The Czech National Bank (CNB) has announced its decision to lower the rate on the countercyclical capital buffer for the loan protection market. Starting from October, the rate will be reduced to two percent, down from the previous rate of 2.25 percent. This marks the second consecutive reduction in the rate by the CNB.

The decision to lower the rate is based on the gradual reduction of cyclical systemic risks observed in the balance sheets of the banking sector. According to CNB spokeswoman Petra Krmelova, the bank board considered various factors, including the current position of the Czech economy in the financial cycle, the extent of accumulated credit risks in the banking sector’s balance sheets, and the overall development of its vulnerability.

Karina Kubelkova, a member of the bank board, had previously indicated in June that the central bank was prepared to lower the reserve rate if the trend of declining cyclical risks in the banking sector continued.

The countercyclical capital buffer requires banks and other credit institutions to establish reserves as a safeguard against risks arising from excessive loan growth. As loans expand, banks are expected to build up resources, while in times of economic downturns accompanied by increased loan losses, these funds should be used by banks to cover losses. The primary objective is to prevent potential problems within financial institutions from adversely affecting the broader economy. The creation of reserves also serves to moderate the growth of riskier loans.

The rate applies to all banks, savings and credit cooperatives, and securities traders. The CNB typically adjusts the rate quarterly and usually provides a one-year advance notice when considering rate increases. However, the central bank has the authority to dissolve the account with immediate effect.

The countercyclical capital buffer was introduced as a tool to enhance the financial system’s resilience by the European CRD IV directive. The CNB first declared the reserve rate in the fall of 2014 and continues to monitor and adjust it in response to changing economic conditions and risks in the financial sector.

Article by Prague Forum