The official parity also determined the valuation of the gold stock on the SNB’s balance sheet. In order to eliminate these residual relics of the gold standard and enable a change in the SNB’s gold policy, the Swiss Constitution as well as the Coinage Act needed to be amended first. BIS Review 31/2005  1  Whereas during the 1980s and the early 1990s, the political climate did not permit such constitutional and legal amendments, the situation finally evolved in the late 1990s. The deterioration of Switzerland’s public finances led to a growing awareness of the opportunity costs of maintaining the existing structure of the SNB’s assets. The vast gold holdings increasingly gave rise to concern in the context of bearish market sentiments and of gold sales by other central banks. In November 1997, a partial revision of the Swiss National Bank Law increased the flexibility of the SNB’s reserve management activities. However, further legislative reforms were required to enable gold sales. In February 1997, a first decision regarding the demonetisation of gold was taken by the Committee for Economic Affairs and Taxation of the National Council, the lower chamber of the Swiss Parliament. Two months later, against the backdrop of mounting international criticism about Switzerland’s role in WWII, the President of the Confederation proposed to allocate some of the gains in the likely event of a gold revaluation to fund a Swiss Foundation for Solidarity which would provide assistance to persons in needs in Switzerland and abroad.
The pressure on interest rate margins will remain strong as long as interest rates remain exceptionally low. Thus, there will be strong incentives for banks to take on more risk. In the short term, an increase in affordability risk or interest rate risk may help to prevent a further decline in profitability. However, it would make banks more vulnerable to a large upward interest rate shock and to a correction on the mortgage and real estate markets. Greater risk-taking in lending could also lead to a renewed increase in momentum on the mortgage and real estate markets. This applies particularly to residential investment property, where upward pressure on prices could remain strong. If interest rates rise, there is the risk of a substantial price correction. This could result in credit losses at the banks that provide funding for such investors. This highlights the importance of the capital surpluses currently held by the domestically focused banks. Going forward, banks should set their risk appetite and their capital planning so as to ensure that they can absorb the losses that would arise under highly unfavourable but possible scenarios. Even under such scenarios, the banks must be able to perform their economically important functions – especially that of providing credit to the economy. The SNB will continue to monitor developments on the mortgage and real estate markets closely, paying particular attention to the residential investment property segment as well as to banks’ risk-taking in mortgage lending.