With both foreign and Swiss interest rates close to zero, the spread between euro and Swiss interest rates disappeared. This created upward pressure on the Swiss franc. A narrower interest rate differential acts like a bonus on Swiss franc holdings. The appetite for Swiss franc assets increased among both foreign and Swiss investors. In the context of a financial and debt crisis, and in a world of high geopolitical risks, a narrower interest rate differential makes the Swiss franc particularly attractive for investors. At the same time it is important to recognise that the current situation cannot be compared to that of 2011. At that time, the Swiss franc was appreciating strongly against all currencies, and, as a response, we introduced the minimum exchange rate. Now the situation is characterised by a general weakness in the euro. Thus, at the end of 2014 and the beginning of 2015, the euro lost substantial value, not just against the Swiss franc but also against other important currencies such as the US dollar and the pound sterling (cf. chart 5). In this new environment, we introduced negative interest rates to partially restore the traditional differential between interest rates on euro and Swiss franc assets. Monetary conditions were adjusted, as the monetary policy stance relative to that abroad had changed. With short-term interest rates in the euro area at zero, negative Swiss interest rates helped restore, at least partially, the pre-crisis interest rate differential.
In addition to this, they have further expanded their loss-absorbing capital base. The Swiss National Bank welcomes these measures and sees them as further steps towards achieving a sounder capital situation. Additional efforts are necessary, however, because the loss-absorbing capital of big banks is still low, given their risk profile and the considerable uncertainty in the international environment. In order for them to be better equipped to deal  BIS central bankers’ speeches  1  with a possible worsening of current economic conditions, the big banks must further improve their capital situation. They can achieve this by retaining earnings. Another measure would be to issue contingent convertible bonds or contingent capital instruments with write-off features, an essential element of the “too big to fail” regulations. They can also strengthen their capital base by accelerating the announced reduction of their risk exposure. By making use of these options, the big banks could quickly and substantially improve their capital situation. Situation of domestically focused banks Allow me now to move on to the situation of banks with a domestic focus. The capitalisation of most domestically focused banks remains good. Profitability – as measured by the ratio of gross profits to assets – dropped slightly, however; not least because of the low interest rate margins. At the same time, domestically focused banks are having to contend with two significant risk factors, namely interest rate risk, which has remained unchanged at a high level, and credit risk, which has risen further.