SNB Seen Targeting Bank Capital to Curb Property Boom: Mortgages

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Swiss National Bank President Thomas Jordan
Thomas Jordan, president of the Swiss National Bank (SNB), Switzerland's central bank. Photographer: Valentin Flauraud/Bloomberg

Thomas Jordan’s fight to protect the Swiss economy is set to widen beyond currency markets and too-big-to fail risks as the central bank chairman considers how to curb the biggest real-estate boom in two decades.

The Swiss National Bank may act to stem what it called risks from “excessive credit growth,” economists from Bank Sarasin to UniCredit Group said. An option available to the central bank would be to force lenders to hold additional capital of as much as 2.5 percent of their domestic risk-weighted assets to help buffer against losses.

The SNB has already put a cap on the franc to counter the currency’s ascent and protect the economy. After leading efforts to boost capital requirements for UBS AG and Credit Suisse Group AG, the country’s two largest banks, Jordan is now turning his focus to smaller lenders as the risk of a significant drop in property prices increases.

“The SNB has been warning for quite a while of a real-estate bubble and it wants to see a cooling,” said Andreas Venditti, a senior analyst at Zuercher Kantonalbank in Zurich. “It’s very possible that the buffer will be implemented before the end of the year.”

In the SNB’s June Financial Stability Report, which also called on Credit Suisse, Switzerland’s second-largest bank, to boost its capital, the central bank said the mortgage market poses a significant risk to Swiss lenders. Home loans have increased by almost 300 billion francs ($307 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.

Surging Prices

The cost of owner-occupied apartments with as many as five rooms has risen the most over the past 10 years, with prices jumping 40 percent, SNB data shows. Prices of rental apartments have increased 29 percent.

UBS and Credit Suisse had combined outstanding mortgages of 240.6 billion francs at the end of 2011, up 2.8 percent from the previous year. Cantonal banks, which are largely owned by the regions, had a 6 percent increase, while the cooperative-based Raiffeisen banks saw mortgages surge 7.4 percent.

UBS said on July 31 that if property values fell by 20 percent, 99.7 percent of its exposure to Swiss real estate would remain covered by collateral. While prices are still climbing in some regions, “at this time, we don’t believe this could destabilize the Swiss economy or cause major losses for UBS,” Chief Financial Officer Tom Naratil said.

Jordan’s Tools

The SNB’s current predicament sets it apart from much of the rest of Europe. The European Central Bank has injected more than 1 trillion euros ($1.2 trillion) of cheap three-year loans to encourage lending, as nations from Spain to Ireland struggle with the aftermath of a burst property bubble. In the U.K., the Bank of England has set up a funding program to boost credit growth, which it describes as “moribund.”

Jordan, 49, spent three years at Harvard University before joining the SNB in 1997. He was appointed chairman in April after overseeing the division for financial stability in the previous two years. In June, he kept borrowing costs at zero and committed to protecting the franc ceiling of 1.20 versus the euro, introduced in September after the euro area’s fiscal crisis prompted investors to pile into the currency, perceived as a haven in times of turmoil.

With a rate increase likely to threaten the franc cap, he may resort to other tools to avert a repeat of the country’s last real-estate collapse in the early 1990s, which sparked a recession.

‘Very Severe’

The SNB has already signaled it doesn’t soft pedal when taking on banks. In the financial stability report, the central bank singled out Credit Suisse as needing a bigger improvement in capital than Zurich-based rival UBS, causing its shares to drop by 10 percent. A decline in house prices along with an increase in defaults is among potential risks under a “very severe but possible scenario,” the SNB said.

“The SNB’s tone was harsh but justified,” said Jan Amrit Poser, chief economist at Bank Sarasin in Zurich. “It would probably do the same thing again, despite the strong reaction in Credit Suisse shares.”

The clash is the latest in a series of battles with banks that began four years ago with Jordan’s predecessor, Philipp Hildebrand. He called for limits to large banks’ leverage, or the ratio of total assets to capital, after UBS and Credit Suisse accumulated assets amounting to seven times the economy.

