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Switzerland Must Be ‘Vigilant’ on Risks of Franc Limit, FSB Says

The Swiss National Bank’s franc limit against the euro may cause the country’s economy to overheat if authorities aren’t vigilant to its effects, according to a report by the Financial Stability Board.

“The combination of the floor with a protracted low interest rate environment could potentially result in excessive credit creation and contribute to the build-up of imbalances in the domestic real-estate and mortgage markets,” the FSB said in an assessment of the nation.

It’s “essential” that regulators “remain vigilant in monitoring trends,” the FSB said. The currency floor is a “bold stance against an overvaluation” of the Swiss franc, it said in the report published yesterday.

Property prices have risen in Switzerland, fueled by zero interest rates and rising demand from foreigners seeking a job. While increasing the benchmark rate may prevent a property bubble from emerging, it would also put upward pressure on the Swiss franc and stand in the way of the limit of 1.20 francs versus the euro introduced in September to fight deflation threats. SNB Vice President Thomas Jordan said last month that “monetary policy is currently unable to react to potential imbalances in the mortgage market.”

Swiss regulators won FSB praise for imposing tough capital and supervisory rules on the country’s two biggest lenders, UBS AG and Credit Suisse Group AG, in the wake of the crisis that followed Lehman Brothers Holdings Inc.’s 2008 collapse. These included a requirement that they hold core reserves equivalent to ten percent of their assets, weighed for risk.

‘More Ambitious’

The Swiss measures are “more ambitious in certain respects” than international rules agreed upon last year for globally systemic lenders, the FSB said. Follow-up measures should include ensuring the two banks have a “rigorous corporate governance framework,” the FSB said.

Authorities should also consider removing government guarantees of the liabilities of some local, so-called cantonal, lenders, the FSB said.

The Financial Stability Board brings together regulators, central bankers and finance ministry officials from the Group of 20 countries. The board coordinates financial rules.

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