Both banks’ capital ratios exceed requirements and are above average by international comparison. Thanks to these capital buffers, the two globally active banks are well placed to face today’s challenging environment. The direct impact of the war in Ukraine should be limited given the comparatively low exposure of Credit Suisse and UBS to the warring parties. However, an escalation of the war or a further widening of sanctions could adversely affect the economic environment and financial market conditions. The SNB addresses such adverse developments in its analysis of standard stress scenarios. This analysis shows that the loss potential for both banks remains substantial. Taking on risk is an integral part of the banking business. From the financial stability perspective, it is crucial that these risks be backed by sufficient capital. Our stress scenario analysis underlines that the ‘too big to fail’ capital requirements applicable to the systemically important banks in Switzerland are necessary to ensure adequate resilience at Credit Suisse and UBS. Domestically focused banks I shall now turn to the domestically focused banks. The profitability of these banks increased slightly in 2021. Improved cost efficiency and lower provisions for credit losses offset the decline in interest rate margins. As in previous years, the domestically focused banks improved their capital position by retaining earnings. Sustainable profits and large capital buffers are essential, as they allow banks to absorb losses and continue lending to the economy during periods of stress. Two sources of risk are of particular relevance for the domestically focused banks in the current environment.

First, an escalation of the war in Ukraine could result in a worse-than-  Page 2/3  Berne, 16 June 2022 Fritz Zurbrügg  News conference  expected economic slowdown in Switzerland. This could lead to a deterioration in the quality of credit portfolios. Second, a significant tightening of financial and monetary conditions could trigger a correction on the Swiss mortgage and real estate markets. Domestically focused banks’ exposure to these markets has increased further since the publication of last year’s Financial Stability Report, with mortgage volume at these institutions having grown once again. As regards credit quality, the strengthening of banks’ self-regulation in January 2020 has led to a reduction in the share of new mortgages with a high loan-to-value ratio in the residential investment property segment. However, affordability risks as measured by the loan-to-income ratio have increased for new mortgages. The SNB’s stress scenario analysis suggests that most domestically focused banks’ capital buffers remain sufficient to cover the loss potential stemming from relevant stress scenarios. These include the scenario involving a severe recession and the scenario involving an interest rate rise with a simultaneous correction in real estate prices. However, these simulations also suggest that the capital ratios of certain banks could decline significantly and approach, or even fall below, the regulatory minimum requirements. Given the risk exposures of these banks, adequate capitalisation is particularly important. The recent reactivation of the countercyclical capital buffer will help to maintain the banking sector’s resilience.