MACRO-PRUDENTIAL POLICY IN

SWITZERLAND

Richard DUTUSwitzerland DeskOECD Economic Department

1/ Macroeconomic overview

2/ Imbalances building up in the housing market

3/ Macroprudential measures adopted• Countercyclical capital buffer (CCB)

Plan of talk

1/ Macroeconomic overview

GDP growth has been strong…

…and the labour market robust.

But deflation is entrenched…

…and the Swiss franc remains strong.

1999 01

1999 06

1999 11

2000 04

2000 09

2001 02

2001 07

2001 12

2002 05

2002 10

2003 03

2003 08

2004 01

2004 06

2004 11

2005 04

2005 09

2006 02

2006 07

2006 12

2007 05

2007 10

2008 03

2008 08

2009 01

2009 06

2009 11

2010 04

2010 09

2011 02

2011 07

2011 12

2012 05

2012 10

2013 03

2013 08

2014 010.5

0.55

0.6

0.65

0.7

0.75

0.8

0.85

0.9

0.95

1

EUR/CHF Ceiling

Source: SNB

Very low interest rates as a result.

2000

01

2000

06

2000

11

2001

04

2001

09

2002

02

2002

07

2002

12

2003

05

2003

10

2004

03

2004

08

2005

01

2005

06

2005

11

2006

04

2006

09

2007

02

2007

07

2007

12

2008

05

2008

10

2009

03

2009

08

2010

01

2010

06

2010

11

2011

04

2011

09

2012

02

2012

07

2012

12

2013

05

2013

10

2014

03

0

0.5

1

1.5

2

2.5

3

3.5

4

3-month, CHF Libor

Source: SNB

2/ Imbalances are building up in the housing market

Mortgages growing faster than the economyM

ar-0

5Ju

n-05

Sep-

05De

c-05

Mar

-06

Jun-

06Se

p-06

Dec-

06M

ar-0

7Ju

n-07

Sep-

07De

c-07

Mar

-08

Jun-

08Se

p-08

Dec-

08M

ar-0

9Ju

n-09

Sep-

09De

c-09

Mar

-10

Jun-

10Se

p-10

Dec-

10M

ar-1

1Ju

n-11

Sep-

11De

c-11

Mar

-12

Jun-

12Se

p-12

Dec-

12M

ar-1

3Ju

n-13

Sep-

13De

c-13

Mar

-14

-4

-2

0

2

4

6

8

Real growth, yoy

GDPMortgages

Source: SNB

Real estates prices rising rapidly

Debt levels high and bank exposed

Mortgages to GDP rising rapidly

Source: SNB

Fixed mortgage interest rates half their 2008 level

Source: SNB

UBS bubble index is now into the risk zone

• Two risks: 1. Defaults

2. Sizeable correction

• Problem: – The interest rate is unavailable due to the exchange rate situation.

• “The interest rate required for macroeconomic stability differs from that required for financial stability”

J.P. Danthine, Vice Chairman of the Governing Board, SNB, 2012

– New instruments are needed.

3/ Macroprudential measures adopted

• Structural macroprudential measures

– Too-Big-To-Fail (TBTF)

• Cyclical macroprudential measures

– Counter-cyclical capital buffer (CCB)

– Other measures

– Structural revision of capital requirements for residential mortgage lending

• Permanent increase in risk-weighting from 75% to 100% for the loan tranche exceeding the 80% loan-to-value ratio

• Effective January 2013– Revision of banking industry’s self-regulation guidelines

• Tighter minimum requirements: – 10% of collateral provided in equity other than

pension assets– The mortgage debt on residential properties has to

be repaid such that it amounts to no more than two-thirds of the collateral value after 20 years

• 100% risk-weighting for new loans that do not meet those tighter requirements

• Effective July 2012– Countercyclical capital buffer (CCB)

Cyclical macroprudential measuresannounced by the Federal Council in June 2012

– A pre-emptive measure allowing authorities to temporarily raise capital requirements as imbalances develop

– Two main objectives:1. Protect the banking sector from excessive credit growth by

increasing its loss absorbing capacity2. Lean against the build-up of excesses by making credit more

costly to banks– The Swiss National Bank (SNB), in consultation with the Swiss

Financial Market Supervisory Authority (FINMA), submits a proposal to the Federal Council, which makes the decision.

– When activated, banks are required to gradually build up additional capital buffer (Common Equity Tier 1 capital) of up to 2.5% of total domestic risk-weighted assets during the upswing

– It is a supplement to other capital requirements– It can be broad-based or target specific segments of the credit

market– When risks materialize or recede, the capital buffer is released

immediately or gradually

The CCB

– Two sets of indicators are used: 1. Domestic mortgage volume indicators2. Domestic real estate prices indicators• Other indicators, e.g. general economic

conditions, leverage, etc.– “Guided discretion”– The level is set proportionally to the degree of

imbalances– Activation possible since July 2012

When is activation of the CCB needed?

On February 13, 2013, the Federal Council decided to activate the CCB.

• Set at 1% of associated risk-weighted positions.

• The proposed capital buffer is targeted at mortgage loans financing residential property located in Switzerland

• Deadline for compliance: September 30, 2013.

• The SNB closely monitored developments on the mortgage and real estate markets, and regularly reassessed the need to either adjust the level of the CCB, or deactivate it.

The CCB has been activated recently…

On January 23, 2014

• Set the level at 2% of associated risk-weighted positions

• Deadline for compliance: June 30, 2014.

…and raised early this year.

The impact

• The activation of the CCB was at least one important factor which motivated several banks – including some major banks – to implement capital measures in 2013 and self-regulation rules, which helped to increase resilience.

• Some sign of cooling in both mortgage lending and residential property prices.

Mortgage lending growth remains strong

1992

06

1993

06

1994

06

1995

06

1996

06

1997

06

1998

06

1999

06

2000

06

2001

06

2002

06

2003

06

2004

06

2005

06

2006

06

2007

06

2008

06

2009

06

2010

06

2011

06

2012

06

2013

06

-2

0

2

4

6

8

10

-2

0

2

4

6

8

10

Year on year % growth in mortgage loans

Source: SNB

– Counterfactual exercise:• The CCB during the last housing boom

– “A large fraction of the loss would have been absorbed” (SNB 2013)

Does the CCB provide resilience?

The problems

• Housing boom is a regional issue in Switzerland. CCB is a blunt instrument.

Real estate price growth varies by region

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

90

110

130

150

170

190

210

230

250

270

90

110

130

150

170

190

210

230

250

270

Total Switzerland

Zurich area

Eastern Switzerland

Central Switzerland

Northwestern Switzerland

Berne area

Southern Switzerland

Lake Geneva area

Western Switzerland

Price index 1997 = 100: Owner-occupied apartments (2 to 5 rooms)

The problems

• Housing boom is a regional issue in Switzerland. CCB is a blunt instrument.

• The impact of the CCB may be limited given comfortable capital levels in domestically oriented banks where mortgage lending is dominant.

• “Increase in the cost of a mortgage by 5-10 basis points at most”(UBS chief economist Daniel Kalt)

• Not as effective as raising interest rates.

• No impact on cash-rich foreign investors.

MACRO-PRUDENTIAL POLICY IN

SWITZERLAND

Richard DUTUSwitzerland DeskOECD Economic Department