thomas jordan : financial stability developments of relevance introductory remarks by mr thomas jordan, vice - chairman of the governing board of the swiss national bank, at the end - of - year media news conference, berne, 15 december 2011. * * * in my introductory remarks today, i would like to look at the most important developments in the area of financial stability that have taken place since the publication of our most recent financial stability report in june of this year. our latest analysis reaffirms the need for action which we had already identified back then. firstly, in view of the high level of risk associated with the current global economic environment, the big banks must – to the extent possible – push quickly ahead with the expansion of their loss - absorbing capital base. secondly, given the medium - term risks in the real estate market, which are particularly affecting domestically focused banks, it is vital that an effective macroprudential policy framework be developed. international developments of relevance for financial stability the global economic and financial conditions which affect the stability of the swiss financial system worsened in the second half of 2011. as my colleague, philipp hildebrand, has already mentioned, the outlook for global growth is currently subdued. a major reason for this is the sovereign debt crisis which has been building up in peripheral euro area countries for the last two years or so and is now threatening to spill over into the core countries of the euro area. the european banking sector is particularly affected, as investors fear losses from write - downs on government bonds. the ensuing loss of confidence in the banking system is resulting once again in a sharp fall in activity on the interbank market, which in turn is leading to higher refinancing costs and liquidity bottlenecks. meanwhile, the european banks themselves are holding back economic activity with their restrictive lending practices. weak economic activity is further hampering efforts by the affected nations to restructure their budgets. all of these developments have caused a steep rise in credit risk premia in financial markets. in response to this serious situation, euro area countries have adopted additional measures to strengthen fiscal discipline in a sustainable way and to restore confidence in the european banking sector and the financial markets. the actual implementation of these measures is essential if the financial markets are to be convinced in the long term. on the whole, we expect that the international environment will probably remain fraught with considerable uncertainty for some time to come ; the risks to financial stability will remain correspondingly high. situation of swiss big banks

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