Feb 14 - The initiative by Swiss authorities to impose a 1%
countercyclical capital buffer (CCB) for banks' domestic mortgages will help
offset the credit risk build-up from the threat of a mortgage market bubble,
Fitch Ratings says.
The Swiss banks should be able to adjust to the additional capital requirement,
announced yesterday, by the end-September deadline given they already hold high
levels of capital to meet the "Swiss finish" standards. Depending on their size
and complexity, Swiss banks have to comply with common equity Tier 1 ratios of
between 7% and 9.2% and total capital ratios of at least 10.5%. All the banks we
rate already exceed these minimum requirements, so the additional 1% capital
buffer on domestic residential mortgages should not be material for them.
Large international banks such as UBS and Credit Suisse will be generally less
affected than domestic regional cantonal banks and co-operative banks.
Risk-weighted assets (RWA) for residential mortgages accounted for a mere 9.6%
and 8.1% of total credit risk RWA at UBS and Credit Suisse, respectively, at
end-H112. This reflects the use of Basel's advance internal ratings based
approach and the banks' considerable international diversification. Conversely,
at cantonal banks, residential mortgages are typically 35% risk-weighted under
the standardised approach and accounted for over 60% of their assets at
A flexible capital cushion that increases in favourable and decreases in
unfavourable economic conditions is a sensible way for the banks to address
unexpected losses. The Swiss National Bank can raise the CCB up to the maximum
2.5% for all domestic assets, not just mortgage loans. So there is still some
degree of flexibility to help cool the property market.
The CCB comes on top of actions by the financial regulator, FINMA, to impose
stricter underwriting and capital standards for mortgage exposures since
mid-2012. A 100% risk-weight is now assigned to mortgages with loan-to-values
greater than 80% and minimum equity and amortisation requirements have been
tightened. Risk-weights have also been raised for new domestic property loans at
UBS and Credit Suisse. The incremental CHF2bn-3bn RWA needed each year for the
next five years is not material for each of these banks.
Others countries, such as Sweden and Singapore, have also taken measures to curb
mortgage lending growth and enhance banking sector stability. But Switzerland
has also activated a CCB. These measures should improve the resilience of the
banks to a domestic housing downturn and maintain market confidence among debt
investors. However, the measures on their own are unlikely to significantly slow
down mortgage lending growth. Mortgage interest rates will still be
significantly lower than in the early 1990s, the peak of the last real estate
cycle, even if the higher cost of capital were to be fully passed on to
Property prices in Switzerland have risen every year since 2002-2003, helped by
low interest rates and net immigration, although mortgage lending growth has
been moderate, at around 5% annually. Signs of overheating in some regions,
notably around Geneva and Zurich, are behind the CCB activation.