news conference berne, 15 december 2016 andrea m. maechler introductory remarks by andrea m. maechler i will begin by reviewing the situation on the financial markets, before going on to talk about the impact of negative interest on the money and capital markets. i will finish my presentation with a few comments on the progress that has been made in reforming benchmark interest rates. situation on the financial markets since the last news conference in june, movements on the financial markets have been heavily influenced by two political events : the unexpected outcome of the brexit vote in june and the us presidential election in november. both events generated short - term uncertainty among investors. nevertheless, positive risk sentiment prevailed overall. leading equity indices in the us, japan and europe have recorded price gains since mid - year ( cf. chart 1 ). in the us, all key indices hit new record highs at the beginning of december. in switzerland, the smi, however, lagged behind the general trend : it is currently virtually unchanged from its mid - year level. the reason for this is the index ’ s strong weighting in defensive equities, from the healthcare and consumer goods sector for example. these securities, which tend to benefit less from increasing risk appetite among investors, came under selling pressure as a result of rising interest rates. on bond markets, high - quality government bond yields have climbed since mid - year ( cf. chart 2a ). firstly, economic data bolstered investor confidence in a global economic recovery. secondly, inflation expectations rose steadily – albeit from a low level – particularly in the uk and the us ( cf. chart 2b ). this trend was reinforced by the outcome of the us election, which fuelled expectations of a more expansionary fiscal policy and a stronger increase in us government debt. the rise in yields also reflects higher risk premia caused by generally heightened uncertainty surrounding the future course of us fiscal and monetary policy. page 1 / 7 berne, 15 december 2016 andrea m. maechler news conference thus, the increase in yields was particularly pronounced in the us. ten - year us government bonds recently stood at around 2. 5 %, 1 percentage point up from mid - year. by contrast, yield increases in japan and europe were on a smaller scale. yields on ten - year swiss confederation bonds recently stood at – 0. 1 %, half a percentage point up from mid - year. approximately 60 % of outstanding confederation bonds are currently still generating negative yields,

reduce the tax shield of debt. debt has an advantage over equity capital in the sense that payments to debt holders are deducted from profits. in contrast, payments to shareholders, i. e., dividends, are made out of profits and hence are subject to corporate taxes. forcing banks to hold more capital reduces their tax shield and thereby diminishes banks ’ market value. what are the orders of magnitude we are talking about here? let me offer you a very rough back - of - the - envelope calculation using publicly available data in switzerland. assume that a bank has to increase its leverage ratio from 1 % to 5 %. if this bank is subject to ” capital ratios helped mask looming crisis ”, the wall street journal europe, 11 november 2008. an effective tax rate of 20 %, the increase in capital will reduce the bank ’ s total market value by less than 1 %. however, these costs notwithstanding, banks and shareholders may also benefit from holding more capital. for instance, banks that were more conservatively capitalised before the outset of the current crisis have now benefited from their relative strength. in the area of wealth management, for instance, stronger banks have been successful in attracting clients from weaker banks. moreover, looking at the poor performance of thinly capitalised banks ’ stocks over the last decade or so, low leverage ratios do not seem very attractive. our empirical analysis suggests that risk - adjusted stock returns of banks do not increase with leverage. a cross - sectional comparison of risk - adjusted returns with other industries is also sobering. the performance of the relatively low - capitalised banking sector has been devastating during the last decade. 7. conclusion to conclude, leverage has been a major contributing factor in the current financial crisis. excessive leverage has amplified the shocks to the financial system. moreover, the now inevitable de - leveraging is imposing further stress on the system. to enhance the longerterm resilience of the financial system, effective regulation to curtail banks ’ leverage is required. in an attempt to put a lower bound on banks ’ leverage, i strongly support enhancing current risk - weighted capital requirements with a simple leverage ratio. a leverage ratio effectively serves as a safety valve against the weaknesses and shortcomings of risk - weighted requirements. it ensures a minimum capital buffer that protects banks against unexpected losses and underestimation of risk. as we have learned from the current crisis, the failure of risk models may quickly turn banks that seem comfortably capitalised into poorly capital