The simulations show how the banks’ net interest income – aggregated over the next five years – would develop under various interest rate scenarios. Page 8/10  Low interest rate environment – all players should be cautious and alert So much for the current situation. But how does the SNB see low interest rates affecting the banking system in the future? First, it is worth reminding ourselves that the authorities, the SNB and the commercial banks jointly adopted a balanced package of measures back in 2012 to help mitigate the financial stability risks associated with persistently low interest rates. Alongside the countercyclical capital buffer referred to above, adjustments to the selfregulation rules for banks in the area of mortgage lending are particularly worthy of mention. Banks now require of borrowers that at least 10% of the loan value be provided from funds that do not stem from the second pillar. Furthermore, borrowers must gradually pay down the mortgage to two-thirds of the loan value within 15 years. As interest rates will have to be kept low for the foreseeable future for reasons of price stability, all players should remain especially cautious and alert. The longer the exceptional interest rate situation persists, the more likely it is that banks will experience higher profitability pressure. Over time, competition between banks may cause interest rate margins to narrow further still. Additional competitive pressure may come from insurers and pension funds, which are increasingly seeking to position themselves as direct providers on the mortgage market.

Since the onset of the financial crisis in 2007, the prolonged slump in global growth and valiant efforts by central banks have pushed interest rates even lower. As a small open economy, Switzerland cannot decouple itself from these global developments. On the contrary, exceptionally low interest rates around the globe have farreaching consequences for our economy. In the past, Switzerland has invariably had lower interest rates than its trading partners, namely the euro area countries, as shown in slide 3, where the blue shaded area depicts the difference between short-term interest rates in euros (yellow) and Swiss francs (red). This interest rate advantage primarily reflects the lower average inflation rate in Switzerland compared to other countries, although political stability, sustainable fiscal policy and credible monetary policy also play a role. Investors have therefore traditionally been willing to hold Swiss franc investments at lower yields. This interest rate advantage was for a long time the ‘natural’ state of things in Switzerland. However, in the wake of the financial crisis, this advantage came under mounting pressure. Monetary policy easing on the part of the European Central Bank resulted in a narrowing of the EUR/CHF interest rate differential. In 2014, yields on short-term government bonds in Switzerland were, at times, even higher than in Germany. This caused upward pressure on the Swiss franc to intensify. 2 From a monetary policy perspective, Swiss franc appreciation calls for monetary policy easing, since the exchange rate has a substantial influence on inflation and economic developments in Switzerland.