News conference
Berne, 18 June 2020
Fritz Zurbrügg
Introductory remarks by Fritz Zurbrügg
In my remarks today, I will present the key findings from this year's Financial Stability
Report, published this morning by the Swiss National Bank.
The COVID-19 pandemic has led to a marked deterioration over recent months in the
economic environment and financial market conditions around the world. This deterioration is
also affecting the Swiss banking sector. Extensive support measures taken by governments
and central banks have somewhat stabilised the situation on the financial markets. As Thomas
Jordan mentioned, the SNB's baseline scenario assumes a partial economic recovery in
Switzerland and abroad in the second half of 2020. Yet, despite this expected recovery, the
Swiss banking sector, along with the rest of the economy, faces considerable challenges.
Overall, Swiss banks are well positioned to deal with these challenges. They have a solid
capital base for managing the heightened risks caused by the pandemic-triggered economic
downturn.
I will start by looking at the two globally active banks, Credit Suisse and UBS. I will then
outline our assessment of the situation at the domestically focused banks, before taking a
closer look at the Swiss corporate loans market from a financial stability perspective.
Globally active banks
Figures released for the two globally active banks, Credit Suisse and UBS, already show the
first signs of the pandemic's impact. Both banks increased their provisions for credit losses in
Q1 2020. They also report a rise in risk-weighted assets, which has led to a reduction in their
capital ratios. Despite the worsening economic conditions, however, Credit Suisse and UBS
recorded higher profits than in the same quarter of 2019.
Under the baseline scenario, the economic consequences of the COVID-19 pandemic affect
Credit Suisse and UBS through two main channels. First, the quality of their credit portfolios
is expected to deteriorate both in Switzerland and abroad. Second, earnings from wealth
management and investment banking are likely to fall, as the stock market correction has
reduced the value of assets under management. Furthermore, heightened uncertainty on the
financial markets could curb demand for client and capital market transactions. These effects
weigh on the profitability of the two globally active banks. Moreover, an additional rise in
risk-weighted assets could lead to a further reduction in capital ratios. Under the baseline
scenario, the impact on Credit Suisse and UBS is likely to be limited as a result of the partial
economic recovery expected in the second half of 2020 as well as the stabilisation in financial
markets.
The outlook for the two globally active Swiss banks is associated with considerable
uncertainty, however. Just how much the quality of their credit portfolios will deteriorate
largely depends on the depth and, above all, the duration of the economic downturn in
Switzerland and abroad. A further worsening of the economic outlook, in combination with
renewed turbulence on the financial markets, would put additional strain on the quality of
these banks' credit portfolios and profitability.
Both globally active Swiss banks are well placed to deal with the challenges posed by the
current difficult environment and to support the real economy through their business
activities. This favourable situation is attributable to risk reduction and, in particular, to the
capital buffers which Credit Suisse and UBS have been building up over recent years, in line
with the TBTF regulations. The SNB's scenario analysis indicates that, thanks to these capital
buffers, the two banks are able to cope with significantly worse developments in the economic
environment than under the baseline scenario. At the same time, this analysis shows that the
current calibration of the TBTF requirements is necessary to ensure adequate resilience at the
two banks. Periods of exceptional uncertainty, as we are experiencing them today, particularly
highlight the value of robust regulatory requirements.
Domestically focused banks
Turning now to the domestically focused banks, we can see that the COVID-19 pandemic has
led to a substantial deterioration in the economic environment for these banks too.
While the impact of the worsening economic situation is barely reflected in the financial
figures for domestically focused banks available to date, forward-looking indicators such as
yield spreads on bank bonds suggest that market participants expect only a slight deterioration
in the financial soundness of these banks.
Under our baseline scenario, the main impact of the COVID-19 pandemic on domestically
focused banks is likely to be on the quality of their loan portfolios. The partial economic
recovery expected in the second half of 2020, together with the measures taken by the
authorities, should help to limit the adverse impact on these banks. Nevertheless, provisions
and write-downs on outstanding loans to Swiss corporations are expected to increase.
Alongside the persistent downward pressure on interest margins caused by the low interest
rate, this is likely to weigh further on the profitability of domestically focused banks - which
is already at a low level. While domestically focused banks should remain profitable in
aggregate, some of these banks are expected to incur losses.
As I mentioned earlier, the outlook is fraught with high uncertainty. In this context, the
existing imbalances on the mortgage and real estate markets present a further challenge for
domestically focused banks. If the recession turns out to be even worse than expected, this
might trigger a correction on these markets. At the same time, significant declines in income
at households and corporations could lead to a materialisation of affordability risks. Both of
these developments would negatively affect the quality of these banks' mortgage portfolios.
The latest vintages of mortgage loans appear to be particularly vulnerable in this regard since
affordability risks have been steadily increasing over recent years.
Given these challenges, the available capital buffers provide a crucial element of robustness
for the domestically focused banks. They play a key role in ensuring the lending and
lossabsorbing capacity of the banking sector even if the economic impact of the COVID-19
pandemic should turn out to be worse than currently expected. The SNB's scenario analysis
indicates that domestically focused banks' resilience is adequate overall.
Bank lending to companies during the COVID-19 pandemic
Let me turn now to developments on the Swiss corporate loan market. One of the key
elements of a stable financial system is the ability of banks to fulfil their function as credit
providers even in the event of a significant shock such as the COVID-19 pandemic. Capital
and liquidity buffers in the banking sector play a central role here. Together with the
Confederation's guaranteed loan programme and the SNB's COVID-19 refinancing facility,
these buffers should ensure that small and medium-sized enterprises have access to loans to
bridge liquidity shortfalls caused by the COVID-19 pandemic.
In cooperation with the other Swiss authorities, the SNB launched a fortnightly monitoring of
the corporate loan market at the end of March, combining quantitative as well as qualitative
information. I'd like to now summarise our two core takeaways so far.
First, the programme of bridging loans secured by federal guarantee and the SNB's
refinancing facility have been successful in rapidly providing liquidity to small and
mediumsized enterprises. By securing these companies' access to liquidity, the programme is doing
its part to limit the negative impact on the corporate sector. This, in turn, should help to
contain the deterioration in the quality of the banks' loan portfolios.
Second, there has been no sign of credit rationing to date in the segment of corporate loans
not guaranteed by the Confederation. Although banks have slightly tightened their credit
conditions for these non-guaranteed loans, rejection rates remain comparable to those under
normal economic conditions. The main cause for rejection is concern about an applicant
company's financial strength. Capital or liquidity constraints of their own are rarely
mentioned by banks as grounds for their rejection of loan applications.
These findings provide reason for cautious optimism regarding banks' capacity to maintain
the supply of credit and liquidity to companies during these extraordinary times.