Capital requirements for mortgage lending business and countercyclical buffer

Bern, 18.11.2011 - Swiss banks should have to hold more capital when granting mortgages with increasing risk. Furthermore, a variable countercyclical capital buffer should strengthen the banking sector's resilience towards the associated risks during periods of excess credit growth. Today, the Federal Department of Finance (FDF) initiated two hearings on drafts for the requisite amendments to the Capital Adequacy Ordinance.

As a result of the favourable interest rate environment, increased lending for residential properties remains evident among Swiss banks. The banks partly assume higher risks against a backdrop of intense competition. Consequently, the Federal Council decided already on 17 August 2011 to counter this trend with more stringent capital requirements for the mortgage sector. In accordance with the ordinance amendment submitted for consultation today, additional capital backing must be available for mortgage claims when the customary lending and affordability limits are exceeded.

The FDF is also proposing the introduction of a variable countercyclical buffer as a further instrument for boosting banks' capital. This will strengthen the banking sector's resilience towards the risks associated with excess credit growth. Moreover, it will counteract excess credit growth and limit the development of systemic risks in the financial sector. These proposals are based on the work of a working group that is led by the FDF and counts representatives of the Swiss Financial Market Supervisory Authority (FINMA) and the Swiss National Bank (SNB) among its members.

The countercyclical buffer will supplement the other, partly pro-cyclical, capital requirements. It is an important component of the Basel III framework. Its introduction in Switzerland is thus in line with international regulatory standards. It would be activated and subsequently deactivated by the Federal Council upon request of the SNB and after consulting FINMA.

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Federal Department of Finance