Czech banks and covered bonds will benefit from central bank’s coronavirus response

Czech National Bank (CNB) implemented a series of proactive measures to assist Czech banks weathering the negative economic effects of the coronavirus outbreak, a credit positive. The measures include a 50 basis point (bp) cut in the two-week repo rate to 1.75%, lowering the Lombard rate to 2.75% and the discount rate to 0.75%, and postponing a planned increase in the countercyclical buffer (CCyB) rate.

The CNB enhanced banks’ access to liquidity by having repurchase (repo) auctions three times a week (instead of once a week). Czech banks can borrow central bank funds at the new 1.75% two-week repo rate, down from 2.25% previously, allowing them to cover shortterm financing needs if needed.

The banks hold large pools of liquid assets to collateralize repo transactions and to protect them from potential funding squeezes in stressed market conditions. The CNB’s action followed European Central Bank (ECB) recommendations on 12 March.

The implemented measures give the banks more flexibility to increase lending and a bit more leeway to absorb pressure on asset quality from the coronavirus’ extraordinary shock on the Czech economy, the full extent of which will be unclear for some time.

Banks’ recently favorable operating conditions are deteriorating and a broad range of economic disruptions, especially in the automotive sector, will likely slow economic growth, particularly in the first half of this year.

The CNB also encouraged banks – at their discretion – to assist struggling borrowers by postponing loan repayments. The Czech Banking Association agreed on three-month payment deferment to support retail borrowers whose income is reduced by the current situation.

This optional measure, which some Czech banks already offer and may include the deferred principal and interest payments, allows borrowers to avoid default and allows banks to avoid immediate credit losses. Ultimately, however, a longer economic disruption will adversely affect loan quality.

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