Here one is struck by the fact that the recent significant upward trend in the credit-to-GDP ratio has been preceded by an even more spectacular jump during the 1970s and 1980s, pushing the ratio to about 150% – a high level in international comparison. During the 1990s, it then fluctuated around this mark. From 2000, we again observe an increase in the ratio3, at accelerated speed since 2009, such that, as of today, the ratio has reached about 170%.4 This more recent upward trend seems to be continuing unabated. How can we understand these developments? And can this understanding form a basis for predicting the likely future evolution of this variable in Switzerland? These are the questions I would like to focus on in this speech. To begin with, let me argue that if the dynamics in credit-to-GDP observed since the 1970s cannot be construed as an ongoing trend, the recent development must either be viewed as a structural adjustment to a new plateau – which seems to have been the case until 1990 – or as a cyclical upswing to be followed by a later correction. Schematically one can describe these possibilities in terms of Figure 5.5 In the first case, the implication is that at some point, credit volumes will be growing in line with GDP again. This could be either the result of an acceleration of nominal GDP growth at constant credit volume growth, or of a moderation of credit growth to adapt to the long run growth rate of nominal GDP.
In 2012, these imbalances intensified further reaching levels that pose a risk to the stability of the banking sector, and hence to the Swiss economy. Here, two facts stand out. First, real estate prices in Switzerland have been persistently increasing since 2000, at accelerated speed since 2008, reaching levels estimated to be 40 to 60% higher than 12 years ago (see Figure 1).1 Second, the growth of credit volumes has been significant with the consequence that credit volumes relative to gross domestic product (GDP) have reached new historical peaks (see Figure 2a and 2b). The fact that these two developments have progressed hand in hand spells out conditions that may lead to subsequent financial instability. Indeed, historical evidence – widely documented by the Bank for International Settlements (BIS)2 – shows that such a twin development – elevated residential prices and dynamic credit growth – constitutes the prime advance indicator of financial instability. We only have to look outside our borders, to the US and various regions of Europe, or back through Switzerland’s own past to get a feel for the devastating consequences on the real economy of financial crises originating in real estate excesses. 2.  Credit: is the sky the limit? Today I would like to focus on one of the two critical elements mentioned above, the growth of credit volumes. Figure 2b easily explains the question asked in the title: is the sky the limit? The answer is just as easy.