Housing Standards 2004/2005
Financing Housing and Refurbishing Housing Estates

4. The Effectiveness of the System of Financing Owner-Occupied Housing in the Czech Republic

4.5 Building Savings - A Qualitative Analysis

• The representatives of building savings banks approached in the research consider the interest risk to be "the most important" type of risk that building savings banks are exposed to. The fall in interest rates in the inter-bank market in the Czech Republic in the case of a low loan-savings ratio in the building savings system, the impossibility of using financial derivatives for security against the interest risk, and the careless interest policy of building savings banks in recent years all led to a sharp fall in the interest income of building savings banks, and this was directly linked to a rise in fees on building savings.
• The representatives in the study consider the selection of financial instruments into which they can deposit their disposable resources to be relatively sufficient. On the other hand, they would welcome an expansion of the range of purposes that interest resources from building savings can be used for (in the sense of being able to finance the purchase of second housing and some long-term consumption items necessary for housing), which would help to raise the indicator of the loan-savings ratio.
• Restructuring "within" individual building savings banks could help to reduce their operation costs, and could also help to make the activity of the real estate register and the work of the courts more operative and more efficient. The inefficient work of the real estate register and the courts is evident from the practical perspective in for example the fact that securing a loan with a security interest in a piece of real estate does not bring the client any significant interest advantages in comparison with other methods of loan security.
• Building savings banks are aware of the potential risk of a fall in the prices of real estate in the market, and therefore the usually grant loans with a maximum LTV of 80%-85%. The methods used for the revaluation of real estate serving as security for loans with a higher nominal value are, however, just an non-transparent and unconvincing as in the case of banks providing mortgage loans.
• In the view of the representatives of building savings banks the level of efficiency in the building savings sector could be increased if the use of the resources acquired from building savings interest were made more transparent and simpler. In this sphere there is a considerable degree of legislative insecurity, which significantly increases the savings banks' costs and puts an excessive burden on their clients.
• All the respondents reacted more on the negative side to the ideas of enabling clients to move between individual building savings banks without losing state support, or possibly only paying state support to those clients who receive regular or bridge loans from building savings (and therefore really use the acquired resources, including state support, demonstrably on housing), or possibly using income targeting of state support or even its complete elimination. In their opinion such measures would result in higher administrative costs and less transparency of the entire system, liquidity problems for savings banks, longer waiting periods for the allocation of loans, etc. Only one opinion was expressed that the level of state support could vary (instead of being guaranteed for the entire duration of the contract) depending on developments in market conditions. At the same time, however, all the respondents agreed that state support for building savings in the Czech Republic after a legal amendment is considerably higher than in the surrounding countries where there are also building savings systems.
• In terms of the relationship between building savings banks and banks providing mortgage loans the representatives of savings banks expressed themselves in the sense that building savings and mortgage loans are based on different philosophies, and therefore the savings banks are not interested in competing directly with mortgage loan providers At the present time they are forced more by the unfavourable market conditions (low interest rates) and the pressure to increase the loan-savings ratio in the building savings system. The fact that the majority of building savings banks are part of financial groups that also contain mortgage loan providers is another reason why the motivation for competition between the providers of the two types of products is not very pronounced.