Swiss Capital Buffer May Have Side Effects, SNB's Jordan Says

Swiss National Bank President Thomas Jordan said the central bank’s measures to limit risks emanating from a booming housing market might yet have unintended consequences.

Central banks are turning to so-called macroprudential tools to fight pockets of overheating -- particularly in the housing market -- even as questions remain about ripple effects. While the SNB’s measures have so far worked well, Jordan said they are still relatively new in their current form.

“In Switzerland, so far the experience is quite positive,” he said in an interview in Zurich. “But it’s probably too early to tell in general whether they’ve had only a positive impact or whether there will be side effects in the long run.”

Swiss apartment prices and mortgage lending climbed by about a third between 2007-2014, and the SNB was behind the introduction of a capital buffer to offset property risks. It isn’t alone in utilizing these tools. Sweden and Norway have enacted countercyclical capital buffers for banks and tightened loan-to-value caps on mortgages, while the U.K. has also put limits on homeloans.

The Swiss buffer, introduced at 1 percent of risk-weighted mortgage assets in 2013 and increased to 2 percent a year later, can be raised as high as 2.5 percent to help safeguard against writedowns.

Swiss banks, who have to hold more capital -- potentially at the expense of generating profits -- aren’t impressed.

“The anti-cyclical capital buffer is a very young macroprudential instrument and as such has increased implementation risks,” Swiss Bankers Association spokeswoman Sindy Schmiegel said via e-mail. Stricter rules for mortgage lending were more effective and the buffer was “introduced and increased very or even too early,” she said.

In any event, the property market seems to have cooled. SNB Vice President Fritz Zurbruegg, who looks after financial stability, said in December that the measures taken to contain risks appeared to be having an effect.

Still, with interest rates in Switzerland likely to remain at rock bottom for the foreseeable future, policy makers have warned it still too early to sound the all clear. But when interest rates do normalize, the buffer may be eased.

“One day or another, it will go back to zero depending on the situation in the housing market,” Jordan said.

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