Switzerland Orders Banks to Hold Buffer for Real Estate

The Swiss government ordered banks to hold additional capital as a buffer against risks posed by the country’s biggest property boom in two decades.

Banks will be forced to hold an extra 1 percent of risk-weighted assets linked to domestic residential mortgages, the government in Bern said in a statement today. Lenders would have to add about 3 billion francs ($3.26 billion) to comply with the new rules, which will be enforced from Sept. 30.

Property prices from Zurich to Geneva are surging as investors funnel money into one of Europe’s most stable economies amid the sovereign debt crisis and record-low interest rates. While the government in July toughened rules on mortgage lending to avoid a repeat of a property collapse in the early 1990s, the Swiss National Bank asked for the buffer to be activated as the market continued to rise.

“We want to counter pre-emptively the possibly difficult consequences of a bubble,” Swiss Finance Minister Eveline Widmer-Schlumpf said at a briefing today. “If the situation stabilizes, we can abolish it the same way we introduced it.”

The SNB singled out the mortgage market as a significant risk in June. UBS AG and Credit Suisse Group AG, Switzerland’s two largest banks, had combined outstanding mortgages of 252.2 billion francs at the end of November, up 4.8 percent from the end of 2011, according to SNB data. UBS didn’t immediately reply to a call for comment on the capital buffer today.

‘Situation Delicate’

UBS fell as much as 1.2 percent in Zurich trading and was little changed at 15.60 francs as of 1:47 p.m. Credit Suisse declined as much as 1.7 percent.

For larger banks such as Credit Suisse and UBS, “the impact will be so small that the banks can manage it,” said Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets. “For smaller banks, the situation is a bit more delicate because Swiss mortgages are their core business.”

Cantonal banks, largely owned by the regions, had 288.6 billion francs in mortgages at the end of November, up 4.7 percent from the end of 2011. All banks, including cooperative-based Raiffeisen lenders, foreign and regional banks, had mortgage claims totaling 834.1 billion francs at the end of November, up 4.3 percent from the end of 2011.

“There are several banks that don’t have any problem” with the capital request, Widmer-Schlumpf said, without disclosing details. “We expect about 15 percent to 25 percent of the total mortgage volume will be affected.”

Higher Buffer

The buffer can be activated to target specific parts of the credit market, with a maximum level of 2.5 percent of total domestic risk-weighted assets of a bank. It can be enforced on Swiss banks and to subsidiaries of foreign banks operating in the country.

At UBS, Switzerland’s largest bank, introducing the buffer won’t change the capital target, Chief Executive Officer Sergio Ermotti said on Feb. 5. The Zurich-based lender aims to boost its common equity ratio, a measure of financial strength, to 13 percent in 2014 from 9.8 percent at the end of December.

Credit Suisse Chief Financial Officer David Mathers said last week that the bank expects to be able to absorb the introduction of a buffer within its overall target for lowering risk-weighted assets. Credit Suisse aims to lower Basel 3 risk-weighted assets for the group to less than 280 billion francs by the end of this year from 284 billion francs at the end of December. A Credit Suisse official declined to comment on the buffer today.

Basel Standards

The Swiss Financial Market Supervisory Authority said it advised the SNB not to implement the capital buffer now.

“Finma would have preferred to wait and see,” the regulator said, adding that it already imposed higher capital requirements on individual banks. Finma wanted to see whether that step as well as more stringent self-regulation and the introduction of Basel III capital standards would bring about a “sustained” reduction in mortgage growth.

The Swiss government toughened lending rules last year, 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.

The UBS Swiss Real Estate Bubble Index remained in the so-called risk zone for a second quarter in the three months through December, according to UBS. Swiss property values climbed 6.3 percent in the 12 months through September, while they declined an average of 1.8 percent in euro-area countries, according to broker Knight Frank LLP’s Global House Price Index.

Cheap Borrowing

The SNB in September 2011 introduced a franc ceiling of 1.20 versus the euro to protect the economy and stop investors from piling into the currency, perceived as a haven in times of global turmoil. It kept borrowing costs at zero in December as part of efforts to defend the cap.

Serge Gaillard, head of the government’s finance administration, said at the briefing that the SNB didn’t have room to raise borrowing costs, calling the franc still “significantly overvalued.”

“The buffer will already show an impact as banks set aside additional capital,” Gaillard said. “The goal is to achieve more modest mortgage growth and to curb prices. It’s up to the SNB to observe any overheating in the market -- nobody is in a better situation to assess risks.”

The SNB said the buffer level “reflects the fact that the current imbalances are still smaller” than those that tipped the economy into recession in the early 1990s. Widmer-Schlumpf said there are “tendencies of bubbles in certain regions.”

“The SNB will continue to closely monitor developments on the mortgage and real estate markets,” it said. “If the situation improves, the CCB can be rapidly reduced or deactivated.”

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