Speech
Embargo
27 April 2018, 10.00 am
Comments on monetary policy and banking regulation
110th Ordinary General Meeting of Shareholders
of the Swiss National Bank
Thomas J. Jordan
Chairman of the Governing Board
Swiss National Bank
Berne, 27 April 2018
© Swiss National Bank (speech given in German)
Mr President of the Bank Council
Dear Shareholders
Dear Guests
It gives me great pleasure to welcome you to our Annual General Meeting. As is customary,
the first part of my speech will be devoted to comments on the current economic situation and
monetary policy. Ten years after the start of the global financial crisis, we can now look back
on a year in which economic momentum has been much more positive - both in Switzerland
and worldwide. The question is: has the global economy now finally completed its unusually
sluggish recovery process? As I will show, there are indeed grounds for optimism, but it is
still too early for this to give way to euphoria.
In the second part of my speech, I would like to look at the state of play in banking regulation.
A decade on from the global financial crisis, we should not just be asking whether we have
recovered from the consequences of this event; we should also take stock of what we have
done to improve the ability of our banking system to withstand future crises. As I will set out,
the regulatory measures put in place have clearly strengthened the resilience of our banking
system, and we therefore have reasons to be optimistic in this regard as well. That said, if we
are to sustainably safeguard the stability of the financial system, it is imperative that we
implement in full the regulatory measures that have already been agreed. We must also
continually review them to ensure they are fit for purpose.
Let me begin with some comments on the current economic situation and monetary policy.
The economic situation and the SNB's monetary policy
Economic situation
The Swiss economy improved continuously last year. Capacity utilisation increased and
unemployment declined. Real GDP in the fourth quarter of 2017 was up 1.9% year-on-year,
while inflation also returned to positive territory last year for the first time since 2011.
The improved economic situation is not only attributable to the upturn in the global economy.
There have also been favourable developments on the foreign exchange markets, as the Swiss
franc has weakened since the second half of 2017, against the euro in particular. This has
boosted the price competitiveness of export-oriented industries and provided welcome relief
for the Swiss economy.
The Swiss franc's trade-weighted real external value is currently around the same level as
prior to the discontinuation of the minimum exchange rate in January 2015. There has thus
been a reduction in the significant overvaluation, but our currency nevertheless remains
highly valued.
Monetary policy
With a view to ensuring appropriate monetary conditions, we are continuing to pursue our
expansionary monetary policy. This is based on the negative interest rate that banks and other
financial market participants are charged on their sight deposits at the SNB and on our
continued willingness to intervene in the foreign exchange market as necessary.
Both instruments remain essential as the situation is still fragile. While the foreign exchange
market has largely shrugged off recent equity market turbulence, circumstances in the
financial markets - and thus by extension monetary conditions for the economy - could
rapidly deteriorate again.
Such a development would be undesirable in the current environment. Inflation is now within
the range that the SNB equates with price stability, and capacity utilisation in the economy
has continued to improve. Nevertheless, inflation remains low and inflationary pressure is
modest despite our expansionary monetary policy. Tightening monetary conditions would be
premature at this juncture, and would risk unnecessarily jeopardising the positive economic
momentum that has been established.
The Swiss economy picked up markedly last year against a positive global economic
backdrop. However, we should not let ourselves get carried away. Despite the easing on the
foreign exchange market in the past twelve months, both short-term (cyclical) and longer-term
(structural) challenges remain. Competition with other business locations around the world
remains as intense now as it was prior to the crisis. Switzerland will only be able to preserve
its economic competitiveness and prosperity if its companies continue to be highly flexible
and innovative, and if our politicians succeed in maintaining our country's particularly
favourable economic conditions.
Turning now to the second part of my speech, I would like to once again take a look back at
the global financial crisis.
