For instance, a large proportion of new  2  BIS central bankers’ speeches  mortgages granted for owner-occupied residential property still have a loan-to-value ratio of over 80%. Furthermore, the share of new loans with stretched affordability has also remained at a high level. At the same time, the interest rate margin of domestically focused banks narrowed further in 2012, while interest rate risk remained historically high. In view of the persistently low level of interest rates, there is the risk that, despite the measures already implemented, imbalances on the Swiss mortgage and real estate markets will continue to build up. This would increase both the likelihood and the consequences of a price correction in the medium term. Such a price correction could be triggered, for example, by a sharp increase in interest rates. Against this background, domestically focused banks should therefore continue to ensure that their resilience is sufficiently high, irrespective of the regulatory requirements, and make adjustments where necessary. They should be able to maintain their economically important functions, even if real estate prices were to fall sharply and interest rates were to simultaneously rise. In particular, domestically focused banks should make sure that the currently high direct interest rate risk is assessed and managed using conservative assumptions. In this context, the assumptions applied by banks with regard to savings and sight deposits are especially important. In an environment of historically low interest rates, these deposits have proven to be very stable sources of financing in recent years.

The credibility of RWA based on banks’ internal models is increasingly being called into question by market participants, analysts and authorities worldwide. It is widely accepted that a bank’s risks can, in principle, be more accurately quantified using the model-based approach than using the standardised approach. Yet banks’ internal models are extremely complex and can vary widely between banks, owing to the use of different model choices and model parameters. This can result in different capital requirements for banks with a similar asset structure. This makes it difficult to accurately assess a bank’s resilience, and to compare one bank with another. BIS central bankers’ speeches  1  To increase the usefulness and credibility of the model-based approach, in-depth analyses need to be carried out to determine whether and to what extent the model-based approach and the standardised approach lead to differences in RWA. The standardised approach does have shortcomings. Yet, since it is independent of bank-specific modelling assumptions, it provides market participants with an additional point of reference for assessing both the level of and changes in model-based RWA. Differences between the two approaches must be well explained and have a sound economic rationale. If the analysis does not reveal any substantial inexplicable differences, this will strengthen market confidence in the modelbased approach. Otherwise, appropriate measures should be considered. This could, for instance, entail setting a floor for some model-based RWA, such as that recently introduced for banks in the US.