SNB would only scrap franc cap if inflation much higher - paper
* Danthine says SNB sees no inflation risks - paper
* Says hiking rates would put price stability at risk
* Says UBS, Credit Suisse to meet Basel III capital rules this year
* Says external shock could trigger housing crisis
ZURICH, Feb 2 (Reuters) - The Swiss National Bank would only consider scrapping its minimum exchange rate of 1.20 Swiss francs per euro if inflation were much higher and there was less upward pressure on the currency, its vice-chairman was quoted as saying on Sunday.
Asked what would have to happen for the SNB to renounce to the cap, Jean-Pierre Danthine told Swiss newspaper Sonntagsblick: "We would have to be in a totally different economic situation. Inflation would have to rise significantly, the appreciation pressure on the franc would have to be noticeably lower."
Danthine said there were no inflation risks over the next three years, meaning the minimum exchange rate remained the appropriate tool to guarantee price stability for the foreseeable future.
The SNB introduced the cap in 2011 to fend off deflation and recession. It had to intervene heavily in forex markets to defend the cap in 2011 and 2012, inflating its balance sheet, but has not had to buy euros for francs in over a year now.
On the risks attached to the size of the SNB's balance sheet, Danthine said: "There's only an inflation danger if the money enters economic circulation. With the SNB bills, we have the instrument allowing us to react immediately if that should happen to too great an extent."
He said raising interest rates was not an option. "If we raise interest rates, we put the minimum exchange rate and price stability at risk," he said.
Danthine said Switzerland had made good progress in tackling the problem of potentially having to unwind its two big banks, UBS and Credit Suisse, in the event of a crisis, but had not solved all the questions yet.
"Switzerland did more than other countries. The banks as well have changed more than their competitors. But we have not reached our goal yet," he said.
He said Credit Suisse was on track to satisfy capital requirements under the new Basel III rules as early as this year. "UBS should also be able to do that," he added.
Danthine warned that imbalances in Switzerland's mortgage and housing market could trigger a crisis in the event of an external shock.
"We've seen the currencies of different emerging countries fall dramatically over the last few days. The euro zone also remains fragile," he said.
He said the SNB was discussing measures to tighten self-regulation in mortgage lending with the finance ministry, the financial markets supervisor FINMA and the banks, considering for example stricter rules for mortgage affordability.
The Swiss government said last month it was raising the level of capital banks must hold against their mortgage book after a move last year to dampen the housing market boom did not adequately rein in the sector.
Danthine declined to say whether he was planning to retire next year or whether he would ask the bank council to allow him to keep his job for a maximum of three more years. (Reporting by Silke Koltrowitz; Editing by Hugh Lawson)
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