Mortgage market regulation
Mortgages are a cornerstone of the Swiss banking industry, so mortgage market regulation is a key focus area for the Swiss Bankers Association (SBA), which lobbies politicians and the authorities for competitive frameworks.
The mortgage business is subject to a variety of regulations governing important aspects such as planning (e.g. the Second Homes Act) and taxation (e.g. the rules on imputed rental value). Some formalities, such as public deeds in digital form, make it easier to grant mortgages, whereas others make it harder.
The main focus, however, is on prudential regulation and the related financial stability policy considerations. The SBA regularly consults with the Federal Department of Finance (FDF), the Swiss National Bank (SNB) and the Swiss Financial Market Supervisory Authority FINMA on developments on the real estate and mortgage markets.
Key measures and instruments
There is a fundamental distinction here between government measures and private-sector instruments. The central instrument on the side of the authorities and the government is the Capital Adequacy Ordinance (CAO), over which the Federal Council has the power of decision.
Article 72 of the CAO governs risk weightings for mortgage loans. The main rule is that, the higher the loan-to-value ratio, the higher the risk weighting and thus also the capital adequacy requirements for banks. The CAO also contains provisions on calculating and adjusting the lending value of properties.
In addition, Article 44 sets the standard for the countercyclical capital buffer. The Federal Council can, at the SNB’s request, require banks to hold a buffer of up to 2.5% in the form of Tier 1 capital for their mortgage business.
Self-regulation as a minimum standard under supervisory law
For its part, the SBA is responsible for two sets of self-regulation relating to mortgages, both of which are recognised by FINMA as minimum standards under supervisory law. These are the Guidelines on minimum requirements for mortgage loans (in German) and the Guidelines on assessing, valuing and processing loans secured against property (in German).
The Guidelines on minimum requirements for mortgage loans govern the borrower’s use of own funds and set out specific limits with regard to amortisation. They are directly linked to the CAO in that a less advantageous risk weighting applies if the minimum requirements are not met. The Guidelines on assessing, valuing and processing loans secured against property, meanwhile, contain qualitative requirements for banks’ internal mortgage lending business processes. In particular, they regulate lending policies, loan monitoring and reporting.