Czech Banks Brace for Profit Impact from Increased Minimum-Reserve Requirement
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Loading... - Maaike Simpson
- 14 Oct 2024
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Czech banks are expected to face challenges in lending and profitability following the Czech National Bank's decision to double the minimum reserve requirement. This move, aimed at reducing the central bank's costs, will see the mandatory buffer increase from 2% to 4% of the reserve base, excluding repo liabilities, effective January 2.
The increase in the reserve requirement means that banks, foreign bank branches, and credit unions will have to hold more funds at the central bank without earning interest. Thomas Unger, a stock analyst at Erste Group Bank AG, predicts this will lead to reduced loan growth and lower interest income from capital buffers. He estimates a potential 5% decrease in 2025 net income for Komercni Banka AS and a 6% decrease for Moneta Money Bank AS, assuming no mitigating actions are taken by the banks.
"This is a de-facto tightening of monetary policy as banks will have fewer resources to provide loans to households and companies," Unger noted. The extent to which banks can adjust their business strategies to offset this impact remains uncertain.
The market's initial response was mixed, with Komercni Banka shares dropping by 1% and Moneta shares rising by 1% in Prague trading. The central bank's decision comes as policymakers aim to tie up excess liquidity while simultaneously reducing borrowing costs to support the economy. Governor Ales Michl has criticized previous policies that expanded the central bank's balance sheet and led to record losses, emphasizing the need for sustainable earnings and caution in monetary easing to prevent inflation.
The decision has faced criticism from David Marek, an economic adviser to President Petr Pavel, who argued that banks might offset lost income by raising interest rates on loans and mortgages, counteracting efforts to ease monetary conditions. Governor Michl, however, defended the move, stating it would lower the cost of monetary policy without impacting the central bank's mandate. He assured that the financial system remains stable and competitive, minimizing potential effects on clients.
As Czech banks navigate this regulatory change, the focus will be on how they adapt their strategies to maintain profitability and lending capacity. The central bank's decision reflects a broader effort to balance economic support with financial stability, amid ongoing debates over the best path forward for monetary policy.
