3 Today, with my focus on the mortgage and real estate markets, I would like to explain the cyclical dimension of systemic risks in greater detail. Experience shows that cyclical systemic risks often stem from the mortgage and real estate markets. Upheavals on these markets after periods of excessive price and credit growth have repeatedly triggered chain reactions with a negative impact on the banking system, public finances and the economy as a whole. History also shows that crises originating in mortgage and real estate markets entail particularly high costs for the economy as a whole, for example by causing recessions that are typically long and severe. 4  3 4  Cf. Zurbrügg F., After the storm: ten years on, how weatherproof is the Swiss banking system today?, speech held at the University of Lucerne, 6 September 2018. Cf. Jordà, O., M. Schularick, and A.M. Taylor (2015), ‘Leveraged bubbles’, Journal of Monetary Economics, vol. 76(S): 1–20. Page 3/12  Let me remind you of the example from Switzerland in the early 1990s. After a long period of rising real estate prices, mortgage interest rates increased and prices declined significantly. This triggered a banking crisis, which in turn led to a recession and a lengthy phase of economic stagnation. The global financial crisis of 2008 was also closely connected with declining prices on real estate markets, particularly in the US, the United Kingdom, Spain and Ireland. In this case, lax lending standards prior to the crisis proved to be a key factor.
We are, above all, interested in the question of whether banks are sufficiently capitalised in view of the aforementioned vulnerabilities, and are able to maintain their economically important functions such as lending despite incurring losses. Our stress tests confirm the relevance of the aforementioned vulnerabilities. They show that banks would suffer substantial losses in the event of an abrupt and steep interest rate rise combined with declining real estate prices. Affordability risks would materialise, meaning that numerous borrowers would no longer be able to pay their mortgage interest. Furthermore, many mortgages would be insufficiently covered, i.e. the mortgages concerned would no longer be fully secured by the value of the properties. In such a scenario, the capital ratios of numerous banks would drop below their target values and, in some cases, even below the regulatory minimum requirements. Equally, our stress tests underscore the importance of the capital buffers currently held by banks, which comprise voluntarily held buffers besides the capital required by statutory regulations. With these capital buffers, our assessments suggest that most banks would be capable of absorbing potential credit losses. In other words, we consider the resilience of most banks to be adequate. Current situation requires vigilance  Ladies and gentlemen, the fact that we consider banks’ capitalisation to be sufficient at present does not mean that we can relax with regard to the vulnerabilities on the mortgage and real estate markets. That the current situation is not more precarious is due not least to the measures taken in recent years (cf. slide 5).