Which of those explanations can plausibly contribute to explain the remarkable development of credit-to-GDP ratio in Switzerland highlighted before? 4. A plausible explanation for the current Swiss developments  As already hinted at, the review of possible structural drivers of an increase in credit volumes does not seem to provide solid support for arguing in favor of a recent permanent shift in the case of Switzerland. Switzerland has a highly developed financial system. Economic stability, a high wealth level – Swiss households’ stock of financial assets amounted to about 3.5 times GDP in 2011 (Figure 6) – a high savings rate and structurally low interest rates are probable reasons for high credit volumes, possibly even a high credit-to-GDP ratio, in international comparison. It is not clear, however, how one could argue that significant changes in these structural factors are currently at work.9 By contrast, many of the cyclical drivers that we have discussed appear highly plausible in the current circumstances. Specifically, the prolonged current period of ultra-low interest rates feeding into and being reinforced by rising real estate prices, combined with the potential for some of the abovementioned behavioral biases, have a higher explanatory power. These developments bear clear risks for financial stability. Let me go into more detail. We are currently experiencing a prolonged period of low interest rates (Figure 7a). This holds globally as well as in Switzerland; it is one of the key consequences of the financial crisis of  7  Minsky, H.P. (1982)  8  Keynes, J.M.
BIS central bankers’ speeches  5  cyclical nature, the elevated property prices and the evidence of high risk appetite translate for the Swiss economy into a state of high vulnerability requiring caution and the exercise of responsibility by all concerned. The activation of the CCB and the adoption of other prudential measures have to be seen in this perspective. References Borio, C. (2012): The financial cycle and macroeconomics: What have we learnt? BIS Working Paper No 395 Keynes, J. M. (1936): The General Theory of Employment, Interest and Money, London, Macmillan; Chapter 12 Minsky, H. P. (1982): Can “it” happen again?, Essays on instability and finance, New York 1982 Reinhart, C. and Rogoff, K. (2009): This time is different: Eight Centuries of Financial Folly, Princeton University Press Schularick M., and Taylor, A. (2012): Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870–2008, American Economic Review, American Economic Association, Vol. 102(2), pp. 1029–61 Stiglitz, J. and Weiss, A. (1981): Credit Rationing in Markets with Imperfect Information, The American Economic Review, Vol. 71, No. 3, pp. 393–410. 6  BIS central bankers’ speeches  BIS central bankers’ speeches  7  8  BIS central bankers’ speeches  BIS central bankers’ speeches  9  10  BIS central bankers’ speeches