The securitized mortgages, polling of mortgages sold through securities, including the infamous US-sub-prime mortgages, were traded on the market during the upward trend in the prices of apartments and houses, and when the interest rates were low, it disguised the risks of the core loans. With securitization of mortgages in such a volume, the banks have transformed the liquidity in their loan portfolios. They financed that by wholesale borrowing. But when the defaults multiplied, and the prices of the apartments dropped, firstly in the USA, and then wider, the investors had to reassess the risks inherent to these securities. Observed as more risky, they lost their value. The demand for these securities plunged. For the same reasons, the value of the mortgage portfolio went down. The value of their assets reduced, whereas the value of the liabilities which remained unchanged. The negative effect increased with the very high level of borrowing compared to the capital (or the so-called leverage), with which many banks worked, and with the fact that the banks have purchased a large quantity of securitized and more complex financial instruments from one another. Not only the real evaluation was difficult, but the distribution of the losses through the financial system was vague. The price of the banks' shares dropped. The capital became restricted. The market has sent a clear signal: the banks' capital was insufficient. The message? Recapitalize them immediately. What does the latest news from the market say? Since the recapitalization packages and other measures have been announced, signs of improvement occurred.

The Swiss Financial Market Supervisory Authority (FINMA) has called on the banks to disclose the differences between calculations using the model-based and standardised approaches. At international level, the aforementioned Basel Committee reforms will likewise result in higher requirements in terms of bank transparency. Domestically focused banks I would now like to turn to the situation of the domestically focused banks. For these banks, developments on the Swiss mortgage and residential real estate markets still represent the greatest source of risk. Over the last six months, momentum on these markets has again eased slightly overall. Growth in mortgage volumes and prices for owner-occupied residential real  BIS central bankers’ speeches  1  estate has been roughly in line with fundamentals. As a result, imbalances on the Swiss mortgage and real estate markets for owner-occupied residential property have remained unchanged since the last news conference. From a financial stability perspective, this is a welcome development. The measures taken to date to contain the risks on the Swiss mortgage and real estate markets appear to be having an effect. The countercyclical capital buffer, for instance, has contributed not only to strengthening the resilience of the Swiss banking sector, but also – together with the other measures taken, such as the revision of the self-regulation rules – to reducing momentum. However, it is still too early to sound the all-clear. For one thing, interest rates continue to be exceptionally low. For another, the residential investment property market, in contrast to the owner-occupied segment, shows no sign of cooling.