To this end, they issued further bail-in bonds, which can be converted into equity in the event of impending insolvency. On the other hand, the two big banks have implemented key organisational measures. For instance, they have both set up Swiss subsidiaries that contain their systemically important functions, including, in particular, domestic deposit and lending business. In order to resolve the ‘too big to fail’ issue in Switzerland, more progress also needs to be made in the area of resolution. This will involve, first, further improvements in gone-concern loss-absorbing capacity in a gone-concern perspective, as stipulated in the regulations and, second, further progress in drawing up robust resolution plans. By end-2019, the big banks will need to demonstrate that they would be able to maintain their systemically important functions in Switzerland without interruption in the event of impending insolvency. The resolution plans will also need to meet foreign regulatory requirements. Domestically focused commercial banks  I will now turn to domestically focused commercial banks, whose main business is in lending and deposit-taking. I would like to highlight three key developments at these banks. First, domestically focused banks further increased their risk exposure in 2016. Mortgage growth at these banks remained strong. Moreover, their interest rate risk exposure from maturity transformation continued at high levels. In addition, they took on greater affordability risks and the share of new mortgages with a high loan-to-income ratio reached a new peak. All this took place against the background of high imbalances on the Swiss mortgage and real estate markets.

The pressure on interest rate margins will remain strong as long as interest rates remain exceptionally low. Thus, there will be strong incentives for banks to take on more risk. In the short term, an increase in affordability risk or interest rate risk may help to prevent a further decline in profitability. However, it would make banks more vulnerable to a large upward interest rate shock and to a correction on the mortgage and real estate markets. Greater risk-taking in lending could also lead to a renewed increase in momentum on the mortgage and real estate markets. This applies particularly to residential investment property, where upward pressure on prices could remain strong. If interest rates rise, there is the risk of a substantial price correction. This could result in credit losses at the banks that provide funding for such investors. This highlights the importance of the capital surpluses currently held by the domestically focused banks. Going forward, banks should set their risk appetite and their capital planning so as to ensure that they can absorb the losses that would arise under highly unfavourable but possible scenarios. Even under such scenarios, the banks must be able to perform their economically important functions – especially that of providing credit to the economy. The SNB will continue to monitor developments on the mortgage and real estate markets closely, paying particular attention to the residential investment property segment as well as to banks’ risk-taking in mortgage lending.