Bloomberg
The Czech central bank stepped up efforts to cool the mortgage market, warning that rising house prices may spiral out of control and hurt lenders in a country with one of Europe’s lowest levels of housing loans.
As record-low interest rates helped fuel a credit expansion in the ex-communist European Union member, policy makers in Prague are pushing for new legislation to give them more power to set limits for new loans. While Czech mortgages represent a much smaller share of the economy than in wealthier western nations, the central bank is warning that the pace of both property price and lending growth is too fast.
“Home loans represent the biggest source of risk for the stability of our banking industry,†Governor Jiri Rusnok told a press conference on Tuesday in Prague. “We need to use these good times to create reserves that will allow the banking sector to function without problems in worse times
as well.â€
In a warning shot to the industry, the central bank increased its so-called counter-cyclical buffer for the industry on Tuesday to 1 percent as of July 2018 from 0.5 percent now. The regulator said it will raise the capital requirement further if lending standards become more relaxed and rapid credit growth persists.
Rusnok urged parliament last week to approve the bill to let the central bank tighten lending rules after lawmakers from the ruling coalition and opposition said it would prevent lower-income families from buying homes. On Tuesday, the governor said the curbs are necessary to protect the banking industry after home prices jumped 11 percent in the fourth quarter of 2016 from a year earlier, among the highest growth rates in the EU, and the amount of new mortgages surged almost 30 percent in January to March.
Komercni Banka AS, the largest listed Czech bank, erased early gains, trading 0.1 percent lower as of 1:43 p.m. in Prague. The Stoxx Europe 600 Banks Index gained
0.5 percent.
The central bank also published the results of regular stress tests, saying banks remained highly resilient to potential economic shocks. Under an adverse test scenario of a protracted recession and deflation, the industry would require a combined capital injection of 12.5 billion koruna ($534 million), or 0.3 percent of gross domestic product. This wouldn’t be a significant amount relative to the size of the banks’ balance sheets, the regulator said.