renew the previously applicable interest rate surcharge of 0.1 percentage points. it also reduced its frequency to once a week.
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