But monetary policy needs to be forward looking, so that does not add up to a compelling case for a change in monetary policy. The question is how has the growth and inflation outlook changed as a result. In my experience, recoveries have momentum. While growth might not be totally steady and even across sectors, as recovery progresses, various mechanisms begin to operate which can give it added momentum. Pressure on existing capacity grows, causing companies to dust off their investment plans. Supply chains tighten and firms start to re-stock. Memories of the uncertainty created by the shocks that generated the recession fades and confidence recovers. The labour market stabilises and unemployment should eventually start to fall, improving job prospects. These things happen over a period of time, so from month to month not much change may be perceptible. But looking back over a longer period, improvement is clear. In my view, this is the process that has been underway for the last year, and this process of gradual healing and recovery is likely to continue in the absence of big negative shocks which could derail growth. Given our experience over the last few years, we should certainly worry about future major shocks from the international economy. But the big downside worries resulting from the financial crisis which were present a year ago have receded, in my assessment. And the response of monetary policy has played a part in that process – though it has not been the only factor at work.
Moreover, most of these banks’ capital is of the highest quality, and thus loss-absorbing. However, in the current environment, the resilience of these banks, as measured by the regulatory capital indicators, is overestimated.   First, certain risks are not captured by the regulatory requirements. This applies, in particular, to interest rate risk in the banking book, which covers traditional deposit and lending activities. In the current situation, with historically high interest rate risk exposures, this is a significant shortcoming.   Second, the current capital requirements have a procyclical effect. Thus rising real estate prices, by causing loan-to-value ratios to fall, can lead to lower capital requirements. Given the growing imbalances on the real estate market, banks’ resilience, as measured by the regulatory capital indicators, is overestimated.   Third, the low level of diversification of most domestically focused commercial banks is not taken into account in capital requirements. The main focus of these banks’ business activities, and their risk exposures, relate to mortgage lending. This concentration of activities is compounded by a geographical concentration at the cantonal or regional level. In the light of these factors, the SNB considers that action is needed on two fronts: First, the capacity of some banks to bear the risks incurred must be reviewed, and strengthened if necessary. This applies particularly to banks which have cumulative risks, such as high interest rate risk and high exposure to the mortgage and real estate markets. FINMA’s microprudential measures will play a key role in this regard.