Jean-Pierre Danthine: Resilience of Swiss banks from a financial stability
perspective
Introductory remarks by Mr Jean-Pierre Danthine, Vice Chairman of the Governing Board of
the Swiss National Bank, at the Media News Conference of the Swiss National Bank, Berne,
12 December 2013.
* * *
In my remarks, I would like to look at the situation at Swiss banks from a financial stability
perspective, taking the big banks first and then moving on to a discussion of domestically
focused banks. To close, I will say a few words on the subject of banknotes.
Big banks: strengthening resilience
Since the last media news conference in June, the two Swiss big banks have improved their
capital situation further. This applies particularly to their risk-weighted capital ratios, where, in
an international comparison, they are above the average for large global banks. Credit
Suisse, for example, has already met the requirement of 13% loss-absorbing capital to
risk-weighted assets, which comes into force in 2019. According to its published plans, UBS
should be able to meet this target by the end of 2014. As regards total capital - which, in
addition to loss-absorbing capital, also comprises low-trigger contingent capital instruments -
the big banks have also made great progress; however, they have not yet achieved the ratios
that will apply from 2019.
Unweighted capital ratios - leverage ratios - generate a different picture. Both banks have
also been able to improve their leverage ratios considerably; yet in an international
comparison based on a number of commonly used definitions, they are still below the
average of large global banks.
As my colleague Thomas Jordan has explained, economic and financial conditions for the
Swiss banking sector continue to be challenging. For this reason, it is vital for the big banks
to continue improving their capitalisation, and in turn their resilience, particularly as regards
the leverage ratio. This is especially important because the leverage ratio is growing in
significance as a measure of bank resilience. In times of crisis, in particular, the leverage
ratio often becomes the focus of market attention.
In the SNB's view, the top priority for the big banks is the consistent and rapid
implementation of the "too big to fail" (TBTF) regulations. The focus should be on the
following areas:
First, the credibility of risk-weighted asset calculations based on banks' internal models
should be strengthened. As outlined previously, risk-weighted ratios yield a different picture
of a bank's capital situation than leverage ratios. In this context, the SNB is currently
supporting FINMA in an examination of whether and to what extent risk-weighted assets
based on banks' internal models differ from those based on the standard approach, which is
model-independent. If this examination reveals no substantial inexplicable differences, this
would strengthen market confidence in the model-based approach. Conversely, if there are
any substantial differences that cannot be explained, corrective measures would need to be
considered and implemented. Such measures would also boost confidence in the
modelbased approach.
Second, it must be ensured that, if necessary, there can be an orderly resolution of a big
bank in the event of a crisis. From the Swiss perspective, the emergency plans on
maintaining systemically important functions are particularly important in this regard. The
emergency plans must be credible and workable in a crisis. For this reason, the big banks
should continue to push forward consistently with their emergency plans. Moreover, global
resolution plans must ensure that the non-systemically important units of a big bank can be
resolved in an orderly fashion. Adjustments to the group structure, as recently announced by
both big banks, represent a first step in this process. An additional tool which can facilitate
global resolution is based on the bail-in concept, which is the subject of widespread
discussion at international level. With a bail-in, debt can be converted to equity capital, which
would enable the big banks to carry additional losses in the event of a crisis. However, the
effectiveness of a bail-in essentially depends on whether appropriate debt is available in
sufficient quantities, and whether its characteristics are such as to ensure a smooth
conversion into equity capital in the event of a crisis. In this regard, the authorities will have
to examine the extent to which it is necessary to expand the existing TBTF regulations to
take account of Swiss specificities.
Domestically focused banks: resilience and lending policies
I would now like to turn to the domestically focused banks. In Switzerland, there has been a
further increase in risks on the mortgage and real estate markets since the end of 2012. This
development poses the greatest challenge to the stability of domestically focused banks over
the medium term.
Conditions on the mortgage market, in particular, have deteriorated. In Switzerland, growth in
mortgages for residential real estate continued to exceed GDP growth in 2013. In the first
three quarters of this year, mortgage volumes increased by CHF 27 billion, or an annualised
4.4%. Over the same period, annual economic output, i.e. aggregated economic output over
four quarters, rose by CHF 8.4 billion from the end of 2012, or an annualised 1.9%. This
means that, for Switzerland as a whole, the already high indebtedness is continuing to grow
faster than people's capacity to offset this debt with income.
