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SNB Sees Need for Corrective Measures on Swiss Property Market

The Swiss National Bank said measures are needed to prepare lenders for “growing” risks stemming from the country’s real estate and mortgage markets.

“SNB estimates on apartment prices indicate that they already exceed values justified by fundamentals,” the central bank said in its annual financial stability report, published today. “In view of the growing risks in the Swiss real estate and mortgage markets, the SNB considers that there is a need for corrective measures.”

The Swiss government this month announced measures to reduce mortgage-lending risks, including rules that will give it the discretion to raise capital requirements for all banks by as much as 2.5 percent of risk-weighted assets to counter “excess credit growth.” They come into effect next month and the government would activate the capital-buffer requirement at the request of the SNB and in consultation with the Swiss banking regulator.

“A temporary adjustment of system-wide capital requirements may have to be considered,” the SNB said in today’s report. “For some domestically focused banks, there is a need for corrective measures not just in the medium term, but also in the short term, since the environment could deteriorate rapidly. These short-term risks should be addressed with microprudential measures.”

Stress Scenario

The SNB is assessing the banks’ capital adequacy by estimating potential risks from a “very severe but possible scenario” of an escalating sovereign debt crisis that leads to a “deep recession” in Switzerland, a fall in real estate prices and an increase in household and corporate defaults. Even in the baseline scenario for the next 12 months, the central bank sees risks increasing in the real estate market.

UBS AG and Credit Suisse Group AG, the country’s biggest banks, had combined mortgage claims amounting to 241 billion Swiss francs ($251.5 billion) at the end of 2011, the SNB said. Mortgage loans of domestically focused banks totaled about 540 billion francs, which is equivalent to about 70 percent of these banks’ total balance sheets.

“The mortgage market constitutes a significant risk concentration for domestically focused banks,” the SNB said, adding that the risk appetite of such lenders “has increased significantly over the last few years.”

Average mortgage volumes at those banks rose 6.5 percent in 2011, according to the SNB.

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