Swiss banks have been able to strengthen their capital bases despite deteriorating economic conditions during the coronavirus pandemic, according to the Swiss National Bank (SNB). This applies to the two big banks, UBS and Credit Suisse, and also domestic banks.This content was published on June 17, 2021 - 15:17
UBS and Credit Suisse now have regulatory capital ratios in line with pre-pandemic levels and fully comply with the legal transparency requirements of the "too big to fail" (TBTF) regulation, according to the 2021 financial stability report issued by SNB on Thursday. Both banks are well position to meet the challenges of the current environment and support the economy.
But the loss potential of the two big banks in stress scenarios remains significant, especially in the case of a recession in the US and the eurozone, according to the report. The pandemic has shown once again that massive shocks and unexpected spikes in uncertainty are a recurring feature of the banking sector.
The Archegos capital Management blow up – which cost Credit Suisse more than $5 billion (CHF4.5 billion) and UBS several hundred million – highlighted how significant losses can happen even without a macroeconomic or systemic financial shock.
The TBTF regulation was introduced in the aftermath of the financial crisis of 2007-2008. It obliged banks to raise their capital to a significantly higher level than before in order to cope with possible losses.
Swiss banks are still operating "in a challenging economic environment" that poses risks to financial stability, warned SNB Vice President Fritz Zurbrügg. A further deterioration on the Covid-19 front could expose banks to loan default problems.
Strong domestic banks
Domestic commercial banks also weathered well last year’s economic deterioration. Their profitability even increased slightly compared to 2019, SNB observed.
The ability of banks to absorb losses is important in the current environment, the SNB said. Mortgage loans issued by domestic banks are particularly exposed to any significant downturn in the real estate market.
Slight slowdown in mortgage growth
The volume of mortgage loans on the books of domestic banks increased by 3.7% in 2020, compared to 4.0% the previous year. The improved economic outlook in recent weeks has reduced the likelihood of a housing market correction, said the Swiss central bank.
The SNB will continue to closely monitor developments in the mortgage and real estate markets.
Last year, the SNB suspended a regulation that requires banks to build up capital reserves to insure against mortgage loan defaults. This allowed banks to supply the sagging economy with emergency funds. The SNB said it would regularly review whether it needs to reintroduce the countercyclical buffer in future.