risks entered into and the capital adequacy of the banking sector. to complete our analysis, we use newly developed models that quantify both the stress to which the banking sector is subjected and its correlation with the macroeconomic environment. the main characteristics and conclusions drawn from these models are published for the first time today. the models will be presented in detail in a series of snb publications. the analysis presented in the financial stability report indicates that the banking sector is stable. in 2003 it was able to raise its profits substantially in spite of a mixed macroeconomic and financial environment. thanks to these profits, banks were able to bolster their capital significantly, thus enhancing their capacity to absorb shocks. the resulting capital ratios in the banking sector are high both in historical terms and by international standards. this impression of pronounced robustness in the swiss banking sector is corroborated by the relatively low level ( in historical terms ) of the stress indicator. this is a new indicator calculated as a synthesis of different stress symptoms. the indicator considers in particular the capital ratios, profits, share prices and risk premiums on bonds in the swiss banking sector. as far as the outlook is concerned, we believe that the macroeconomic environment and the financial markets do not present any significant threat to the stability of the swiss banking system. the forecasts for 2004 point to a rebound in economic growth in switzerland and the european union along with a continuing upswing in the united states. moreover, the rise in prices on the swiss real estate market has remained moderate by both historical and international standards. it is thus unlikely that this market will see any abrupt downward adjustment - traditionally a major stress factor for the banking sector. and finally, the available indicators suggest that the major global banking sectors are also relatively robust. at present, therefore, the risk of contagion - i. e. of a crisis having repercussions on switzerland - is remote. two sources of potential stress should, however, be mentioned. first, a slowdown in the economy which, though unlikely, is still conceivable - could have negative repercussions on the quality of loan portfolios and on stockmarket prices. second, in the more likely event of a sustained economic upswing, a sharper - than - expected rise in interest rates could also worsen the quality of loan portfolios by increasing the interest burden on households and companies more than expected. analysis of the various scenarios suggests that sufficient capital is available in the swiss banking

the banking sector and in the oversight of the payment and securities settlement systems ( system oversight ) - but also contributes actively to overcoming crises. in a crisis, the national bank - like any other central bank - is primarily responsible for maintaining liquidity. on the one hand, it can do this by ensuring that the market is amply supplied with liquidity. and on the other hand, as lender of last resort ( lolr ) it can also provide emergency liquidity assistance to individual banks that are illiquid but still solvent. here too we adopt internationally accepted procedures. many central banks still prefer not to inform the commercial banks in too much detail about their role as lolr. quite understandably, they want to prevent the banks from being lulled into a false sense of security. the jargon term for this is “ constructive ambiguity ”. by contrast, the swiss national bank has opted - after carefully weighing up the moral hazard implications of its conduct - to communicate its terms to the banks both clearly and well in advance. the modalities are described in the guidelines of the swiss national bank on monetary policy instruments of 30 april 2004. to receive an lolr credit, a bank must on the one hand be systemically relevant and, on the other hand, be solvent and able to furnish sufficient collateral. without collateral, the national bank cannot grant any credit. this fundamental principle is enshrined in the national bank act. by disclosing our terms to the banks in advance, we are eliminating any possible misinterpretation of the liquidity risks and helping to ensure that preparations are in place for a liquidity crisis which can never be ruled out altogether. this is what we refer to as “ constructive clarity ”. conclusion to sum up, i would like to reiterate that the situation of the swiss financial system is stable. however, this gratifying conclusion should not allow us to rest on our laurels. maintaining a stable financial system in the long term calls for constant efforts to prevent and cope with crises. while this challenge must primarily be met by the private sector, the authorities can, should and must support its efforts. financial stability report 2004 ( 424 kb )