This working group will draw up proposals and the associated legal adjustments for implementing the recommendations in the Federal Council’s ‘too big to fail’ evaluation report. Alongside these regulatory initiatives, the SNB still considers it necessary that the big banks increase transparency with regard to RWA. FINMA has now called on these banks to disclose the differences between calculations using the model-based and standardised approaches. Such enhanced transparency is necessary to restore the credibility of modelbased RWA and to strengthen market discipline. The SNB continues to hold the view that risk-weighted capital requirements – including a floor for model-based RWA – and leverage ratio requirements should complement each other. Risk-weighted requirements should guide economic decisions at the margin, while the leverage ratio should serve as a backstop. Yet, until the measures to resolve the RWA problem take effect, it is prudent to give a greater weighting to the leverage ratio when assessing the big banks’ resilience. Indeed, analysts increasingly pay attention to the leverage ratio when assessing and comparing banks. Domestically focused commercial banks Increased mortgage exposure, capital situation stable I would now like to turn to the domestically focused commercial banks. In 2014, these banks further increased their exposure to the Swiss mortgage and residential real estate markets. While the share of new loans with high loan-to-income ratios – a measure of affordability risk – remained persistently high, mortgage lending growth and the share of new mortgage loans with a high loan-to-value ratio decreased. Hence, the increase in exposure was lower than in previous years.

Resilience needs to be further improved for three reasons: First, the big banks’ loss potential relative to their capitalisation continues to be substantial. Second, while the Swiss big banks’ risk-weighted capital ratios are above the average for large globally active banks, the same cannot yet be said for their leverage ratios. Third, it can be expected that regulatory developments at both international and national level will result in increased capital requirements. 1 The Swiss big banks should prepare for these developments. RWA problem identified, but not yet resolved In the capital regulation of banks, risk-weighted assets (RWA) play a key role. As mentioned in previous Financial Stability Reports, both markets’ and authorities’ confidence in RWA calculated using banks’ internal models has steadily declined. A number of studies have shown that, in some instances, model-based RWA do not properly reflect a bank’s economic risks.2 As a consequence, capital ratios calculated using model-based RWA may overstate the true level of resilience. 1  Based on the review of the Swiss “too big to fail” regulations by the group of experts on the further development of the financial market strategy (Brunetti group of experts), the Federal Council has instructed the Federal Department of Finance to prepare legal adjustments, which primarily concern more stringent capital requirements. Cf. media release of the Federal Council, 18 February 2015. 2  For instance, international studies have revealed significant differences in RWA between banks using the model-based approach.