For another, the sharp increase in loan volumes – especially for mortgages – against a backdrop of persistent economic uncertainty and the substantial rise in real estate prices points to higher credit risk. In addition, for first mortgages on residential properties, banks are required to have less capital backing under Basel II than they did under Basel I – before 2007 (i.e. under Basel I), a mortgage had to be backed with 4.0% capital; since then (i.e. under Basel II), that figure is only 2.8%. This not only gives banks an incentive to grant more mortgages, but also enables them to reduce the capital buffer used to absorb loan losses. In view of the increased interest rate and credit risk, we urge the domestically focused banks to be prudent. They must be prepared for interest rates to rise. Besides the direct effect on the interest rate margin, particular attention also needs to be given to the indirect effect of an interest rate increase, namely that if loans are granted without sufficient attention being paid to borrowers’ financial situations, a rise in the interest rate will inevitably result in higher loan losses. As I have mentioned, the domestically focused banks are well capitalised by historical standards. But in view of the risks and uncertainty, they will also need to maintain a large capital buffer.
Thus indirect risks pose a serious threat to Swiss banks, even if direct risks – measured by the direct claims on those countries particularly affected until now – are moderate. In this climate, it seems inappropriate to us that banks increase their appetite for risk. Reforming the regulatory framework / “too big to fail” A year ago, we emphasised the urgency of alleviating the “too big to fail” issue. Where do we stand today? Allow me to state clearly right now: the “too big to fail” issue will not resolve itself. Last year, the big banks significantly reduced their balance sheets – a move explicitly welcomed by the SNB. The “too big to be rescued” issue has thus also receded somewhat. However, there has been hardly any alleviation of the “too big to fail” issue. Big bank liabilities, which at the end of 2008 were still almost six times Swiss GDP, were reduced by the end of 2009 to just over four times GDP. Nevertheless, the big banks’ share of markets relevant to the Swiss economy – and hence their systemic importance – remains just as high as before: the big banks grant a third of domestic loans and hold a third of domestic deposits. In other words, Switzerland is still vulnerable, and the need for action remains great. This opinion is shared by the commission of experts appointed by the Federal Council on “Limiting the economic risks posed by large companies”, of which I am Vice Chairman.