Fitch: Raised Countercyclical Buffer Eases Swiss Property Risks

Thu Jan 23, 2014 11:17am EST

Related Topics

(The following statement was released by the rating agency) LONDON, January 23 (Fitch) The doubling of the Swiss countercyclical capital buffer (CCB) for banks’ domestic mortgages to 2% will help ease the risks for banks from rising house prices, Fitch Ratings says. It should help to cool the property market and avoid a housing bubble. An overheated housing market could put pressure on the credit profiles of banks and, if they were to suffer material losses, on the sovereign credit profile. The additional capital requirement for mortgages that has to be met by end-June should not have a major impact on overall capital for the banks we rate. They already hold high levels of capital, exceeding the minimum “Swiss finish� standards. Regional cantonal banks and co-operative banks are likely to be more affected than large international banks such as UBS and Credit Suisse. Their domestic focus means that residential mortgages typically account for around two-thirds of their assets. The large banks have greater diversification and benefit from lower risk-weightings on domestic mortgages under the model-based approach. A larger capital cushion for unexpected losses will help offset the build-up of credit risks at banks from a mortgage market growing more quickly than GDP. Mortgage loans increased by 4.4% on an annualised basis in the first nine months of 2013 compared with a 1.9% rise in annual economic output, according to the Swiss National Bank (SNB). The bank regulator, FINMA, has taken several measures to reduce risks in mortgage lending since mid-2012. Borrowers are required to pay 10% of the property value in cash and mortgages must amortise to two-thirds of collateral value within 20 years. Mortgages above 80% of the property value are assigned a 100% risk-weight. It is possible that risk-weights could be increased further for the two large banks. The SNB is currently supporting FINMA in reviewing the differences between risk-weights based on banks’ internal models and those based on the standard approach used by domestic and regional banks. FINMA’s actions and the CCB appear to have helped reduced house price growth. More onerous capital and underwriting standards for mortgages may have led banks to constrain supply, refocus on other loans and raise prices, which would have dampened demand. The increases in price indices slowed for both single family homes and owner-occupied apartments in 2Q13 and 3Q13. However, at 5% yoy and 3.2% yoy in 3Q13 respectively, they still outpaced headline inflation, which was almost non-existent. Overheating of the housing market is still a risk, despite prices moderating. But the higher CCB should help. Strong net immigration and robust income growth have been the main drivers of demand for housing, especially in the major city centres. Swiss households’ strong net wealth, with substantial financial asset holdings offsetting the increase in mortgage borrowing, will help offset risks if house prices correct sharply. Contact: Christian Kuendig Senior Director Financial Institutions +44 20 3530 1399 Fitch Ratings Limited 30 North Colonnade London E14 5GN Eugene Chiam Analyst Sovereigns +44 20 3530 1512 Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: Switzerland here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

FILED UNDER: