is relevant for regulation. the big banks are quite well placed by international standards in this regard. however, if the unweighted capital ratio is used as a benchmark ( in switzerland, it is not subject to any minimum requirements ), the capital levels of the big banks are more modest when viewed internationally. the reasons for this discrepancy are the comparatively low proportion of off - balance - sheet business at the swiss big banks on the one hand, and the low average weighting of trading and loan books on the other hand. thirdly, there is no indication – from our perspective – that the risks entered into in the banking industry have risen : market and interest rate risk have only increased slightly on an aggregate level, and credit risk even seems to have fallen. consequently, the banking sector is in good shape at the moment. as far as prospects for the near future are concerned, we believe that the macroeconomic environment and financial market conditions pose no major threat to the stability of the swiss banking system. the outlook for 2005 indicates that economic growth in most regions will only slow down at a moderate pace. in addition, the available indicators suggest that there is currently little risk of contagion effects causing a crisis in the swiss banking sector. nevertheless, there are still potential sources of risk. they pertain to credit risks in particular. firstly, an unexpectedly sharp economic downturn could have a serious impact on the quality of the loan portfolios and the stock market. secondly, should we witness a swift economic recovery, however, a sharp rise in the still very low interest rates could also result in a deterioration of the loan portfolio. this is because the growing interest burden would suddenly put considerable pressure on households and companies with mortgages to pay off. banks would also be directly affected by the steep interest rate hike, as the interest rates on their assets tend to be fixed for a longer period than those on their liabilities. in view of the interest rate risks taken and the now extremely low provisions in the swiss banking sector, the negative consequences of an unexpectedly sharp interest rate increase could be relatively far - reaching. the swiss banking sector should nevertheless have sufficient capital to bear up, even under such circumstances. hedge funds might pose an indirect threat to stability in that their failure affects systemically important banks. in our opinion, this is an unlikely scenario, however. hedge fund risk management at swiss big banks is adequate. the sfbc supervises the big banks ’ hedge fund activities. their exposure to hedge

have left a ‘ hole ’ in activity. rather, the combined effect of low interest rates and preference shifts is continuing to support demand. over time, though, that additional surge in building approvals from homebuilder and other subsidies will have been worked through and will no longer be a support for the level of dwelling construction. but not yet, because – as i'll explain – the construction industry appears to be at capacity. construction at capacity despite the surge in demand and building approvals, the data on housing completions have not yet picked up in the same way ( graph 7 ). this is why current and expected growth in the housing stock is around the same rate as in the first decade of the century. the large number of detached approvals have mostly started construction, but there is now an unusually large pipeline of detached homes that are yet to be completed. graph 7 residential pipeline ’ 000 quarterly activity commencements dwellings approved but not yet completed ’ 000 higher density approvals completions detached 2022 2002 sources : abs ; rba all the signs point to the fact that the residential construction industry is at capacity and cannot work down this pipeline any faster. to be clear, this has nothing to do with land availability or governments approving enough homes. the land has been made available and the building project is already approved. the issue is how fast these projects can be completed. we hear from liaison contacts in the construction industry that delays are common. normally, a detached home takes about six months to build. currently, they are telling us that it is averaging around nine months. the divergence in the relationship between dwelling investment and its usual drivers also suggests that construction is at capacity. normally, dwelling investment can be reasonably well explained by factors such as recent building approvals, population growth and interest rates. but lately, actual outcomes have been significantly weaker than those usual relationships would imply ( graph 8 ). graph 8 pipeline model – total new dwelling investment $ b $ b actual model $ b $ b change in backlog, four - quarter rolling sum higher density detached - 5 - 5 sources : abs ; rba some of these delays relate to the availability of materials. the supply chain disruptions around the world have impinged on a range of building materials, especially steel and timber, but also everything from tiles to appliances. around one - fifth of firms are reporting that the availability of materials is a significant constraint on their output ( graph 9 ). this is far higher than reported over the