But how can this potentially damaging link between the mortgage and real estate markets, the banking system and financial stability be explained? First, it is important to remember that these markets represent a major concentration of risks, especially for banks and households. Thus, mortgage claims in Switzerland are the biggest asset item on banks’ balance sheets. They account for roughly 30% of total assets in the banking system – and if one considers only the domestically focused banks that operate predominantly in the Swiss credit market, this percentage rises to 70%. Moreover, residential property is the most important asset overall of households in Switzerland, and mortgage loans are their largest liability. Around 45% of household wealth is invested in real estate, and mortgage loans account for a full 95% of household debt.5 These figures highlight a further important aspect: The real estate market is largely debt financed. Roughly 95% of mortgage loans are granted by banks. There are thus close links between the mortgage and real estate markets and the banking sector. A final important fact is that real estate markets have historically been subject to prolonged and pronounced cycles. Such cycles can last for years or even decades. During the long upswing phases, risks tend to be underestimated, thereby leading to excessive risk-taking by households, companies, investors and banks. A downswing, by contrast, can generate the mutually reinforcing effects of falling prices and loan defaults. This can lead to severe upheavals in the banking system and entail high economic costs.
In this context, the SNB regularly reassesses the need for a reactivation of the CCyB. Closing remarks Ladies and gentlemen, I now come to my concluding remarks. Are we heading for a big real estate crash? Is there a bubble that will burst soon? If you were expecting me to answer these questions today, I’m afraid I have to disappoint you. To predict the future would require a crystal ball. By their very nature, crises cannot be predicted. 12  Behncke (2020), for example, shows that LTV risks did in fact decrease due to the banks’ self-regulation rules in 2012 and the activation of the CCyB in 2013. Cf. Behncke S., Effects of macroprudential policies on bank lending and credit risks, SNB Working Papers, 6/2020. 13 Cf. Schelling. T and P. Towbin, Negative interest rates, deposit funding and bank lending, SNB Working Paper, 5/2020. Page 11/12  The key question, from our point of view, is: Are there substantial vulnerabilities on the mortgage and real estate markets? We can answer this question with a ‘yes’. According to our assessment, markets today are more vulnerable to corrections in the form of declining prices and increasing numbers of mortgage loan defaults. Thanks to substantial capital buffers, however, most banks should currently be capable of absorbing the associated losses. The capital buffers are therefore essential to financial stability – and will remain so in future.