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.
Second, the economic and financial context in which French banks are operating is also a source of risks. Indeed, lessons must be learned from the slowdown in the USA, amply illustrated by the housing downturn, which resulted in higher risk in the sub-prime segments of the retail banking market. It should also be acknowledged that financial markets could become more unsettled. If higher risk aversion were to encourage greater use of risk transfer products, this could drain liquidity from some markets and undermine the efficiency of banks' management. From a supervisory perspective, the problem is all the more acute since the growing reliance on credit risk transfer instruments tends to make it harder to assess the type and degree of risk that banks actually bear when, for example, they arrange complex transactions. Third, the regulatory environment for French banks is changing radically as a result of the Basel II accords. Banks that have adopted the advanced approaches to risk management must put models in place – usually as early as January 2008 – for the internal rating and assessment of credit risk, market risk and operational risk. On-site inspection teams from the Commission Bancaire are currently scrutinising these models. Their investigations show that, overall, large banking groups have taken the measure of this project early on, so as to be ready for the deadline of the 1st January 2008, even if some improvements need to be made in certain areas.