Three reasons behind the March retention of the cyclical capital buffer at 1.25 per cent
Economic commentary by Jaromir Šindel, Chief Economist of the CBA
At the beginning of March, the CNB left the countercyclical capital buffer (CCyB) unchanged at 1.25%. It remains at this level after a reduction from 1.75% in July. From the March minutes, there are mainly three reasons behind its retention at 1.25%: 1) the inadequacy of the CCyB change given the structure of the recovery in bank lending, mainly in favour of lower risk-weighted housing loans; 2) the combination of no credit losses, a positive real interest rate and unrelaxed credit standards; 3) the need for a fresh look at the CCyB in light of last year's introduction of the systemic risk buffer (SyRB). See below for more details.
In the fourth quarter of last year, the capital ratio in the banking sector rose slightly to 22.9% from 22.7% in the previous quarter, while for the highest quality part of CET1 capital, it reached 20.56% compared to 20.51% in the previous quarter. For more details, see CBA Monitor: Banking Sector.
The CBR will decide this week on the setting of the 2-week repo rate, which I expect it to keep at 3.75%. This is primarily due to the continued momentum of inflationary pressures that is not returning core inflation to the CBR's inflation target. I discuss this in more detail below.
The March retention of the countercyclical capital buffer was consistent with the recommendation, which took into account the stable risks of banks' balance sheets and unrelaxed credit standards. This is compounded by the absence of credit losses and the effect of a positive real interest rate. This was despite a recovery in lending to households, as corporate credit remained in the doldrums. Here, a section of the CNB's Board does not see the CCyB as an appropriate instrument to deal with the selective credit market recovery (J. Kubicek), which is also due to the low risk weights on secured housing loans (J. Seidler). By way of illustration, risk weights on retail loans secured by real estate were below 20% in the first half of last year, while those on corporate loans were below 60% (see Chart III.12 in the CNB's autumn Financial Stability Report ).
According to the minutes of the Board meeting, we are likely to see an adjustment in the view on the use of the countercyclical buffer with regard to the use of the systemic risk buffer (SyRB). This is set, from the beginning of this year, at 0.5%, taking into account the assessment of structural risks. Its introduction was announced in June last year, which was complemented by the aforementioned reduction of the countercyclical buffer by half a percentage point in July. In the current economic climate, it is difficult, not least for the Board, to distinguish between cyclical and structural risks.
The CNB will also discuss financial stability later this year on 5 June, 11 September (setting the CCyB) and 27 November. Below I provide a graphic accompaniment to the key arguments. A different view is available on the CBA Monitor: Banking Sector.
The persistence of stronger inflationary momentum, which is preventing further declines in both CBN interest rates and market rates at the longer end, primarily reflects:
- Core inflation, which is back near the upper end of the CNB's inflation target tolerance band at the start of the year: month-on-month growth of over 0.25% seasonally adjusted, comment here.
- Still strong wage growth: annualized 6.9% in 4Q-2024, comment here.
- brisk house price growth: see CSO data for Q4-2024, comment here.
- and new mortgages: see February's hypomonitor with commentary here.
The coexistence of a recovery in household lending vs. still subdued corporate lending is evident not only in the year-on-year dynamics of credit stock, but also and especially by looking at the credit impulse from new loans entering the economy
However, the recovery in household lending activity is returning their share of total credit to post-Covid levels
Relatively standardised lending standards of banks
Source: CNB, CBA
Countercyclical buffer in banks' capital adequacy 
The markets are expecting unchanged interest rates until the CNB's March meeting.