Jean-Pierre Danthine: Situation at 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,
19 June 2014.
* * *
As my colleague Thomas Jordan has explained, economic and financial conditions continue
to be challenging. Against this background, I would like to examine the situation at Swiss
banks from a financial stability perspective, looking first at the big banks and then moving on
to a discussion of domestically focused banks.
Big banks: strengthening resilience
Over the past year, the Swiss big banks have further improved their capital situation. In terms
of loss-absorbing capital - defined as Common Equity Tier 1 capital plus high-trigger
contingent capital instruments - their risk-weighted capital ratio either already exceeds or is
close to the 13% requirement that will apply from 2019. They also meet or are very close to
meeting the corresponding leverage ratio requirement of 3.1%. In terms of total capital, both
big banks have also substantially improved their ratios. However, they have yet to meet the
corresponding requirements applicable from 2019.1
The SNB welcomes the significant progress made by the big banks in improving their capital
situation and their compliance with some of the requirements applicable from 2019. The SNB
recommends that they continue to improve their resilience and, in particular, their leverage
ratios. This is important for two reasons.
First, the loss potential for the Swiss big banks - estimated under the different adverse
scenarios considered - continues to be substantial relative to their capitalisation. These
adverse scenarios are not forecasts. They represent unlikely, highly unfavourable but
coherent developments in economic and financial conditions. For financial stability in
Switzerland, it is important that the big banks remain adequately capitalised in the event of
such scenarios occurring. In addition, irrespective of the scenario considered, substantial
losses can also result from operational and legal risks, as recent experience has shown.
Second, an international comparison reveals an uneven picture of the Swiss big banks'
capitalisation, depending on which capital measure one examines. Although their
riskweighted ratios are above average for large globally active banks, the same cannot be said
for their leverage ratios, as calculated according to various common definitions. Leverage
ratios are gaining in importance as a measure of banks' resilience. Experience shows that
these ratios quickly become the focus of market attention during a crisis. Moreover, the
international requirement, effective from the beginning of 2015, to disclose the Basel III
leverage ratio will enable a direct comparison between large globally active banks. This is
why it is essential for banks to have a solid leverage ratio.
Increasing the credibility of model-based risk-weighted assets
Increasing the credibility of risk-weighted assets (RWA) based on banks' internal models
remains an important goal. As discussed in the 2013 Financial Stability Report, model-based
RWA are being called into question by market participants, analysts and authorities
worldwide. This is particularly significant as RWA are at the heart of the capital regulations
for banks. It is widely accepted that a bank's risks can, in principle, be more accurately
quantified using the model-based approach than using the standardised approach. Yet
banks' internal models are highly complex and can vary widely between institutions, thus
making it difficult to accurately assess a bank's resilience and compare one bank with
another.
The SNB welcomes the efforts by the Swiss big banks to increase transparency with regard
to their risks. For example, both institutions recently started to disclose changes in their
RWA, broken down by cause. Of particular interest is the proportion of the reduction in RWA
which is attributable to model adjustments. In addition, Credit Suisse has been publishing a
statistical measure of total loss potential for some time now, and UBS recently started to
publish a statistical measure of loss potential by business division and a scenario-based
post-stress capital ratio.
The SNB encourages the big banks to further increase transparency with regard to their
risks. It continues to recommend that the big banks disclose RWA according to both the
model-based approach and the model-independent standardised approach. This
recommendation is in line with increasing efforts being made at international level. Disclosing
RWA according to the standardised approach would provide market participants with
additional information for assessing the level of, and changes in, model-based RWA.
In this context, the analysis of RWA being carried out by FINMA with the support of the SNB
will play an important role. The big banks have already provided the necessary data by
calculating RWA based on the standardised approach. Now the analysis will focus on the
question of whether, and why, RWA based on the banks' internal models differ from those
based on the model-independent standardised approach. Differences must be well explained
and have a sound economic rationale. If the analysis does not reveal any substantial and
inexplicable differences, this would strengthen the credibility of the model-based approach.
Conversely, if substantial differences cannot be explained, corrective measures would need
to be considered.
Domestically focused commercial banks
I would now like to turn to the domestically focused commercial banks. In 2013, these banks
further increased their already high exposure to mortgage and real estate market risk. First,
growth in domestically focused banks' mortgage lending was almost unchanged from the
previous year. By contrast, the big banks' lending growth decreased significantly in 2013.
Second, domestically focused banks' risk appetite in mortgage lending remained high
overall. While there has been a decline in the share of new mortgage loans with a high
loanto-value (LTV) ratio since the last Financial Stability Report, no trend towards lower
affordability risks is discernible. Third, they continued to carry a historically high level of
interest rate risk in the banking book. As a result, these banks are particularly vulnerable to
adverse scenarios which assume a significant interest rate increase coupled with a price
correction on the residential real estate market.
While domestically focused banks' exposure to risk is high, their current capital ratios are
also significantly above the regulatory minimum. As a consequence, substantial capital
buffers are available in the system to absorb losses from negative developments in the
economic and financial environment. Nonetheless, from a financial stability perspective, the
banks' high exposure to risk, coupled with the imbalances on the mortgage and real estate
markets, is a source of concern. The situation calls for a prudent lending policy, both to limit
banks' future loss potential and to help prevent a further build-up of imbalances.
Regarding the latter, the different measures taken thus far by the authorities appear to have
had some positive impact. Measures such as the revision of the self-regulation rules in July
2012 and the activation of the countercyclical capital buffer (CCB) in early 2013, which
contributed to strengthening banking sector resilience, seem to have helped contain market
momentum. Nonetheless, imbalances built up further in 2013, thereby justifying the increase
in the level of the CCB, decided by the Federal Council in January 2014.
Since then, imbalances have remained almost unchanged. On the one hand, momentum on
the mortgage market slowed somewhat during the first quarter of 2014. On the other, during
the same period, the rate of real estate price growth remained similar to that observed over
the last few quarters, only slightly exceeding the growth of fundamental factors. From a
financial stability perspective, these are welcome developments.
Experience shows, however, that short-term changes in momentum do not necessarily imply
a change in trend. Given the persistence of the low interest rate environment, banks and
authorities should remain alert and take the necessary steps to keep risks for financial
stability in check.
First, measures giving banks stronger incentives to pursue a more cautious mortgage
lending policy should be considered. Such measures should target both the owner-occupied
residential property and the residential investment property segments. Efforts should now be
directed towards preparing regulatory measures that could be implemented swiftly should
momentum pick up again on the mortgage and residential real estate markets.
Second, interest rate risk exposure in the banking book should be appropriately backed with
capital. Under the aegis of the Basel Committee on Banking Supervision, international
standards on capital requirements for interest rate risk are currently being developed. Given
the significance of this risk factor, domestically focused banks should ensure they adopt a
prudent stance towards measuring and managing this risk. In this context, the SNB fully
supports FINMA's efforts to ensure that risk-taking by individual banks is reduced or backed
by specific capital charges whenever the risk exposure is deemed exceptionally large by
historical or industry standards.
In parallel with these measures, the SNB will continue to monitor developments on the
mortgage and real estate markets closely, and will reassess the need for an adjustment to
the CCB on a regular basis.