Jean-Pierre Danthine: Financial stability developments and the delayed
new Swiss banknotes
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,
13 December 2012.
* * *
In my introductory remarks today, I would like to look at the main developments in the area of
Financial Stability Report
financial stability since the publication of our in June of this year.
Afterwards, I will talk about the postponement of the new banknote series.
In the area of financial stability, the improvement in the big banks' capital situation is
particularly noteworthy. The prevailing uncertainties and the risks for the banking sector as a
whole remain considerable, however.
Prevailing risks remain considerable
General economic and financial conditions for the Swiss banking sector remain difficult. On
the one hand, the situation in the financial markets has eased since June 2012. This is
largely due to various decisions and measures taken by governments and central banks
worldwide. On the other hand, the easing of tensions in the financial markets should be
interpreted with caution. Should the measures already taken not be effective or should the
progress made in restructuring government budgets be slow, we cannot rule out renewed
turbulence in the financial markets. The European banking industry is also in a fragile state.
Although CDS premia for European banks have been going down in the last few months,
their level is still considerably above previous years as well as that of Swiss and US banks.
Finally, as my colleague Thomas Jordan has explained, the global economic outlook remains
modest. For Europe, in particular, we have revised our short-term forecast downwards again
slightly.
For Switzerland, the National Bank is expecting moderate growth. Economic conditions
remain comparatively good, which - in conjunction with the low level of interest rates - is
boosting the continued strong momentum in the mortgage and real estate markets. I will
speak about developments in this market in more detail later on.
To sum up, the risks in the banking environment remain considerable. First, the risk of an
escalation of the European debt crisis is not insignificant. Second, imbalances are building
up in the Swiss real estate market. This goes hand in hand with an increased risk of
significant price corrections in the medium term.
Greater resilience of the big banks
The situation of the big banks has improved since the last news conference, as both
institutions have further increased their resilience. This increase was particularly pronounced
at Credit Suisse. According to the bank's most recently published data, it increased its
holdings of loss-absorbing capital by roughly three-quarters in the second half of 2012. In
addition to retaining profits, this increase is mainly attributable to the capital measures
announced in July, which have already been implemented to a large extent. In addition, as
part of their strategic reorientation, both big banks announced measures which will further
enhance their resilience. For instance, both institutions are planning to further expand their
loss-absorbing capital, to reduce their risks and, in particular, trim their balance sheets as
well as to pursue a policy of dividend restraint.
The National Bank welcomes the increase in the big banks' resilience achieved thus far, as
well as the announced measures to further improve their capital situation. The consistent
implementation of these measures is important for two reasons: First, leverage has remained
high despite the improvement in the capital situation. Second, the risks in the environment -
and thus the associated potential losses for the big banks in the event of a further escalation
of the European debt crisis - remain considerable.
Situation at domestically focused banks
I would now like to turn to the situation at domestically focused banks.
The risks associated with the environment in which these banks operate increased during the
past six months. Indeed, the isolated signs of a slowdown of growth in the mortgage and real
estate markets observed in the second quarter did not materialise in the third quarter. In
particular, prices in the different segments of the residential real estate market continued to
rise at a sustained pace. At the same time, growth in the mortgage loan volume was still
considerably higher than GDP growth. Imbalances have therefore grown.
As far as risk appetite and capitalisation are concerned, the situation of domestically focused
banks has not changed significantly during the last six months.
On the one hand, banks' risk appetite has not diminished overall. This is substantiated by the
following: First, in the case of new mortgage loans, both the loan-to-value ratios and
loan-toincome ratios have remained at a high level. Second, interest rate risk has not declined and
remains high. Third, the already low margins on interest income have continued to decrease.
There are nevertheless considerable differences from one bank to another, in particular as to
how their risk appetite has evolved. Certain banks have reduced their risk-taking significantly
during the last quarters, while others have increased their exposure to risk.
On the other hand, average capitalisation for domestically focused banks relative to
regulatory requirements is still at a historically high level. However, as the SNB already
emphasised in its latest Financial Stability Report, the resilience of these banks, as
measured by the regulatory capital indicators, is overestimated.
Therefore, six months after being announced, the stricter capital requirements for mortgages
and the revision of the self-regulation rules for mortgage lending have not, or not yet, led to a
significant trend reversal in mortgage and real estate markets, although there is some
anecdotal evidence pointing in that direction. It cannot be ruled out that the impact of these
measures has not fully materialised or is simply not yet reflected in the data available. In
particular, due to the still exceptionally low interest rates, there is, however, a considerable
risk that these imbalances continue to build up, and the risk of an abrupt correction over the
medium term keeps increasing.
Under these circumstances, the SNB is carefully monitoring the developments in mortgage
and real estate markets. It periodically assesses the necessity to activate the countercyclical
capital buffer.
Issuance of the new banknote series in 2015 at the earliest
In February 2012, the National Bank informed the public that the new banknote series would
be postponed. Today, I would like to provide some background information on our decision.
The National Bank is committed to putting banknotes into circulation that are state of the art
in terms of both their design and their technological aspects. In order to meet this standard,
such a project must be launched at an early stage. Integrating and combining security
features involving new technologies that have not previously been used for banknotes
presents a special challenge. Since the development phase for new security features is very
long, launching a new series is likely to take several years for the technical feasibility
assessment alone. Certain insights can only be gained during the actual serial production.
The development of the new banknote series began in 2005 with a design competition. In the
planning phase for the technical feasibility and during initial production tests in 2010, it
became evident that the complexity of the new security features necessitated a
postponement of the issue date to autumn 2012. In autumn 2011, during an early phase of
the serial production, technical difficulties arose which had not been discernible in the testing
phase, whose results were positive. For this reason, the SNB this year decided to conduct a
comprehensive re-assessment of the entire project together with the industrial partners
producing the new banknote on its behalf. As a result, several mostly technical measures
were defined and in some cases have already been implemented. These measures should
ensure that the series can go into long-term industrial production.
Owing to the complexity and scope of the necessary work, the first denomination of the
series, the CHF 50 note, may be expected in 2015 at the earliest. The SNB will announce the
issue date as soon as production of the first banknote denomination has been completed.
Since the National Bank wants to continue meeting the highest quality standards, it has
accepted a postponement in the new issue, a decision which was rendered all the easier
because the banknotes currently in circulation continue to offer a high standard of security.