The situation on the residential real estate market has also deteriorated slightly. Depending
on the segment, real estate prices have risen in real terms by between 2.6% and 3.5% on
average since the beginning of the year. Despite a slowing of momentum compared to last
year, these growth rates are still high in a historical comparison. In addition, overall, prices
for residential real estate have increased more strongly than rents or income since the
beginning of the year.
There is also no sign of a reversal of domestically focused banks' risk appetite. With regard
to mortgage lending for owner-occupied residential property, the proportion of new loans with
high loan-to-value ratios has decreased slightly. Where affordability risks are concerned,
however, no such development can be identified. Moreover, domestically focused banks
remain the driving force behind the strong domestic mortgage growth. While a few individual
banks have reined in their lending considerably compared to last year, others have
maintained a high level of lending growth, or have even stepped up lending. Finally, interest
rate risk exposure is extremely high by historical standards, whereas average interest rate
margins have narrowed further over the same period.
On a positive note, domestically focused banks' capitalisation as measured by regulatory
requirements remains at historically high levels. However, as discussed in this year's
Financial Stability Report, these regulatory capital ratios could be overstating the banks'
resilience, because the major risks prevailing in the mortgage and real estate markets or the
interest rate risk exposure are not, or only partly, taken into account. Against this backdrop,
banks should - irrespective of the regulatory requirements - continuously assess their
resilience, and make adjustments where necessary. They should be able to maintain their
economically important functions, even if real estate prices were to fall sharply and interest
rates were to simultaneously rise.
Over the last few years, a number of measures have been taken to reduce the risks to
financial stability arising out of developments in the mortgage and real estate markets. The
most recent of these measures is the activation, in February this year, of the countercyclical
capital buffer (CCB). These measures were necessary and useful. For example, this year a
few large domestically focused banks - citing, among other reasons, the activation of the
CCB - have taken steps to strengthen their capital and thereby their resilience. So far,
however, the package of measures has not been enough to prevent a further build-up of
imbalances on the mortgage and real estate markets.
In an environment of persistently low interest rates, coupled with banks' undiminished
appetite for risk, the danger of a further build-up of imbalances remains considerable. For
this reason, the SNB continues to monitor the situation very closely, and regularly assesses
whether the CCB should be adjusted.
Supply of secure banknotes ensured at all times
Now I would like to say a few words on the subject of banknotes. At the beginning of October,
we informed the public that, since autumn 2012, a small number of Swiss 1000-franc
banknotes have been in circulation which were not issued by the SNB. As you know, these
notes were abstracted during the production process at Orell Füssli, before they had been
through all stages of production.
Out of consideration for the investigation by the Office of the Attorney General, this
information was only made public after some of these notes appeared in Switzerland. As
previously announced, those in possession of such banknotes will be reimbursed the
nominal value by Orell Füssli.
For the SNB, security is paramount in the production of banknotes. Orell Füssli has reviewed
its security arrangements, and has taken the necessary measures to ensure that such events
are precluded to the greatest possible extent in the future.
I would like to emphasise that the SNB and Orell Füssli have been working together in the
area of banknote production for about a century. The supply of secure banknotes for our
country has been, and will continue to be, guaranteed at all times. We will also be pursuing
the development of the new banknote series in close collaboration with Orell Füssli.
As you are aware, the new banknote series has suffered a series of delays. The SNB is
committed to putting banknotes into circulation that are state of the art in terms of both
design innovation and technology. Our current banknote series was unique in this respect
when it was issued in the mid-1990s. And it still has a very high security standard today, as a
result of this commitment to quality. This means that the SNB is not under any pressure to
roll out a new banknote series quickly. The new series must meet very high security, quality
and technical production standards - and will have to do so for at least 15 years after its first
release. So it is worth taking the time to ensure that the new security features, which are
complex, technologically innovative and have never before been applied to banknote design,
can also stand up to the rigours of industrial production processes. A number of tests are
currently being carried out. The first denomination in the new series - the 50-franc note - will
not be issued until 2015 at the earliest. We will announce the exact issue date as soon as
production of the first banknote denomination has been completed.