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Swiss banks taking more risks to compensate for record-low interest rates

Swiss banks focused on property lending are taking more risks to compensate for the impact of record-low interest rates, increasing the threat of a real-estate bubble, Swiss National Bank Vice President Fritz Zurbruegg said.

Swiss Bank Risk

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“Exceptionally low interest rates are putting pressure on interest rate margins and this is weighing on the profitability of Swiss banks,” Zurbruegg said in a speech in Bern on Thursday. That “creates an incentive for banks to step up their exposure to interest-rate risk and adopt an imprudent attitude in their affordability assessment.”

Swiss lenders have been struggling to offset the squeeze of a minus 0.75 percent deposit rate imposed by the SNB to protect the country’s economy and weaken the Swiss franc. While the return on investments from mortgages to bonds has dropped, most of the country’s banks — including the two largest UBS Group AG and Credit Suisse Group AG — have steered clear from charging private clients’ deposits.

While banks with a larger focus on Switzerland have “taken on additional interest-rate risk” since the SNB decided to lower borrowing costs below zero percent, lenders’ exposure is “manageable at the moment” partly amid stricter capital rules, Zurbruegg said. The Swiss central bank is monitoring the situation, he added.

Risks to the Swiss property market remained elevated in the three months through September, according to a quarterly index compiled by UBS. While the buy-to-rent price ratio reached an all-time high, moderate mortgage growth and strengthening economy prevented imbalances in the owner-occupied housing market from widening, it said in the report on Nov. 2.

Banks executives themselves are aware of the risks.

“You see a lot of pressure in the system across the board, not only in Switzerland, in a search for assets, which creates, in my point of view, a clearly unintended — I hope — unintended consequence of creating asset bubbles,” UBS Chief Executive Officer Sergio Ermotti said in September. “The reality is that we may need to start to think about how to pass more negative rates to a broader client base than being able to re-price the asset side of the equation.”

Overall, “the negative interest rate charged on banks’ sight deposits at the SNB is indispensable from a monetary policy perspective,” the SNB’s vice president said, reiterating comments made by his fellow rate setters Thomas Jordan and Andrea Maechler in recent days. “Given low interest rates around the world and the difficult global economic situation, negative interest — coupled with the SNB’s willingness to intervene in the foreign exchange market — serves to ease upward pressure on the Swiss franc.”


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