2 Instruments  Macroprudential authorities have a wide range of instruments at their disposal to achieve these objectives. In order to contain the build-up of vulnerabilities, authorities can rely on instruments that aim to keep borrowing at sustainable levels. Examples of these so-called borrower-based instruments are restrictions on the loan-to-value (LTV) or loan-to-income (LTI) ratios, as well as specific requirements on loan maturity and amortisation. Specifically, these instruments limit borrowing from households who have insufficient personal equity, or whose income would not be able to cover debt payments if interest rates were to rise beyond a certain level. As a result, these instruments should reduce overall credit growth and, indirectly, house price growth, thereby containing the build-up of vulnerabilities. In order to strengthen banking sector resilience, macroprudential authorities can rely on instruments that directly target bank capital, the so-called capital-based instruments. These instruments increase bank capital above minimum capital requirements. In other words, they create a safety buffer that serves as a shock absorber in times of stress. Important instruments in this category are capital buffers that depend on a bank’s size (e.g. buffers for global systemically important banks). In addition to these structural instruments, authorities can rely on an instrument that depends directly on the level of cyclical risks in credit markets, namely the countercyclical capital buffer (CCyB). The idea behind the CCyB is that banks should build up capital gradually as cyclical risks in credit markets increase, thereby strengthening their resilience.
Economica, 85: 735-770; B. Richter, M. Schularick and I. Shim (2019), The costs of macroprudential policy, Journal of International Economics, 118: 263282; Ampudia, M., M. Lo Duca, M. Farkas, G. Perez Quiros, M. Pirovano, G Rünstler, and E. Tereanu (2021), On the Effectiveness of Macroprudential Policy, ECB Working Paper Series 2559. Behncke, S. (2022), Effects of macroprudential policies on bank lending and credit risk, Journal of Financial Services Research. Ibidem. banks (cf. slide 2). As a consequence, banking sector resilience to shocks is now much larger than before the GFC. Stress tests conducted by many central banks indicate in fact that bank capital is likely to be sufficient to cover potential losses under severe stress scenarios. 9 At the SNB, we also regularly conduct stress tests for the Swiss banking sector. Results, reported in our annual Financial Stability Report, suggest that most banks have adequate capital buffers to absorb losses under adverse scenarios, in particular also in the event of an abrupt and steep interest rate rise combined with declining real estate prices. This implies that banks could withstand the shock, and still fulfil their key role as credit providers to the real economy. The coronavirus pandemic has highlighted the importance of banking sector resilience. Despite the elevated uncertainty prevailing at the onset of the pandemic, market participants remained confident in the banks’ ability to absorb potential losses resulting from the pandemic and to continue at the same time to fulfil their role as credit providers.