the deterioration in the global economic environment has not left the swiss big banks unscathed. in the second half of 2011, their profitability suffered from the volatile financial market situation as well as from low customer activity levels. against this backdrop and given the enhanced regulatory requirements, ubs and credit suisse have announced that they will be significantly reducing their risk exposure for the next few years. in addition to this, they have further expanded their loss - absorbing capital base. the swiss national bank welcomes these measures and sees them as further steps towards achieving a sounder capital situation. additional efforts are necessary, however, because the loss - absorbing capital of big banks is still low, given their risk profile and the considerable uncertainty in the international environment. in order for them to be better equipped to deal bis central bankers ’ speeches with a possible worsening of current economic conditions, the big banks must further improve their capital situation. they can achieve this by retaining earnings. another measure would be to issue contingent convertible bonds or contingent capital instruments with write - off features, an essential element of the “ too big to fail ” regulations. they can also strengthen their capital base by accelerating the announced reduction of their risk exposure. by making use of these options, the big banks could quickly and substantially improve their capital situation. situation of domestically focused banks allow me now to move on to the situation of banks with a domestic focus. the capitalisation of most domestically focused banks remains good. profitability – as measured by the ratio of gross profits to assets – dropped slightly, however ; not least because of the low interest rate margins. at the same time, domestically focused banks are having to contend with two significant risk factors, namely interest rate risk, which has remained unchanged at a high level, and credit risk, which has risen further. interest rate risk measures the potential for loss which results from a mismatch between the term structure of a bank ’ s assets ( e. g. mortgages ) and that of its liabilities ( e. g. customer deposits ). while the term structure of assets gets increasingly longer, that of liabilities remains very short. the rise in credit risk was due, on the one hand, to the deterioration in the outlook for the swiss economy. a slowdown in economic growth in switzerland could have a negative impact on domestic credit quality, with the result that banks would face the prospect of writeoffs on their assets. on the other hand, the continued strong rise in mortgage loans and real estate

require. to explain the rationale behind the snb ’ s current monetary policy in more detail, let me briefly outline our assessment of the global economic situation, as well as the risks for the swiss economy. subdued global economic outlook and substantial downside risks in our global baseline scenario, the outlook remains – overall – subdued. economic growth will continue to be driven by emerging markets. however, we expect growth rates in china and india – the most important countries in emerging asia in economic terms – to remain below potential in the near term, due to prior monetary policy tightening, high inflation, and sluggish external demand. looking at the us, recent data suggest that the situation has improved slightly. however, this should not hide the fact that economic growth in the us is likely to remain sluggish. as you may know, unemployment is still high and the fiscal environment remains contractionary. for the euro area – switzerland ’ s most important trading partner by far – the economic outlook has deteriorated since last autumn. uncertainty bis central bankers ’ speeches about an escalation of the sovereign debt crisis is undiminished. as a result, the euro area is likely to face a mild recession in early 2012. this short overview shows quite plainly : we still live in a world with substantial downside risks. thus, the global economic situation might turn out to be worse than described above. one possible risk is a more pronounced slowdown in emerging market growth. this would reinforce the downturn in european countries. another risk is that fiscal consolidation in the us may exert a greater drag on growth than projected today. but the main risk is – without doubt – a further escalation of the european debt crisis. were such a risk to materialize, the consequences for the international financial and banking system – and in turn for global activity – would be severe. swiss economic outlook what does the economic outlook for switzerland look like, given a baseline scenario with a world economy on a weak growth path as described above? after two years of fairly robust recovery, we expect the swiss economy to slow considerably in 2012. the situation remains very challenging for switzerland. on the one hand, the still very strong swiss franc is weighing on export performance. firms are suffering from compressed margins. if the difficult exchange rate situation persists, companies may consider relocating production capacity to other regions. on the other hand, the slowdown in external demand, as expected in our global baseline scenario, will likely weigh on investment spending and labor demand