Thomas J Jordan: Financial Stability Report – potential risks and actions Introductory remarks by Mr Thomas J Jordan, Vice Chairman of the Governing Board of the Swiss National Bank, at the half-yearly media news conference, Berne, 16 June 2011. *  *  *  In my introductory remarks today, I would like to present the most important points from our recently published Financial Stability Report, in which we consider potential risks to financial stability and identify where action may be needed. General economic and financial conditions for the Swiss banking sector improved further in 2010. Overall, global economic growth was stronger than expected last year, despite the expiry of fiscal stimuli. In Switzerland, too, economic development was robust and growth was high in an international comparison. Against this background, the profitability and capital situation of both big banks improved further, and remained good for banks with a domestic focus. However, the economic environment remains fragile, and a renewed, sharp deterioration over the next twelve months cannot be ruled out. In the short term, the prevailing uncertainty primarily affects the two big banks, which are still exposed to considerable credit and market risk relative to their loss-absorbing capital. For domestically focused banks, by contrast, the risks are largely of a medium-term nature, and are related to potential adverse developments on the Swiss real estate and mortgage markets. In view of these risks, all Swiss banks should ensure that they have a broad and high-quality base of loss-absorbing capital.
Likewise, the capitalisation of domestically focused banks hardly changed in 2010 and remains good in relation to both risk-weighted assets and total assets. However, the fact that capitalisation is high overall does not take into account that the regulatory capital requirements do not fully capture certain risks. For example, the interest rate risk and credit risk associated with potentially adverse developments in the real estate and mortgage markets are not taken into account, or only partially accounted for. Yet these risks are especially pronounced in the current environment. On the one hand, interest rate risk for all domestically focused banks continues to remain at a historically high level. Since there is a maturity mismatch between assets and liabilities, a rise in interest rates would result in losses for the banks. The overall high level of interest rate risk is driven by Raiffeisen and cantonal banks. On the other hand, credit risk at domestically focused banks continued to increase. This is because the mortgage lending volume, which is closely linked to developments in the real estate market, continued to grow. The situation in the Swiss real estate market has deteriorated slightly since last year’s Financial Stability Report was published. Even though they varied widely, most real estate price indices suggest that prices also rose substantially in 2010.