The Czech central bank announced on June 13 that it will raise counter-cyclical capital requirements for banks as part of a campaign to temper hot credit markets.

The central bank has been pushing for some months to deflate the accelerating loans market – and the mortgage market in particular – due to fears that competitive lending amidst the cheap financing environment is creating a bubble that could rebound on the banking sector. The CNB warned in late May that it may move to raise the countercyclical buffer.

The CNB said that from July 1 2018 banks must hold a buffer of 1% against domestic lending. The current counter-cyclical buffer, introduced at the start of the year, stands at 0.5%. The move is due to “continued rapid credit growth and a need to create buffers for ‘worse times’”, the central bank noted. “The main risk is the continuation of a spiral between property prices and property purchase loans,” it added, suggesting lending conditions have become too lax.

CNB officials have warned in recent weeks that the Czech housing market is overvalued and the central bank needs to start slowing a spiral of prices and demand for mortgages. The central bank introduced recommendations in April that lenders refrain from providing mortgages worth more than 90% of loan-to-value (LTV), and limit loans of 80% LTV to 15% of their loan books.

The CNB said on June 13 that it does not currently consider it necessary to further lower the LTV limits, but it will by the end of the year assess to what extent providers are complying with the stricter limits and whether their current settings are appropriate. Legislation allowing the central bank to set binding limits is now in parliament.

However, the CNB had expressed concern that if the bill does not go through before the October elections it will be hugely delayed. The central bank’s plan B was to increase the countercyclical buffer, or introduce case-by-case capital requirements. Officials said they preferred alternative solutions to the “hammer of the countercyclical capital buffer”.

The move could hit banks hard, analysts suggested last month. Lenders are already running with a tiny capital buffer, they point out.

“Note that Komercni [banka’s] tier 1 ratio is just 30bps above the regulators threshold, so any kind of increase would eat up the part of the capacity for dividends and Komercni would have to reduce the payout ratio target again,” pointed out KBC in a note.

However, the CNB made it clear that it feels lenders are not responding to advice over financial market stabilisation. The central bank issued a new report on June 13 stating that all other parts of the system remain highly resilient to potential adverse shocks, and systemic risks remain merely potential in all other areas.

“In the area of property purchase financing, however, they are no longer purely hypothetical,” the CNB said in a statement.

“Credit providers should abide by the CNB’s recommendations just like skiers follow the 10 golden rules for keeping safe on the slopes – you cannot just plunge headlong down the slope thinking things will somehow work out,” Governor Jiri Rusnok said.

The central bank has suggested Czech property prices are around 10% overvalued. Eurostat data shows that housing prices grew 11% year-on-year in the fourth quarter of 2016, the fastest pace in the European Union.