Jean-Pierre Danthine: Presentation of the Swiss National Bank's
Financial Stability Report
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,
18 June 2015.
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As my colleague Thomas Jordan has explained, global economic growth in the first quarter
of 2015 was below expectations. However, over the last 12 months, we have seen an
improvement in international economic and financial conditions, although substantial risks
remain. The domestic environment has become more challenging due to the strong
appreciation of the Swiss franc that followed the discontinuation of the minimum exchange
rate in January 2015. 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. A more detailed assessment of the situation
can be found in the latest Financial Stability Report published today.
Big banks
Further improving resilience
Over the past year, the Swiss big banks have continued to improve their capital situation,
albeit at a slower pace than the year before. They already meet most of the requirements
which will apply from 2019. While acknowledging the progress made, the SNB recommends
that the big banks do not lose momentum in their efforts to improve their resilience. This is
particularly warranted with regard to the leverage ratio.
Resilience needs to be further improved for three reasons: First, the big banks' loss potential
relative to their capitalisation continues to be substantial. Second, while the Swiss big banks'
risk-weighted capital ratios are above the average for large globally active banks, the same
cannot yet be said for their leverage ratios. Third, it can be expected that regulatory
developments at both international and national level will result in increased capital
requirements.1
The Swiss big banks should prepare for these developments.
RWA problem identified, but not yet resolved
In the capital regulation of banks, risk-weighted assets (RWA) play a key role. As mentioned
in previous Financial Stability Reports, both markets' and authorities' confidence in RWA
calculated using banks' internal models has steadily declined. A number of studies have
shown that, in some instances, model-based RWA do not properly reflect a bank's economic
risks.2 As a consequence, capital ratios calculated using model-based RWA may overstate
the true level of resilience.
To address this problem, regulatory initiatives have been launched at international and
national level. At international level, the Basel Committee on Banking Supervision is
fundamentally revising the standardised approach. The Committee is also examining the
introduction of a floor for internally modelled RWA based on this revised standardised
approach. One important objective of the floor would be to ensure that capital requirements
based on banks' internal models do not fall below a prudent level.
At national level, FINMA - together with the big banks and with the support of the SNB - has
conducted a comparison between RWA calculated using the model-based and standardised
approaches. The results of this comparison, in addition to the measures already taken by
FINMA and those expected at the international level, will be taken into account by a working
group led by the Federal Department of Finance. This working group will draw up proposals
and the associated legal adjustments for implementing the recommendations in the Federal
Council's 'too big to fail' evaluation report.
Alongside these regulatory initiatives, the SNB still considers it necessary that the big banks
increase transparency with regard to RWA. FINMA has now called on these banks to
disclose the differences between calculations using the model-based and standardised
approaches. Such enhanced transparency is necessary to restore the credibility of
modelbased RWA and to strengthen market discipline.
The SNB continues to hold the view that risk-weighted capital requirements - including a
floor for model-based RWA - and leverage ratio requirements should complement each
other. Risk-weighted requirements should guide economic decisions at the margin, while the
leverage ratio should serve as a backstop. Yet, until the measures to resolve the RWA
problem take effect, it is prudent to give a greater weighting to the leverage ratio when
assessing the big banks' resilience. Indeed, analysts increasingly pay attention to the
leverage ratio when assessing and comparing banks.
Domestically focused commercial banks
Increased mortgage exposure, capital situation stable
I would now like to turn to the domestically focused commercial banks. In 2014, these banks
further increased their exposure to the Swiss mortgage and residential real estate markets.
While the share of new loans with high loan-to-income ratios - a measure of affordability risk
- remained persistently high, mortgage lending growth and the share of new mortgage loans
with a high loan-to-value ratio decreased. Hence, the increase in exposure was lower than in
previous years.
With respect to bank capitalisation, the situation remained largely unchanged in 2014. First,
the domestically focused commercial banks' leverage ratios remained stable at high levels by
historical standards. Second, these banks' risk-weighted capital ratios increased slightly and
are significantly above regulatory minimum requirements overall. Furthermore, stress test
results suggest that most domestically focused banks should be able to absorb estimated
losses without seeing their capitalisation fall below the regulatory minimum. Nevertheless,
under the most relevant adverse scenarios for these banks, the losses would deplete a large
proportion of their surplus capital.
Experience in Switzerland in the 1990s, as in other countries, suggests that this would lead
to a general weakening of the banking sector and significantly affect banks' ability to lend,
with negative and lasting repercussions for the real economy.
The stress test results highlight the importance of banks holding significant capital surpluses
relative to the regulatory minimum requirements. The activation of the countercyclical capital
buffer in 2013 and its increase in 2014 has made a significant contribution in this respect.
Risk of renewed increase in imbalances on mortgage and real estate markets
Overall, imbalances on the mortgage and residential real estate markets have remained
broadly unchanged since the last Financial Stability Report. From a financial stability
perspective, this is a positive development.
However, it is still too early to give the all-clear. On the one hand, imbalances remain at a
high level and have not yet started to decline. On the other hand, the further decline of
capital and money market interest rates observed since January 2015 carries the risk of a
renewed increase in imbalances on the Swiss mortgage and residential real estate markets
over the medium term.
First, compared to alternative assets, investments in real estate appear to have become
more attractive for banks, commercial investors and households. In the residential
investment property segment in particular, additional demand from investors searching for
yield might push prices up further.
Second, the unprecedented interest rate environment creates additional incentives for banks
to incur higher interest rate and credit risks. They might be tempted to increase both maturity
transformation and lending to compensate for the additional pressure on margins and to
stabilise short-term profitability. Such strategies would further increase banks' exposure to
large interest rate shocks and to a correction on the mortgage and real estate markets. Given
these risks to financial stability, banks and authorities should remain alert and, if necessary,
take measures to contain such risks.
In particular, should momentum on the mortgage and residential real estate markets pick up
again, additional measures might become necessary. In this regard, particular attention
should be paid to the investment property segment. This segment is more likely to be
materially affected by the additional demand from investors searching for yield in the current
environment. Furthermore, the measures taken so far have predominantly addressed the
segment of owner-occupied residential real estate.
For its part, 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 countercyclical capital
buffer on a regular basis.