Driven by the strong fear of a possible rise in interest rates and how that will impact real estate loans, the Swiss authorities proposed to her systemically important banks (UBS and Credit Suisse) to hold an additional 24 billion CHF in reserves.
A Credit Suisse source, however, suggested that this further increase in capital requirements is to ensure that Switzerland is covered in the event of another financial crisis, reasoning that the bulk of the current capital cushions could be reserved for other jurisdictions like the US and the UK, thereby leaving Switzerland uncovered.
Currently, the Swiss economy is witnessing a number of events with big implications for the future, such as:
- Persistently low interest rates (which are currently negative)
- Increased Swiss mortgage lending over the past decade
- Increased property prices, stagnating rent and increasing vacancy rates
- Increased mortgage loan default risk
- 85 Percent of Swiss bank’s domestic assets are concentrated in mortgages
- Stability and sustainability in real estate and mortgage markets is key to general economic wellbeing
- Swiss Banking Association considering to amend its self-regulation for the mortgage market so as to better manage the growing risk.
Looking forward
As the risks in the Swiss property market increases, banking regulators are demanding more focused and far reaching actions. Because of the relative widespread risk, the Swiss financial regulator FINMA believes that this problem can only be tackled through regulatory solutions. There is a preference by the banks, however, towards a reduced mortgage amortization period, cutting of loan-to-value ratio to force buyers to provide larger down payments to qualify for such loans.
Switzerland already has the most stringent capital requirements globally but must continue to innovate in order to achieve a robust and self-sustaining capital future that guarantees the stability of her resilient banks.
Thus, it is apparent that the short term future of Swiss finance is more oversight, particularly in the mortgage sector. How well these are applied to the current mortgage market situation will determine the future of the general economy.
Sources:
Swiss Banks Should Face More Raids by Finance Watchdog IMF Says, Bloomberg
Swiss government to tighten capital requirements for banks, The National
Boom risks taking Swiss real estate off-piste, Business Live
Imagine a ghost town the size of Bern with every home empty,' The Local
Photo: UBS