Regulation ten years after the UBS incident
Banking system weaknesses exposed by financial crisis
Almost ten years ago, the federal government, FINMA1 and the SNB were forced to take
steps to stabilise UBS and the Swiss financial system, with the state and taxpayers having to
temporarily take on the big bank's risks. Many other countries found themselves confronted
with similar problems and also had to rescue banks.
The financial crisis brought to light fundamental weaknesses in the international financial
system. As regards the banking system and regulation, two aspects stand out in particular.
First, at that time many banks' resilience was inadequate. Relative to their risk exposure, their
liquidity and equity buffers were insufficient to absorb major outflows of funds and losses.
Second, certain banks were so large and interconnected that their collapse would have
triggered a chain reaction, dragging down other - fundamentally healthy - financial
institutions with them. This would have resulted in considerable costs to the economy. When
such banks got into difficulties, the states in question had no option but to rescue them.2 This
has become known as the 'too big to fail' issue.
International measures to strengthen financial stability
In the aftermath of the crisis, the relevant international bodies defined new standards and
revised existing regulations to strengthen financial stability. In December last year, for
example, the Basel Committee on Banking Supervision finalised the Basel III international
regulatory framework for banks. Prior to that, the Financial Stability Board (FSB) had already
adopted new rules to address the 'too big to fail' issue.
These regulatory approaches have tackled the weaknesses that were uncovered. An initial set
of measures sought to strengthen the resilience of all banks, with more effective rules being
issued with regard to liquidity and capital adequacy.
The new liquidity standards ensure that banks can absorb exceptionally high outflows of
funds over a period of 30 days, and that they have sufficient amounts of stable funds to
finance their activities for the next twelve months.3
The capital requirements were amended in two respects. First, deficiencies in the
riskweighted capital ratio (that is to say, the ratio between capital and risk-weighted assets) were
remedied; the changes restrict the banks' scope in calculating their risk-weighted assets.4
Second, a non-risk-based measure was added to the capital requirement. I would like to look
at this briefly now.
In making business decisions, for example when granting a loan, banks have to weigh up risk
and return. The risk-sensitive management of a bank therefore needs to be matched by
risksensitive regulation. The risk-weighted capital ratio requirements address this, ensuring that a
bank engaging in transactions with higher returns - and hence higher risk - also has to hold
more capital. Accordingly, the risk weight applied to a speculative foreign investment is
markedly higher than that applied to a mortgage in Switzerland.
That being said, it is often difficult to estimate and model risks precisely. For this reason, a
simple, non-risk-based capital ratio has now also been introduced, stipulating that a bank's
capital may not fall below a certain percentage of its total assets.5 By setting a minimum
capital requirement, this ratio protects against overly optimistic risk assessments.
The new liquidity and capital requirements apply to all banks. They strengthen the ability of
an individual bank to withstand major outflows and losses without becoming illiquid or
insolvent.6 A second set of measures is aimed exclusively at large and highly interconnected
banks, and addresses the 'too big to fail' issue.7
Banks whose collapse would have a significant impact on the economy and financial system
were thus made subject to more stringent requirements than other banks.8 These systemically
important banks must hold an additional capital buffer to bolster their resilience and reduce
the likelihood of them getting into difficulty.
However, the possibility of major shocks in the financial industry and real economy causing
systemically important banks to get into existential difficulties can never be entirely ruled out.
Systemically important banks must therefore take financial and organisational precautions to
prepare for such an event.9 Specifically, they must hold sufficient loss-absorbing capital to
enable them to carry out a restructuring or wind-down on their own, i.e. without taxpayers'
money.10 They must also put measures in place to ensure that they will remain able to act in
the event of a crisis and that the bank can be restructured or wound down in an orderly
fashion.
This second set of measures thus reduces the risks stemming from systemically important
banks in that it strengthens the crisis resilience of such institutions while also enabling a
restructuring or orderly wind-down.
5
The ratio of capital to total assets is known as the Leverage Ratio.
