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Switzerland’s Federal Council is taking action against an excessive rise in prices in the real estate market and exorbitant mortgage debt.
At a recent meeting, the Federal Council decided to accept the application of the Swiss National Bank (SNB) and to partially activate the countercyclical buffer. This means that from September 30, 2013, banks will be obliged to hold additional capital for residential mortgages.
Based on the Capital Adequacy Ordinance (CAO), the SNB can request the Federal Council to oblige the banks to hold additional capital in the form of a countercyclical buffer. The SNB submitted the corresponding application to the Federal Council on February 5, 2013.
The SNB concludes that activating the countercyclical buffer is unavoidable. The sustained growth in mortgage debt and rise in real estate prices of residential properties has led to imbalances which pose a significant risk to the stability of the banking sector and to that of the economy.
The SNB is thus requesting that from September 30, 2013, banks will be obliged to hold additional, allowable equity capital in the amount of 1% of their directly or indirectly secured risk-weighted assets in accordance with article 72 of the CAO.
Activating the countercyclical buffer is thus targeted only at mortgage loans for residential property. Other loans, in particular those for companies, are not affected by this measure.
The objective of the countercyclical buffer is to strengthen the resistance of the banking sector and the overall economy against the risks posed by excessive credit growth, and at the same time to counter excessive credit growth and price rises at an early stage.
According to the Swiss Tax Administration, activating the countercyclical buffer is justified for the following reasons; first, the increase in levels of debt arising from mortgage loans has been more rapid in the last few years than growth in the overall economy, and mortgage volume in relation to income has already reached levels which, not just historically, but also in the context of international standards, can be regarded as risky; second, the rise in prices of residential property has been greater than can be justified by fundamental factors; third, the monetary policy room for manoeuvre in terms of a rise in interest rates, which would have a restraining effect on the mortgage and real estate market, is limited due to the overvalued Swiss franc.
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