‘Hildebrand I’

Less than two weeks after the proposal in June 2008, Credit Suisse Chief Risk Officer Tobias Guldimann rejected the idea by saying: “We manage banks according to Basel II, not Hildebrand I.” Switzerland has since introduced even stricter rules for large banks, requiring them to hold total capital equal to as much as 19 percent of risk-weighted assets.

The SNB’s influence increased after UBS had to turn to the government for aid in October 2008. A month later, the banking regulator signed into law requirements for UBS and Credit Suisse to limit gross assets in proportion to capital and tighten the rules for reserves compared with risk-weighted assets by 2013.

While the big banks have increased buffers to weather potential crises -- Credit Suisse bowed to pressure on capital from the SNB last month -- the central bank has signaled other lenders may have to do more to counter “growing risks” at home.

Prices of rental apartments with as many as five rooms jumped 4.1 percent in the first quarter from a year ago, SNB data show. In the region of Zurich, the median asking price for a single-family home was 1.61 million francs in the second quarter, according to property consultant Wueest & Partner. That’s almost 2 1/2 times the average asking price in London, based on data from Rightmove Plc.

Unemployment Drop

Swiss property prices have been pushed higher by record-low borrowing costs and looser immigration laws, making it easier for companies to hire skilled workers such as engineers and doctors from neighboring countries. Switzerland’s adjusted jobless rate of 2.9 percent is close to a three-year low.

SNB Vice Chairman Jean-Pierre Danthine said on June 14 that property-price levels in Zurich and Geneva “exceed those that can be justified by fundamental factors” and the “risk of an abrupt correction” of imbalances could increase.

“Given the cyclical risks in the Swiss mortgage and real estate markets, a temporary adjustment of banking system-wide capital requirements may have to be considered,” Danthine said. Jordan the same day welcomed the government’s decision to make the so-called countercyclical capital buffer available.

Buffer Impact

While the ruling coalition would have the final say, it’s up to the SNB to monitor risks and file a request for an activation of the buffer after consultation with the financial-market regulator. The level of the buffer could be gradually increased “if the desired impact failed to materialize,” according to a government report.

The government initially planned to make the buffer available from 2013 before bringing it forward to last month. It would be up to the financial-market regulator to force banks to meet capital requirements by restricting dividends or taking other measures.

Zuercher Kantonalbank’s Venditti said UBS and Credit Suisse have sufficient capital to cover the buffer. He declined to comment on the possible impact on smaller Swiss lenders.

“It makes sense for the SNB to take a cautious stance on real-estate risks,” said Matthias Holzhey, an economist at UBS in Zurich who focuses on the property market. “If there was an acceleration in developments, the buffer would make sense at some point but I would be surprised if they activated it anytime soon. They may keep using tough words instead.”

‘Risk’ Territory

The UBS Swiss Real Estate Bubble Index, created by Holzhey, fell in the second quarter for the first time since the end of 2008. Even so, the index is still close to entering “risk” territory, according to an Aug. 3 statement.

Swiss President Eveline Widmer-Schlumpf said on Aug. 7 that the government hasn’t received a request from the SNB or any sign that policy makers aim to activate the buffer. There “have been indications that the market is calming,” she said.

The government toughened lending rules last month, forcing borrowers to supply 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.

UBS said in an Aug. 3 note that while the measures “may curb demand for residential property and slow down price growth rates somewhat,” the market “is still clearly booming.” Alexander Koch, an economist at UniCredit Group in Munich, said the buffer could be announced as soon as this month.

“Jordan is well briefed in controversy,” said Peter Rosenstreich, chief foreign-exchange strategist at Swissquote Bank SA in Geneva. “There are always people that don’t like the decisions, but it doesn’t change the SNB’s job. If their objective is to go directly at the real-estate market, which is clearly in a bubble scenario, they’re going to do it.”

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