Fritz Zurbrügg: Introductory remarks, Swiss National Bank news
conference
Introductory remarks by Mr Fritz Zurbrügg, Vice Chairman of the Governing Board of the Swiss
National Bank, at the Media News Conference of the Swiss National Bank, Zurich, 16 December
2021.
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In my remarks today, I will begin with the developments in the Swiss banking sector environment.
I will then provide an assessment of the current situation at the two globally active banks, Credit
Suisse and UBS, as well as at the domestically focused banks.
Economic environment
Since publication of the last Financial Stability Report in June, economic and financial conditions
have generally remained favourable for the Swiss banking system, although uncertainty about
how the pandemic will evolve remains high. The global economic recovery has continued. Share
prices in most regions are currently higher than they were in June, while risk premia on corporate
bonds are low. Meanwhile, growth in residential property prices has continued worldwide.
However, this macroeconomic environment still carries significant risks for global financial
stability. First, there are signs of overvaluation on the stock and real estate markets in various
countries; at the same time, global public and corporate debt is high. These vulnerabilities make
the financial markets more susceptible to shocks, particularly large interest rate rises. Second,
as my colleague Thomas Jordan explained, heightened uncertainty about the economic outlook
persists. Further deterioration in the international economic environment due to the pandemic
situation could adversely affect the quality of banks' credit portfolios.
In Switzerland too, vulnerabilities exist, particularly on the mortgage and residential real estate
markets. These vulnerabilities have increased further since the onset of the coronavirus
pandemic, as mortgage growth and price rises for residential property have been higher during
this period than can be explained by fundamental factors such as income and rents. Over the
last six months too, property prices and mortgage volume have continued to grow.
Globally active banks
The two globally active Swiss banks remain in robust shape. Like other internationally active
banks, Credit Suisse and UBS have benefited from the favourable environment. Increased client
activity as well as growth in assets under management, the latter driven especially by positive
market developments, led to higher fee and commission income at both institutions.
Furthermore, the two banks were able to release part of their provisions for credit losses set up
in connection with the coronavirus pandemic.
The capital situation at both banks has continued to improve since the last Financial Stability
Report. At UBS, this improvement is attributable to retained earnings; at Credit Suisse, in
particular to the capital increase conducted in the wake of the losses relating to US hedge fund
Archegos. At the same time, the estimated loss potential at the two banks as assessed under
our stress scenarios remains virtually unchanged. Overall, resilience at both institutions -
measured by their capital ratios following a stress event - has increased slightly thanks to the
improved capital situation.
The two globally active Swiss banks thus continue to be well placed to face the challenges in the
current environment and support the real economy. However, their loss potential is still
substantial and there is heightened uncertainty about economic developments. Furthermore, the
Archegos losses and other recent events illustrate that banks also take significant risks which
are not directly linked to the macroeconomic environment. All these factors underline the
necessity of the 'too big to fail' capital regulations for ensuring adequate resilience at the two
globally active banks.
Domestically focused banks
I shall now turn to the domestically focused banks. The coronavirus pandemic has left hardly any
trace to date on these banks' financial figures and risk indicators. Value adjustments on loans in
the first six months of 2021 were low and, following a slight increase in 2020, overall profitability
has remained stable year-on-year.
Viewed over a longer period, the profitability of domestically focused banks is nevertheless still
low. This is primarily due to the interest rate margin which has narrowed considerably over the
last decade. This downward trend also continued during the first half of 2021.
Looking ahead, pressure on the profitability of domestically focused banks is expected to remain.
First, the interest rate margin is likely to narrow further should interest rates persist at a low level.
In this event, the renewal of existing loans at lower rates would continue. Second, a lagged rise in
the need for value adjustments for corporate loans remains likely. However, these value
adjustments should prove lower than was originally feared at the onset of the pandemic.
Domestically focused banks' exposure to the mortgage and real estate markets has increased
further. Mortgage lending volume at domestically focused banks has continued to rise in 2021
and, at the same time, affordability risks remain high. The already large share of new mortgages
with a high loan-to-income ratio has increased slightly since the beginning of the year. By
contrast, a positive sign from a financial stability perspective is the fact that the share of new
mortgages for residential investment properties with a high loan-to-value ratio has declined
during 2021. This is as a consequence of the amended self-regulation rules for banks in the
mortgage financing for residential investment properties segment, which came into force at the
beginning of 2020.
In light of the risk exposure and vulnerabilities on the mortgage and residential real estate
markets, substantial capital buffers in the banking system are especially important. They enable
the banks to absorb potential losses while, at the same time, supplying the economy with credit.
The SNB's scenario analysis indicates that, thanks to the available capital buffers, most banks
would be in a position to absorb the losses under relevant stress scenarios, including that of a
large interest rate rise with a simultaneous correction in real estate prices.
The SNB continues to monitor developments on the mortgage and real estate markets closely,
and regularly reassesses the need for a reactivation of the countercyclical capital buffer.