Danthine Says Bank Rule Change Now Won’t Speed Up Risk Reduction

Swiss National Bank Vice President Jean-Pierre Danthine said regulators should stick to their current plans on stricter rules to make the banking system safer.

“It is unlikely that a sudden change in strategy would lead to a faster elimination of the underlying risk,” Danthine said yesterday, according to the text of a speech in Lugano, Switzerland. “We are in the midst of implementing a complementary and balanced package of measures” and “when it is fully implemented, this package will substantially reduce, and possibly eliminate, the too-big-to-fail problem.”

Switzerland introduced some of the strictest capital and liquidity rules in the world in 2011, forcing its two biggest banks, UBS AG and Credit Suisse Group AG, to hold capital equal to as much as 19 percent of risk-weighted assets by 2019. The banks are likely to meet this criteria by the end of 2014, Danthine said, reiterating earlier comments.

While the issue of systemically important Swiss banks won’t be solved until the 2019 capital requirements are met and a resolution mechanism is in place, “tangible progress has already been made,” Danthine said.

Real-Estate Boom

Switzerland has also enforced rules to reduce cyclical risks in its real-estate market, which is in the midst of its biggest expansion in two decades. The central bank has sounded the alarm on unsustainable mortgage borrowing and is trying to prevent a repeat of the property-market crisis in the 1990s, which led to the closing of a bank and hobbled growth for years.

In an effort to protect banks from a housing crash, the Swiss government in February, following a proposal by the SNB, introduced new capital rules as of Sept. 30. From that date, lenders have been required to hold an extra 1 percent of risk-weighted assets linked to domestic residential mortgages.

“Mortgage volumes and real-estate prices continue to grow at rates significantly above those justified by fundamental factors such as income and population growth,” Danthine said. “This means that the imbalances, which are already large, are increasing further,” he said. “At the same time, indications of a possible slowdown in momentum became visible during the course of 2013.”

It is “difficult to judge precisely where we are in the credit cycle or the direction in which we are heading,” Danthine said, calling for “prudent behavior” of involved parties.

Banks should apply “conservative lending criteria in terms of both loan-to-value ratios and affordability,” while borrowers should bear “in mind that real-estate prices are already at elevated levels,” he said. The latter need to ensure that “even if interest rates were to rise sharply, they could afford to service a loan,” he said.

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