SNB Financial Stability Report: Expected Rate Cut and Positive Remarks on Banks’ Resilience
The SNB has, as anticipated, lowered its policy rate to zero. Given the reduced inflationary pressures and the deteriorating global economic outlook, this step is understandable. In addition, the SNB yesterday published its Financial Stability Report. The report notes that banks continue to hold capital ratios significantly above regulatory requirements and are well positioned to absorb adverse scenarios. Against this backdrop, the SNB’s remarks on the need for further far-reaching capital measures once again raise questions.
Social bookmarks
Back to Zero after Three Years
With the rate cut, the SNB has returned to a zero-interest rate policy after less than three years. The central bank is easing its monetary policy to address subdued inflation expectations and the impact of ongoing trade tensions. While this decision is understandable, it does not come without costs. The negative real interest rates undermine incentives for responsible saving and further increase pressure on the pension system. Investors in search of yield may be tempted to pursue overly risky investments.
Moreover, a zero-interest rate environment represents an additional burden for banks, whose profitability already suffered in 2024 due to lower net interest income. Banks may seek to compensate for this through their lending business or by introducing fees. On a positive note, the SNB has explicitly highlighted the risks associated with negative policy rates and refrained from introducing them yesterday.
Praise for Systemically Important Banks – So Why Reach for the Sharpest Tool?
In its Financial Stability Report, the SNB notes positively that UBS already meets the fully implemented too-big-to-fail capital requirements, which are not due to come into force until 2030. The risk-weighted capital ratios of the other systemically important banks also exceed regulatory requirements, according to the report.
Capital buffers thus continue to appear adequate to live up to their name in a range of risk scenarios. In light of this, with the exception of a detailed analysis of capital requirements for foreign subsidiaries, the SNB’s overall assessment is very positive. It is therefore surprising that the SNB fully supports the Federal Council’s package of measures, which takes the most stringent approach to capital requirements.
Robust Capitalisation of Domestic-Focused Banks
Once again, the SNB commends the robust capitalisation of domestically focused banks, which remains well above regulatory requirements. These banks would therefore be able to absorb substantial losses in the event of a real estate crisis without having to restrict their role in supplying credit to the real economy. This makes it all the more questionable that, just a few months after the implementation of Basel III Final, FINMA is already reopening the discussion on the need for further regulatory improvements in the area of mortgage market regulation.
For years, the SNB has pointed to increased risks in the real estate and mortgage markets. However, these risks should be put into perspective: a closer look reveals that the share of new mortgages with high loan-to-value ratios is declining and loan-to-income (LTI) ratios – a measure of affordability – remain well below their 2022 peak.