The question is whether these netting benefits will prove robust in a major stress – if not, the aggregate leverage ratio for firms in our sample would fall by up to 70 basis points. Second, the growth in synthetic prime brokerage (sometimes the clue is in the name – “double-leverage” is another classic of the genre, and one we have recently issued more guidance on in order to head off unsafe practices). Prime brokers can provide exposure to an asset via repo or synthetically using a total return swap, and the synthetic approach now accounts for around half of the prime brokerage activity undertaken by firms in our sample. The exposure measure does a reasonable job of capturing this activity, by requiring the firm to capitalise the effective notional position. But firms can hedge the position and thus avoid capitalising much of it where they are able to offset two client positions on equal, opposing TRSs. We should keep testing how robust these “internalisations” are likely to be in stressed conditions, to ensure that we have captured the impact of these exposures on firms’ capital positions in the same way we’ve already captured their effect on liquidity – if they came unstuck because of clients withdrawing positions then our rough worst case estimate of the impact on firms’ aggregate leverage ratio is 10 basis points. I make these points on missing leverage not to suggest that we have any short-term intentions to re-litigate these issues at Basel or elsewhere.
Swiss economic outlook What does the economic outlook for Switzerland look like, given a baseline scenario with a world economy on a weak growth path as described above? After two years of fairly robust recovery, we expect the Swiss economy to slow considerably in 2012. The situation remains very challenging for Switzerland. On the one hand, the still very strong Swiss franc is weighing on export performance. Firms are suffering from compressed margins. If the difficult exchange rate situation persists, companies may consider relocating production capacity to other regions. On the other hand, the slowdown in external demand, as expected in our global baseline scenario, will likely weigh on investment spending and labor demand in the quarters to come. Although some recently released indicators point to a slight stabilization, we project the Swiss economy to grow only weakly over the next few quarters. Moreover, as mentioned before, there is a very high degree of uncertainty regarding the global outlook. This is also true for the Swiss economy, which depends particularly on economic conditions in the euro area. If the risk scenario of a further escalation of the debt crisis were to materialize, economic activity in Switzerland would suffer a much more pronounced slowdown than just described. Such a development would lead to a severe risk of deflation. Current Swiss monetary policy Given this highly uncertain outlook, the SNB is – more than ever – committed to enforcing the minimum exchange rate with the utmost determination at any time.