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SNB’s Danthine Says Economy Vulnerable to Credit Bubble

The Swiss economy is vulnerable to instability in the banking sector caused by an unsustainable rise in mortgage debt, the central bank’s vice president said.

In recent years, credit growth has outpaced that of the economy, and the ratio of private debt, primarily mortgage loans, now stands at a record 170 percent of annual output, Jean-Pierre Danthine said in a speech in Geneva yesterday.

“The elevated property prices and the evidence of high risk appetite translate for the Swiss economy into a state of high vulnerability requiring caution and the exercise of responsibility by all concerned,” he said.

Switzerland is in the midst of its strongest housing boom in two decades, fueled in part by the SNB’s loose monetary policy that has made taking on debt inexpensive. The central bank has held its benchmark interest rate at zero since August 2011 and in September of that year capped the franc at 1.20 per euro to shield the economy from the crisis in the neighboring euro region.

High residential property prices and fast credit growth are the main advance indicator for financial instability, Danthine said. They were observed in the U.S. and other countries that are now grappling with a housing-market collapse, demonstrating what Danthine called “the devastating consequences on the real economy of a financial crisis originating in real-estate excesses.”

Stricter Rules

Last year, Swiss rules on mortgage lending were toughened to help ensure borrowers weren’t overextending themselves. Property prices are an estimated 40 percent to 60 percent higher than they were 12 years ago, he said.

“In 2012, these imbalances intensified further, reaching levels that pose a risk to the stability of the banking sector, and hence the Swiss economy,” Danthine said.

In a bid to thwart risky lending, the government in February ordered banks to hold additional capital as a buffer. The requirement, implemented at the behest of the SNB, takes effect from Sept. 30.

“It’s clearly too early to tell” whether the buffer has had an effect on mortgage prices, Danthine said. While “here and there we do see a change in the environment,” this probably was not strictly due to the measure, he said.

The bulk of mortgage debt in Switzerland is held by regional banks.

To contact the reporter on this story: Catherine Bosley in Zurich at

To contact the editor responsible for this story: Craig Stirling at

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