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UPDATE 2-Swiss tighten controls on lenders to cool housing market
January 23, 2014 / 7:50 AM / 4 years ago

UPDATE 2-Swiss tighten controls on lenders to cool housing market

* Government raises capital requirements for banks

* Capital buffer was first activated in Feb 2013

* Rise in mortgage loans and house prices poses risk (Writes through with SNB Chairman, economists, data)

ZURICH, Jan 23 (Reuters) - The Swiss government is raising the level of capital banks must hold against their mortgage book to 2 percent from 1 percent after an attempt last year to dampen Switzerland’s housing market boom did not adequately rein in the sector.

Real estate prices and mortgage lending have risen strongly in Switzerland in recent years, a by-product of ultra-low interest rates set by the Swiss central bank to lessen the appeal of the safe-haven franc and prevent a recession.

Growth in residential mortgage lending outpaced GDP growth in 2013, raising the spectre of the real estate collapse in the 1990s that dented growth and hurt banks.

“The main impact of the requirement will be to make banks more robust in case of losses and more reluctant, or selective, in giving out credit. It won’t make a difference for interest rates,” said Jan Poser, chief economist at J. Safra Sarasin. “It should have a dampening effect. It was a wise decision.”

Swiss banks will have to hold 2 percent extra capital against risk-weighted assets in their mortgage portfolio from June 30, 2014, up from the previous 1 percent requirement.

The SNB cannot easily raise rates as this would clash with its policy of capping the Swiss franc, a measure it imposed in September 2011, after investors fleeing the euro zone crisis bid the franc up to record levels.

At the request of the central bank, the so-called countercyclical capital buffer can be raised to up to 2.5 percent under Swiss law - something which will allow the SNB some extra scope for cooling the market, should the new measures not have the required stabilising effect, Poser said.

BALANCING ACT

The government said in a statement on Thursday a sustained strong increase in mortgage loans and the prices of residential properties had caused important imbalances posing “a considerable risk for the stable development of the economy and thus for the stability of the banking sector too.”

Prices are expected to grow more slowly this year, economists at UBS said in a study this week, but added the risks of a correction have continued to rise, with housing prices climbing faster than rents, household incomes, and consumer prices.

Mortgage volumes increased an annualised 4.4 percent in the first three quarters of 2013, while annual economic output rose 1.9 percent over the same period, according to SNB figures.

The government first activated the buffer in February last year at the SNB’s recommendation, with the capital requirements effective in September.

The SNB said that though this as well as other measures had cooled lending in 2013 somewhat, more was needed, echoing comments from its December rate decision.

“The buffer has worked well up to now in terms of building capital in the banking system,” SNB Chairman Thomas Jordan told Swiss television. “We are still not happy with developments in mortgage lending, it hasn’t slowed enough. Therefore, it is necessary to raise the buffer.”

The bulk of Swiss home mortgages are held by the country’s smaller banks, rather than the dominant UBS and Credit Suisse, which are already subject to strict capital rules imposed after the financial crisis.

Switzerland’s banks acknowledged that the housing market was overheated, but voiced disappointment over the government’s attempts to curb lending.

“Uncertainties over its impact on the economy as a whole are high,” the Swiss Bankers Association said in a statement.

The government and the SNB said talks were currently taking place between the finance ministry, the financial regulator FINMA, the SNB and the sector in order to strengthen the self-regulatory guidelines. (Reporting by Caroline Copley, Silke Koltrowitz, and Alice Baghdjian; Editing by Simon Cameron-Moore and Raissa Kasolowsky)

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