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 end-2011.
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 customers.
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.