Moreover, risk appetite at domestically focused banks is still high, as is reflected in the interest rate and affordability risk exposures in their mortgage business. Stress tests carried out by the Swiss National Bank suggest that these risks are currently sustainable, thanks to good capitalisation overall. Against the backdrop of persistently low interest rates, this is welcome. In the future, too, a decisive factor for financial system stability will be the banks’ ability to maintain risk exposures at a sustainable level. The current low interest rate environment creates strong incentives to increase interest rate or affordability risk exposures in lending business. For instance, there is a public debate about whether the imputed interest rate used to assess affordability should be reduced. The level of this imputed interest rate is not set by the  Page 2/3  Berne, 15 December 2016 Fritz Zurbrügg  News conference  regulator and varies between banks. However, it does play a key role in affordability assessments. Banks typically use a rate of 5%. Let me go into this topic in further detail. While today’s period of low interest rates could well persist and the rise in interest rates might only be very gradual, mortgages generally influence borrowers’ financial situation and banks’ balance sheets over a period of decades. As such, when assessing affordability and calibrating risk exposure, long-term interest rate developments are also relevant. Despite the current pressure on interest rate margins, banks should therefore continue to take a long-term view in their risk policy.

While undoubtedly exciting, these developments bring in their own unique risks and challenges. I would like to flag a few of them, particularly from the standpoint of financial stability. First, cyber security risk is becoming an increasingly major part of banks’ operational risk landscape. As various hacking episodes illustrate, now fraud can be perpetrated swiftly, remotely, and on a massive scale. Though such occurrences are still uncommon, the impact is substantial, given the high degree of interconnectivity of our systems and markets. Second, fintechs are unbundling parts of the finance value chain, offering financial services directly to customers. Apart from increasing competition, and squeezing banks’ profits, fintechs are moving part of the banking business to shadow banking which remains lightly regulated, if at all. Likewise, tech-enabled peer-to-peer lending and crowdfunding can further  2  expand the scale of shadow banking, and may also exacerbate procyclicality. As this discussion indicates, innovations are by nature a disruptive force, causing a considerable degree of instability. Therefore, regulators face a daunting task of keeping financial systems safe and stable while continuing to ensure the convenience and efficiency that modern technologies offer. To ensure that, we must strengthen our own capacity to identify, monitor, and mitigate the risks from technological innovations. This would require closer cooperation with the banking industry as well as among regulators, both within a country and across the borders. Yet that is not enough; we also need to leave our comfort zone and engage with other stakeholders, primarily the tech firms themselves.