At the same time, indications of a possible slowdown in momentum became visible during the course of 2013.8 Taken together, these developments make it difficult to judge precisely where we are in the credit cycle or the direction in which we are heading. This situation is an example of the fundamental identification difficulty  8  Nominal growth rates for mortgage claims have slowed to about 4.5% from around 5% in the two preceding years. At the same time, apartment price growth has slowed from 6.8% (average growth rate in 2012) to 5.2% in Q2 2013 (annual growth rates of nominal transactions prices based on quarterly data provided by Wüest&Partner). 4  BIS central bankers’ speeches  pertaining to the analysis of the financial cycle. Further academic advances in the development of new tools to help identify cyclical risks would be highly welcome. The lessons are clear, however. In the current environment of significant uncertainty and persistent risk, prudent behaviour on the part of all actors is called for. For banks, this means applying conservative lending criteria in terms of both loan-to-value ratios and affordability. For borrowers, it means bearing in mind that real estate prices are already at elevated levels and ensuring that, even if interest rates were to rise sharply, they could afford to service a loan. And finally, for regulators, it means continuing to monitor the situation very closely and being ready to take further regulatory measures, if the hopes of a soft landing are not fulfilled. References Bank for International Settlements (2011).
A stable financial system cannot be based on questionable and opaque risk assessments. To regain confidence in these calculations, banks should make sure that their RWA calculations are transparent and traceable. In particular, they have to ensure that changes in RWAs over time, and differences in published RWAs between institutions, can be explained and economically accounted for. Third, the ongoing work on recovery and resolution plans should be pursued with total determination. If required for the guaranteed maintenance of systemically important functions, changes in the current organisational structure should be explored and initiated without delay. Fourth, on the regulatory side, further progress in defining the key elements of a viable resolution and recovery strategy for globally active banks is needed. In the absence of global bank insolvency legislation, this necessitates close coordination among regulators across borders. Specifically, further steps are necessary to guarantee that resolution measures – such as a bail-in – ordered by the home regulator are mutually recognised by foreign authorities. In this regard, it is encouraging that the resolution and recovery plans for our big banks are being developed in close collaboration with the foreign regulatory authorities concerned. Let me finish with some words regarding the cyclical risks. Mortgage volumes and real estate prices continue to grow at rates significantly above those justified by fundamental factors such as income and population growth. This means that the imbalances, which are already large, are increasing further.