highly risky. banks are also faced with structural challenges. the accelerated pace of change in information technology and altered customer behaviour require high levels of investment. at the same time, the increasing digitalisation of distribution channels has stiffened competition, since it is easier for new rivals to enter the market. another significant challenge for banks is the current economic environment. weak global growth and persistently low interest rates in recent years are weighing on profitability in the banking sector. what repercussions does the latter aspect – low interest rates – have on banks in switzerland in this generally difficult environment? this is the question that i would like to address in detail this evening. i will begin by briefly explaining why the negative interest rate in switzerland is currently necessary from a monetary policy perspective. i will then show the extent to which this interest rate environment has influenced the profitability of swiss banks. i will conclude with a discussion of the associated risks to financial stability, which require special attention. page 2 / 10 negative interest rate as a monetary policy imperative given low rates worldwide to answer the question of why the negative interest rate in switzerland is currently necessary from a monetary policy perspective, it is worth looking somewhat further into the past. the last 30 years have seen interest rates around the globe trending downwards, as illustrated by the rates on ten - year government bonds in switzerland, germany and the us ( slide 2 ). a key explanation for this downward trend is that both inflation rates and their volatility have declined worldwide. consequently, investors require less compensation for the risk of a fall in the value of money due to inflation. the literature gives further reasons for the general decline in interest rates since the mid - 1980s. 1 the propensity to save has increased overall, while at the same time the demand for investment capital has receded. this combination of higher supply of and lower demand for capital exerts downward pressure on interest rates. since the onset of the financial crisis in 2007, the prolonged slump in global growth and valiant efforts by central banks have pushed interest rates even lower. as a small open economy, switzerland cannot decouple itself from these global developments. on the contrary, exceptionally low interest rates around the globe have farreaching consequences for our economy. in the past, switzerland has invariably had lower interest rates than its trading partners, namely the euro area countries, as shown in slide 3, where the blue shaded area depicts the difference between short - term interest rates in euros ( yellow ) and swiss francs ( red

). this interest rate advantage primarily reflects the lower average inflation rate in switzerland compared to other countries, although political stability, sustainable fiscal policy and credible monetary policy also play a role. investors have therefore traditionally been willing to hold swiss franc investments at lower yields. this interest rate advantage was for a long time the ‘ natural ’ state of things in switzerland. however, in the wake of the financial crisis, this advantage came under mounting pressure. monetary policy easing on the part of the european central bank resulted in a narrowing of the eur / chf interest rate differential. in 2014, yields on short - term government bonds in switzerland were, at times, even higher than in germany. this caused upward pressure on the swiss franc to intensify. 2 from a monetary policy perspective, swiss franc appreciation calls for monetary policy easing, since the exchange rate has a substantial influence on inflation and economic developments in switzerland. initially, appreciation places downward pressure on prices of imported goods and services, which account for around 25 % of the basket of commodities cf. bean, charles et al. ( 2015 ), low for long? causes and consequences of persistently low interest rates, geneva reports on the world economy 17, bis ( 2015 ), 85th annual report, chapter i : is the unthinkable becoming routine? another important reason for the upward pressure of recent years is the generally higher level of uncertainty in the financial markets, manifesting in a greater desire for safe investments. the swiss franc – along with the us dollar and the yen – are commonly considered safe haven currencies – cf. ranaldo, angelo and paul soderlind ( 2010 ), safe haven currencies, review of finance, 14, pp. 385 – 407. page 3 / 10 used to calculate the swiss consumer price index. an appreciation of the swiss franc therefore translates into a decline in the inflation rate. furthermore, appreciation impairs the price competitiveness of the domestic export industry and dampens foreign demand for swiss goods and services. this, in turn, adversely affects domestic growth and therefore also indirectly weighs on inflation. as you are aware, the snb has a statutory mandate to ensure price stability while taking due account of economic developments. thanks to the introduction of the negative interest rate in switzerland, the original interest rate differential to the euro area could at least partially be restored. this – along with the snb ’ s willingness to intervene in the foreign exchange market – has helped