News conference
Berne, 13 December 2018
Fritz Zurbrügg
Introductory remarks by Fritz Zurbrügg
In my remarks today, I will be looking at the current developments in the area of financial
stability. I shall look at the big banks first before turning to the domestically focused banks.
Big banks
The financial market situation facing the two big banks has become more volatile since the
press conference in June. Given this heightened uncertainty on the markets, the share prices of
big banks both in Switzerland and abroad have come under pressure. By contrast, premia for
credit default swaps of such banks have remained at a similar level as in June overall.
The SNB's assessment of the situation at the two big banks is essentially unchanged from that
at the last press conference. This applies both to resilience and to the orderly resolution of a
distressed bank.
As regards resilience, Credit Suisse and UBS are still on track to meet the revised 'too big to
fail' requirements on going-concern loss-absorbing capacity. They already meet all final1
risk-weighted capital requirements. However, as regards the leverage ratio, i.e. the
unweighted ratio of capital to assets, further improvement is needed.
The big banks have made significant progress in recent years in the area of resolution. They
have steadily expanded their holdings of bail-in instruments. At group level, both institutions
are already compliant with the final requirements for gone-concern loss-absorbing capacity.
Moreover, Credit Suisse and UBS have taken important organisational steps to improve their
resolvability as part of their resolution planning. For instance, they have both set up Swiss
subsidiaries that contain their systemically important functions, including, in particular,
domestic deposit and lending business.
To ensure an orderly resolution in a crisis, progress is still needed in three areas in particular.
First, FINMA, as the competent authority, is currently in the process of drawing up resolution
funding plans. These aim to ensure that a bank has sufficient liquidity to implement a
resolution without recourse to state support. Second, it must be ensured that big banks'
lossabsorbing capacity is adequate, not only at group level, but also on a stand-alone basis at the
level of the individual group entities. In this context, the Federal Council has announced that,
during the first half of 2019, it will decide on the corresponding requirements for the highest
operating unit of the big banks - i.e. the parent entity. Third, Credit Suisse and UBS must
further reduce the financial and operational dependencies within the group.
Domestically focused banks
I would now like to turn to the domestically focused banks. Here too, there has been little
change since the Financial Stability Report was published in June. Mortgage and real estate
markets remain the biggest source of risk. I would like to make two observations in this
connection.
First, the imbalances on the mortgage and real estate markets persist. Both mortgage lending
and prices for single-family homes and privately owned apartments have continued to rise at a
moderate rate over recent months. And while prices for residential investment property have
not increased any further, the risk of a price correction in this segment is particularly high.
The renewed increase in vacancy rates indicates that the robust activity in rental apartment
construction may have led to oversupply, exerting downward pressure on rental income and,
in turn, on the prices of these properties. At the same time, initial yields on residential
investment property, in other words the ratio of rental returns to transaction prices, are at
historically low levels. In the event of an interest rate rise, initial yields on investment
properties will also have to increase upon a change of ownership. This would place additional
pressure on prices.
Second, the risk appetite of domestically focused banks remains high. This is partly due to the
fact that interest rate margins of these banks fell further in the first half of 2018. As long as
this pressure on margins persists, incentives for domestically focused banks to increase
risktaking will remain substantial. The high risk appetite of the domestically focused banks is, for
instance, evident from the fact that mortgage lending growth at these banks continued at a
robust 4%, whereas the market as a whole saw growth of around 3%. At the same time,
affordability risks, which these banks take on when granting new mortgage loans to finance
residential investment properties, have risen once again over the course of the year. Since
many of these loans also carry considerable loan-to-value (LTV) risk, they would be
particularly vulnerable in the case of a sharp increase in interest rates and a correction in real
estate prices.
It is important that banks are in a position to bear the risks they take on. In the SNB's opinion,
this requirement is met by most domestically focused banks owing to their good capitalisation
level. Capitalisation levels appropriate to the exposures incurred need to be maintained in
future, too. This is particularly relevant in view of the previously mentioned granting of
mortgages with high affordability risks, which increases the banks' loss potential.
Given the risks I have just described, the SNB continues to take the view that targeted
measures in the area of residential investment property lending should be considered. Such
measures are currently being examined. In addition, the SNB will continue to monitor
developments on the mortgage and real estate markets closely, and regularly reassess the need
for an adjustment of the countercyclical capital buffer.