6
The financial crisis showed that it is not only the amount of capital that is important, but also its quality. Basel III therefore also raised
capital quality requirements. In particular, the regulation ensures that eligible capital can already be used to absorb losses before
insolvency proceedings are initiated. This is the only way that such capital can act as a buffer and counter the threat of the bank having
to cease operations.
7
The international regulatory framework has also put in place further measures to reduce systemic risks in the banking sector. For
example, the risk of contagion within the banking sector is to be reduced through more consistent measurement and control of
concentrations of exposure to specific counterparties (e.g. other banks). The procyclicality of regulation is also addressed - in phases of
excessive lending the regulator can set a countercyclical capital buffer. This increases the capital requirements for banks during
upswings, releasing the capital again in downturns. The measure is designed to prevent banks from having to increase their capital and
restrict their lending activities during a downturn, thereby exacerbating cyclical fluctuations.
8
The FSB ranks Credit Suisse Group AG and UBS AG as global systemically important banks (G-SIBs). In Switzerland, the Banking Act
gives the SNB the authority to designate banks as being systemically important for the Swiss market, following consultation with
FINMA. Banks are deemed to be systemically important if they perform functions in the domestic lending and deposit-taking business,
as well as in the payment transactions area, which are essential to the Swiss economy and cannot be substituted at short notice. In
addition to Credit Suisse Group AG and UBS AG, the SNB has designated Zürcher Kantonalbank, the Raiffeisen Group and
PostFinance Ltd as systemically important.
9
These are referred to as gone-concern requirements. A fundamental distinction is drawn between going-concern and gone-concern
requirements. The former address the ongoing business activities of a bank, whereas the latter relate to the event of a bank having to be
restructured or wound down.
10
The fact is that banks typically get into difficulty precisely when they no longer have sufficient capital available. The regulations
therefore allow for debt to be written off or converted into equity in such instances. Such instruments, which are designed to absorb
losses in the event of a resolution, are referred to as bail-in instruments.
Banking regulation in Switzerland
With these two packages of measures, the international bodies have defined global minimum
standards. However, many countries have gone further than these requirements, Switzerland
among them.
Why does it make sense for us to set high standards in this area? Switzerland has a
particularly large financial centre relative to the size of its economy. The banking sector is
directly responsible for around 5% of value added in Switzerland, and employs more than
115,000 people. Moreover, in its role as a financial intermediary it is essential for the efficient
functioning of the economy. It is therefore of major importance to the economy as a whole.
Efficient and internationally active banks play a key role in this context. A break-up of
systemically important banks would therefore not be in Switzerland's overall economic
interests, making it all the more crucial that these banks be sufficiently robust. For this reason,
the Swiss regulations require systemically important banks to hold a larger capital buffer than
the minimum standard laid down in the international framework.
You might argue that higher capital requirements are detrimental to the financial centre. In the
case of Switzerland in particular, however, such requirements must not be viewed solely as a
cost driver. In today's world, a robust banking system is a significant advantage for a business
location in the face of international competition. It attracts clients and businesses, and is
therefore desirable not only in the interests of financial stability, but also from the perspective
of the banks themselves.
Furthermore, Swiss regulators have opted for a streamlined regulatory approach compared
with other countries with major financial centres. Switzerland refrains from actively
intervening in the business models or organisational structures of the banks, and no distinction
is drawn between desirable and undesirable banking practices. Our regulation focuses on the
essentials, specifically on ensuring that banks can themselves absorb any losses resulting from
the risks they take on, without destabilising other parts of the financial system or damaging
the economy.
Taking stock
What have we achieved with the measures that have been put in place? Is the Swiss banking
system more resilient to crises today? Please allow me to give you our take on this. I will first
look at those banks with a domestic focus before moving on to the big banks.
Switzerland's domestically focused banks were not at the centre of the financial crisis, and all
in all the new regulations are also likely to have little effect on them; their liquidity and
capital buffers are mostly well above the regulatory minimum requirements. The stress tests
that the SNB regularly conducts to assess risks also show that the banking system is largely
well capitalised.
