Czech National Bank to be handed extended powers over mortgage market

By bne IntelliNews September 27, 2016

The Czech finance ministry is working on legal amendments that would hand the central bank greater powers to regulate the mortgage market, Deputy Finance Minister Lenka Juroskova said on September 27.

The Czech National Bank (CNB), which recently warned that the highly relaxed conditions on the mortgage market pose a potential risk to financial stability, has been in talks with the ministry about the changes to the central bank law for some time. Competition is driving record low interest rates and ever more generous terms, helping to send Czech housing prices into rapid growth.

The draft bill, expected to be submitted to parliament prior to next year’s parliamentary elections, will enable the CNB to constrain mortgage lending by capping three ratios: loan-to-value, loan-to-income and repayments-to-income, Juroskova said. The rules for calculating the limits will be decreed by the central bank, she said, adding that noncompliant loan providers should be fined, Hospodarske Noviny reports. 

The Czech mortgage market expanded at record pace last year, supported by all-time-low interest rates. The average interest rate on mortgage loans has consistently hit new lows over the past year; the latest figures placed it at 1.88% in July. Continued monetary easing in the Eurozone and the Czech Republic has intensified competition among lenders, and mortgage rates are expected to remain under 2% this year and into at least the first half of 2017.

Booming credit growth amid the fast expanding economy creates risk of a rising stock of bad debts. The CNB has already unveiled a countercyclical capital buffer (CCB) of 0.5% that will launch in the new year. Additionally, the country’s top five lenders will be required to increase the amount of capital they hold in reserve to protect against systemic risks in the sector. 

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