In this way, recruitment is meritocratic, a Darwinian survival of the fittest. Yet most organisations are not singular. They are team sports. What matters most to organisations is collective performance, not individual brilliance. Most successful ones are not a Darwinian dog-fight. Diversity is important precisely because it improves collective functioning, over and above individual ability – recall the “Page equation”. Diversity is, by definition, a collective concept. That lays bare a potential tension between recruitment practices, which typically focus on the characteristics of the individual, and organisational success, which typically relies on the characteristics of the collective. This disconnect is, interestingly enough, the self-same one exposed by the global financial crisis. Pre-crisis regulation was also individually-focussed. Regulators looked at banks one by one. Each of them individually had good CVs, strong social skills, were smartly dressed. Yet the collective consequence was a financial system in which everyone looked the same, thought the same and placed the same bets. That lack of diversity left the whole system vulnerable to collapse which, of course, it duly did. Since the crisis, regulators have learned their lesson. Regulation has taken on a systemic orientation, with regulatory measures calibrated to risk across the financial system as a whole. That means regulators taking measures which promote system-wide diversity, such as encouraging new entrants into the field with new business models. In short, financial regulation these days seeks to take explicit account of the social externalities of systemic risk.

A second – and important – explanation can be seen in the red shaded area of this chart (slide 8). Domestically focused banks have reacted to the decline in liability margins by increasing asset margins by around 50 basis points. Specifically, following the introduction of negative interest, they raised rates for long-term mortgages (shown here in blue), while returns on long-term market investments (illustrated here using the ten-year swap rate in yellow) continued to fall. The banks have since managed to keep asset margins high, notwithstanding the fact that market rates have continued to decline. But there is another, equally important explanation for the limited impact of the low interest rate environment on the profitability of domestically focused banks: these institutions have increased their risk appetite. This applies particularly to affordability risk (typically measured using the loan-to-income ratio) in lending and to interest rate risk from maturity transformation. Let’s take a closer look at the current risk situation with respect to domestically focused banks in Switzerland. Affordability risk refers to cases in which a borrower can no longer afford to make interest and amortisation payments for a loan under unfavourable conditions. 5 A representative quarterly survey conducted by the SNB indicates that a substantial share of new mortgages exhibit high loan-to-income ratios. Moreover, this share has been rising since 2013. 6 Put simply, interest rate risk is the risk that banks will suffer losses as a result of rising interest rates.