Notwithstanding this, the risk appetite of domestically focused banks has increased again in
recent years, not least due to the low interest rate environment. There are also imbalances on
the mortgage and real estate markets. It is therefore important that the domestically focused
banks are aware of the risks they have assumed and ensure that they remain well capitalised in
the future.
And what about the two big banks? Both have clearly strengthened their resilience in recent
years, and are on track to meet the required standards within the stipulated time frame. They
have continually improved their capitalisation with respect to maintaining operations as a
going concern and ensuring their loss-absorbing capacity in the event of a restructuring or
orderly wind-down.11 They have also put in place key organisational measures to increase
their resolvability. For example, both have set up Swiss subsidiaries that would continue their
systemically important functions in Switzerland in the event of a crisis. The big banks have
therefore already made substantial efforts on this front.
What still remains to be done? First, the process of building up capital to absorb losses in a
resolution scenario must be completed, and this will be achieved in the near future. Second,
by the end of 2019 the two big banks have to demonstrate that in the event of a crisis, they
would still be able to maintain the functions that are systemically important for Switzerland.
In other words, the Swiss entities that cover the systemically important functions must be
sufficiently independent of the remainder of the bank, both operationally and financially. In
addition, plans for a restructuring or wind-down of the entire bank (at the global level) have
still to be finalised.
Looking at the domestically focused banks and the big banks together, we can say that the
resilience of our banking system as a whole has increased significantly. We are convinced that
our banks are better able to withstand a crisis today than they were ten years ago. What is
more, banks' management bodies and the supervisory authorities alike now have a better
understanding of how to assess risks.
The comprehensive implementation of the agreed measures will further improve the stability
of our financial system. We will still have systemically important banks in the future.
However, these must no longer be too big to fail; that is to say, the state and taxpayers must
no longer have to fear being held hostage. The new banking regulations therefore contribute
to reducing risks, but they also take into account both the considerable economic importance
of Switzerland's banking sector and our interest in having a significant financial centre.
I would like to cross over here, if I may, to the sovereign money initiative. The authors of this
initiative hope that, if adopted, it would result in a more stable financial system. However,
switching to an untested sovereign money regime would radically transform Switzerland's
tried-and-tested financial framework. Given the lack of empirical data and comparable
systems worldwide, such a transformation risks plunging Switzerland into a period of great
uncertainty. The SNB therefore considers that the most effective approach is to make our
banking centre more crisis resilient using the measures I set out before.
It is now incumbent on us to complete the implementation of the new regulations rigorously.
A large part of this has already been done. The authorities will of course have to review the
effectiveness of the regulations going forward, and in so doing must also consider the costs of
such regulation for the banks and the economy. The goal here has to be to keep costs as low
as possible without diluting the fundamental elements of financial stability.
Concluding remarks
Ladies and Gentlemen, in my speech I have painted a positive picture of regulatory efforts
and of our banks' ability to withstand a crisis. The resilience of our banking system has
increased significantly, and will be improved yet further once all of the regulations have been
implemented in full. Nonetheless, we would be wise to keep our feet on the ground.
The new banking regulations will not be able to prevent all crises - indeed, it is not claimed
that they can. Their purpose is to substantially reduce the likelihood and severity of any future
financial crisis. At the same time, the Swiss regulations will resolve the 'too big to fail' issue.
Together these measures will strengthen the resilience of the banking sector, which can surely
only benefit our economy and enhance our prosperity.
Allow me to conclude by taking this opportunity, also on behalf of my Governing Board
colleagues, Fritz Zurbrügg and Andréa Maechler, to thank our employees for their hard work
and dedication. We also thank you, our shareholders, for your loyalty to the SNB and your
faithful support. Let me also thank our young guests from Gymnase intercantonal de la Broye
in Payerne and Kantonsschule Schüpfheim in Canton Lucerne for their interest in monetary
policy and the SNB. Thank you all for your attention.