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. 1  Total capital comprises going-concern loss-absorbing capital (Common Equity Tier 1 capital plus high-trigger contingent capital instruments) and low-trigger contingent capital instruments.

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.