Monetary Assessment: Key phrases from Jean-Pierre Danthine
Big banks: Strengthening resilience
Over the past year, the Swiss big banks have substantially improved their capital situation. Risk-weighted capital ratios have been raised markedly, and both banks are now very well placed in an international peer comparison. Credit Suisse has also raised its leverage ratio considerably [REMARK: against one year ago, when the SNB was critizing the bank]….
However, given the prevailing risks in the environment and the losses incurred in the recent crisis, the SNB still considers current leverage ratios at the Swiss big banks to be low. In addition, a number of comparative studies imply that, in terms of leverage ratios, UBS and Credit Suisse are currently below the international average.
.. According to these plans [their own Risk-weighted asset/ RWA calculation], and measured in terms of loss-absorbing capital, by the end of 2014, Credit Suisse and UBS are likely to have already met the risk-weighted capital requirement of 13% which will apply from 2019. Moreover, these plans will lead to a substantial increase in their leverage ratios by the end of 2014.
Credibility of model-based risk-weighted assets
The credibility of RWA based on banks’ internal models is increasingly being called into question by market participants, analysts and authorities worldwide. … in-depth analyses need to be carried out to determine whether and to what extent the model-based approach and the standardised approach lead to differences in RWA. … Differences between the two approaches must be well explained and have a sound economic rationale. … SNB recommends that the big banks increase transparency with regard to their risks.
Domestically focused banks: Resilience and lending policies
In an environment of historically low interest rates, there has been a build-up of imbalances on these markets.On the one hand, the ratio of mortgage loans to GDP has increased to very high levels in a historical comparison. On the other, growth in real estate prices has been persistently stronger than what can be explained by fundamental factors.
These measures include a revision of the self-regulation rules for mortgage lending and stricter capital requirements for mortgage loans. Despite the measures taken, however, imbalances continued to build up in 2012. Against this background, the Federal Council decided in February 2013 to activate the countercyclical capital buffer, at the proposal of the SNB. …
.. capitalisation of domestically focused banks is significantly above the regulatory minimum requirements. … However, figures on regulatory capital may overestimate the true resilience of these banks. For one thing, the risks in the real estate market in particular are not or only partly taken into account in the regulatory capital requirements. For another, neither interest rate risk nor the low diversification of these banks – whose activities are centred on the domestic mortgage market – are fully reflected in the capital requirements.
… First, … real estate markets have seen a further build-up of risks
..Second … the volume of mortgage claims at these banks has increased by around 5%.
… Third, banks’ risk appetite remained high…. For instance, a large proportion of new mortgages granted for owner-occupied residential property still have a loan-to-value ratio of over 80%.
In view of the persistently low level of interest rates, there is the risk that, despite the measures already implemented, imbalances on the Swiss mortgage and real estate markets will continue to build up. This would increase both the likelihood and the consequences of a price correction in the medium term. Such a price correction could be triggered, for example, by a sharp increase in interest rates….
…domestically focused banks should therefore continue to ensure that their resilience is sufficiently high and maintain their economically important functions, even if real estate prices were to fall sharply and interest rates were to simultaneously rise.
From a financial stability perspective, in the event of a further build-up of risks in the Swiss mortgage and real estate markets, it might prove necessary to take further regulatory measures. The SNB, for its part, will regularly assess whether an adjustment of the countercyclical capital buffer is necessary
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Tags: Countercyclical Capital Buffer,currency reserves,financial system,Monetary Assessment,Monetary Policy,money market,price stability,SNB mandate,Swiss National Bank