financial stability could increase further. as we saw in 2015, even a lower momentum on the swiss mortgage and residential real estate markets can cause imbalances on these markets to increase. this can happen, for instance, when combined with comparatively weaker developments in fundamentals such as gdp growth. moreover, in a sustained period of low interest rates, real estate prices will remain subject to upward pressure. another rise in prices or decline in yields could occur particularly in the residential investment property segment. this would increase the risk of a substantial correction in the event of an interest rate rise, which would put pressure both on leveraged investors and on the banks who finance their investments. at the same time, in an environment of persistently low interest rates, the pressure on interest rate margins would continue. such pressure creates powerful incentives for banks to take on more risks. the focus here is on maturity transformation and affordability risk in mortgage lending. in the short term, this may allow banks to increase their profitability, but the flip side is that this also makes them more vulnerable to interest rate shocks and corrections on the mortgage and residential real estate markets. domestically focused banks would be particularly exposed to a major interest rate shock. as we explain in our financial stability report, in the event of a normalisation of interest rates, banks would initially benefit from the restoration of the liability margin. however, a major interest rate shock would cause net interest income to fall significantly at many banks, potentially resulting in losses. the greater a bank ’ s maturity transformation is, the higher these losses will be. even if the current low interest rate period were to continue and interest rates were only to rise very gradually, the possibility of a major interest rate shock should not be ruled out. experience has shown that interest rate corrections can sometimes be sudden and sharp. it should also be borne in mind that interest rates on the money and capital markets are currently more than 300 basis points lower than at the beginning of 2008. in other words, bis central bankers ’ speeches even if interest rates were to return to levels previously considered normal, this would still constitute a major correction. in view of the fact that risks to financial stability could increase further over the short to medium term, the capital surpluses of domestically focused banks are of particular significance. when defining their appetite for risk and their capital plans, the banks should continue to ensure that they are also able to absorb the losses associated with highly unfavourable but possible scenarios in the future. even under scenarios of

lsap = large scale asset purchases, mep = maturity extension programme, apf = asset purchase facility, qqe = quantitative and qualitative easing 17. 11. 2016 financial markets and monetary policy implementation – an evolving relationship | andrea m. maechler | © snb sources : andrade et al. ( 2016 ), snb central banks further reduced long - term interest rates by purchasing government bonds sources : imf, snb the different asset classes are more strongly correlated today than before the crisis 17. 11. 2016 financial markets and monetary policy implementation – an evolving relationship | andrea m. maechler | © snb sources : bloomberg, snb equity prices in the us reached new highs despite falling earnings expectations 17. 11. 2016 financial markets and monetary policy implementation – an evolving relationship | andrea m. maechler | © snb sources : bloomberg, snb little change in us equity market ’ s pre and postcrisis reaction to news 17. 11. 2016 financial markets and monetary policy implementation – an evolving relationship | andrea m. maechler | © snb thank you for your attention © swiss national bank