News conference Swiss National Bank 2017, Fritz Zurbrügg

Both of the big banks have also made progress on the second pillar of the regulations, ‘resolution’, which covers the orderly restructuring and wind-down of a bank that can no longer function as a going concern and is thus deemed to have become a gone concern. With a view to managing such a crisis scenario, Credit Suisse as well as UBS have  increased  their gone-concern loss-absorbing capacity by issuing further bail -in instruments, which can be converted into equity in the event of impending insolvency. As we explained in our  Financial Stability Report published in June, since the ‘too big to fail’ regulations came into force, Credit Suisse and UBS have also taken important organisational steps to improve  their resolvability. Despite these positive developments, the two big banks still need to make further progress if they are to fully comply with the second-pillar requirements. This applies  both to their gone-concern loss-absorbing capacity and their resolution planning.

Full compliance with all of the ‘too big to fail’ requirements will further strengthen the big banks’ going and gone-concern loss-absorbing capacity as well as improve their resolvability in a crisis. Both of these sets of requirements must be addressed if Switzerland’s ‘too big to fail’ problem is to be solved.

First, imbalances on the mortgage and real estate markets persist. Although mortgage growth has remained relatively low in 2017 – as in the previous year – developments on the real estate market show a somewhat different picture: price growth in the residential property segment 2 had been falling since 2013, but recently transaction prices have started to pick up again. Moreover, with the exception of a few quarters (including the third quarter of 2017), prices in the residential investment property segment have risen markedly since 2013. As prices over this period have increased more strongly than fundamentals such as rents, risks have accumulated in this segment; it is thus especially vulnerable to a substantial correction in the medium term. This situation is compounded by brisk construction activity in the rental apartments segment, which could lead to oversupply. Signs of this can already be seen in rising vacancy rates.

Second, the risk appetite of domestically focused banks remains high. This is particularly evident from the affordability risk data. The share of new mortgages with high loan-to-income ratios has risen significantly in recent years and has reached a historical high. The interest rate risk of domestically focused banks likewise remains high, while their interest margin continued to decline in the first half of 2017. As long as there is pressure on margins, incentives for domestically focused banks to increase risk-taking will remain substantial.

Third, notwithstanding the risks in the macroeconomic environment and the banks’ high risk appetite, SNB stress tests continue to suggest that, overall, domestically focused banks’ resilience remains adequate. Thanks to robust capitalisation, most of these banks would be able to absorb the losses likely to be incurred in adverse scenarios; given the risks I have  outlined, this is welcome. In the future, too, it will be decisive for the stability of the financial system that banks hold sufficient capital to cover the risks on their books – irrespective of  ongoing margin pressure.

The SNB will continue to monitor developments on the mortgage and real estate markets closely, paying particular attention to the residential investment property segment as well as to  risks emanating from mortgage lending. In parallel, it will continue to regularly reassess the need for an adjustment of the countercyclical capital buffer.

As announced, the next denomination, the 200-franc note, will be issued in autumn 2018. The 1000-franc note and the 100-franc note will follow in 2019. The SNB will announce the precise issue dates well in advance.