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| Swiss Central Bank President Thomas Jordan |
“In the current situation, a further appreciation of the Swiss franc would constitute a very substantial threat to the Swiss economy, and would carry with it the risk of deflationary developments,” Jordan said at a conference in Zurich today. “With this in mind, we will continue to enforce the minimum exchange rate with the utmost determination.”
The Swiss National Bank has purchased billions of euros to defend the franc ceiling, which was introduced a year ago to protect the economy from the impact of an appreciating currency. With borrowing costs at zero, Jordan called today on banks to use “prudent credit standards,” saying there is a risk of a “further buildup of imbalances followed by a significant price correction” in the real-estate market.
Jordan is turning his focus to potential threats from the property market after the SNB said in its Financial Stability Report in June that there is a need for “corrective measures.” Home loans have increased by almost 300 billion francs ($314 billion) in a decade and gained 5.2 percent last year to 797.8 billion francs. That’s about 140 percent of Swiss gross domestic product.
Lending Rules
The government toughened lending rules earlier this year, forcing borrowers to provide at least 10 percent of the value of the property from their own funds without using pension assets. Under the measures, mortgages will have to be paid down to two- thirds of the lending value within 20 years.
In addition, the Swiss government can force lenders to hold additional capital of as much as 2.5 percent of their domestic risk-weighted assets to counter threats to financial stability following a request from the SNB for activation.
The Zurich-based SNB said on Aug. 27 that given “indications of a possible slowdown” in the second quarter of the “exceptionally strong” momentum in the domestic residential mortgage and real-estate markets, the so-called countercyclical capital buffer won’t be be activated this year. Still, the central bank is “observing closely” all developments to see whether the buffer is necessary, Jordan told Swiss television in an interview on the same day.
“This is far from an all-clear for the real estate market,” Jordan said. The measure “serves two purposes -- strengthening the resilience of the banking system by increasing its loss-absorbing capacity and helping to lean against the buildup of excesses. It is a very flexible instrument and may be activated for specific sectors of the credit market only.”
There are signs that residential properties are already “overvalued” in the regions of Zurich, Geneva and Zug as well as other parts of the country, Jordan said. Residential mortgages account for about 70 percent of assets of domestically oriented Swiss banks, according to the SNB.
The SNB will hold its next monetary assessment on Sept. 13.
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