2 According to this theory, the pass-through of changes in monetary policy interest rates to the real sector of the economy is influenced by banks’ ability to provide credit to firms. This applies, in particular, to banks with less liquid balance sheets, often the smaller banks. 3 With a bank lending channel, the effects of monetary tightening on the supply of credit becomes more pronounced. The European banking sector has undergone a phase of some structural changes over the past years. In particular, as in other parts of the world, the European market for structured financial products, such as asset-backed securities or Collateralized Debt Obligations, has grown rapidly over the last decade. For instance, the quarterly issuance of euro-denominated asset-backed securities increased from just under € billion at the beginning of the present decade to above € billion in the second quarter of this year. 4 These developments potentially influence banks’ ability to grant credit. 5 Such changes are important for the conduct of monetary policy because, first, they affect monetary analysis (one of the pillars of the ECB’s monetary policy strategy), and second, because they are likely to affect the monetary transmission mechanism. On the one hand, increased securitisation is expected to weaken the effects of the bank lending channel by dampening the effect of monetary tightening on the supply of credit. Indeed, some evidence points to the fact that the supply of loans is positively affected by securitisation.
Affordability risks of new mortgages financing residential investment property are high and have risen further. These developments have taken place against a background of persistent imbalances in the mortgage and real estate markets. Both mortgage-lending volume and prices for single-family houses and apartments continued to rise at a moderate rate in 2019. Although prices of residential investment property have stagnated of late, there is still a risk of a price correction in this segment in particular. On the one hand, this is due to the sharp price increases in previous years. On the other, larger numbers of vacant dwellings suggest that brisk construction activity in rental apartments may have led to an oversupply. Despite banks’ high risk appetite and the persistent imbalances in the markets, SNB stress tests suggest that the resilience of the domestically focused banks remains adequate overall. Thanks to robust capitalisation, most of these banks would be able to absorb the losses incurred in adverse scenarios. Given the risks I just mentioned, this is positive. It is crucial for the stability of the financial system that banks continue to hold sufficient capital to be able to cover the risks on their books. Ongoing pressure on margins means that the incentive for domestically focused banks to take on risks remains high. This applies to mortgage lending in particular. The revised selfregulation rules for banks in the residential investment property segment, which come into force at the beginning of 2020, should help to prevent a further build-up of risks in this segment.