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SNB: Switzerland has turned the page on an expansionist policy

The normalization of central bank rates worldwide “seems to be underway”, but it is to be expected that rates will remain low over the medium term, said Vice President Fritz Zurbrügg.

“Switzerland and other countries have turned the page on expansionary macroprudential policy in recent months,” said Swiss National Bank (SNB) Vice President and CEO Fritz Zurbrügg. “Some have actually started tightening their macroprudential policy.”

The reason for this change is a very different economic situation compared to that which prevailed at the start of the pandemic, which inflicted an “unprecedented” shock, justifying measures “on an unprecedented scale”, explains the central banker on Tuesday in a speech at the International Center for Monetary and Banking Studies (CIMB) in Geneva. “The conditions that led to this accommodative macroprudential policy have disappeared,” he summarizes.

The normalization of central bank rates on a global scale “appears to be underway”, against the backdrop of a sharp rise in the inflation rate. Nevertheless, it is to be expected that rates will remain low over the medium term, believes the Zurich resident. The growth of interest rates is “restrained by structural factors such as demographics, inequality and the high level of demand for safe assets”, over which monetary policy has no influence.

Vulnerable mortgage market

The vulnerability of the mortgage market and residential real estate has increased with the pandemic, yet these sectors are of great importance for the Swiss banking system. Ensuring the resilience of the latter is essential “because of the share of the banking sector in the economy, including in comparison with other countries, and the dominant role played by a small number of establishments”.

Currently, many indicators reflect “a growing overvaluation on the residential real estate market”, notes the vice-president. The SNB estimates that apartment prices are currently overvalued by 10% to 35% in Switzerland, an order of magnitude “higher than at the start of the pandemic” reports the outgoing leader.

Added to this is “an increase in the risks associated with exceeding the financial capacity of borrowers”, measured by the progression of the loan/income ratios of newly granted mortgage loans, notes the official.

The sectoral countercyclical capital buffer was raised and set at a higher level than before the pandemic, in this case at 2.5%, i.e. the regulatory maximum.

The idea is that banks should “gradually increase their capital, thereby strengthening their resilience, as cyclical risks develop in the credit market,” says Zurbrügg. Better equity capital allows credit institutions to better absorb shocks in times of crisis, because funds can then be freed up to continue to grant loans or absorb any losses.

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