Czech Banks Hit With Extra Capital Rule as Loans Spawn Risks

  • Central bank sets countercyclical buffer above zero first time
  • Deposits surpassing loans at Czech banks, squeezing earnings

The Czech central bank ordered financial institutions to beef up their capital cushions, already among the highest in Europe, in a move designed to contain the risks that a lending boom poses for the economy.

Banks, credit unions and investment companies will have to set aside extra capital linked to loans after policy makers in Prague raised the so-called countercyclical buffer rate to 0.5 percent from zero. The change will take effect at the start of 2017, the Czech National Bank said Friday on its website.

“A higher-than-zero countercyclical capital buffer rate is being introduced for the first time because of a more pronounced recovery in lending, which is starting to create conditions for systemic risk to emerge,” Vice Governor Vladimir Tomsik said in the statement.

The central bank is balancing efforts to avoid excessive credit expansion with a push to stimulate the economy using near-zero interest rates and a cap on koruna appreciation. Czech banks, which have more deposits than loans, have been relying on credit growth to prop up their wilting profits.

Komercni Banka AS, Societe Generale SA’s unit and the country’s only traded lender, fell 1.1 percent to 4,798 koruna the end of trading in Prague, extending its slump this quarter to 9 percent.

‘Surprising’ Move

Czech banks had a record 2.79 trillion koruna ($112 billion) of loans at the end of October, a 6.9 percent increase from a year earlier, according to the central bank. Separate data from the regulator show that the total volume of loans to the private sector, including those provided by non-bank institutions, equaled 75.6 percent of Czech gross domestic product at the end of June, down from 77.6 percent a year earlier.

Policy makers’ decision to create the extra buffer is “surprising” because the pace of Czech loan growth is still below levels that would require such measures under the guidance of the Basel Committee on Banking Supervision, according to Jakub Seidler, chief economist at ING Groep NV’s unit in Prague.

The move is also at odds with the results of stress tests published Friday by the regulator, which found that the Czech banking industry is “sufficiently resilient to potential adverse shocks,” with an overall capital adequacy ratio of 17.3 percent, more than double the required minimum of 8 percent.

“It’s possible that the CNB is afraid, given the strong economic growth, that the economy might overheat and systemic risks might increase,” Seidler said in a report to clients. “But then you can legitimately ask whether it’s really optimal to maintain a significantly relaxed monetary policy.”

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