Early Thursday morning, the Swiss National Bank (SNB) presented its annual financial stability report. In addition to its core task of ensuring price stability, the SNB also contributes to financial stability. The report provides an assessment of the Swiss banking sector and the relevant environment, particularly the real estate market.

The publication also serves to highlight vulnerabilities that could threaten system stability and contains recommendations on how to address them. The points that are particularly important to the SNB are typically highlighted at the press conference later in the morning, where the interest rate decision is also presented.

Aligned with the Federal Council

While the last report was shaped by the experiences of dealing with the immediate crisis of Credit Suisse (CS) in March 2023, this time the lessons learned from the collapse of the major bank for future regulation dominate. The SNB adopts a sober approach and does not deviate from the line set by the Federal Council in its report on banking stability in April. It supports stricter capital and liquidity requirements, reforms that allow for earlier intervention by regulators, and adjustments to resolution rules that serve the rehabilitation or liquidation of a bank.

The summary of the report outlines three main demands: First, the SNB wants to strengthen the role of additional capital (Additional-Tier-1, AT1). It is important that these instruments are converted into equity as soon as a bank can still save itself. «This was not the case during the CS crisis,» the SNB notes.

More Cautious Valuation of Assets

Second, the SNB supports the demand for greater caution in calculating core capital (CET1). Software or tax credits, for example, would lose significant value in a restructuring. Complex and illiquid positions should also be valued more conservatively.

Third, the parent company should be required to back its subsidiaries with more capital. In the case of CS, the value of the holdings collapsed drastically because profit estimates for the foreign subsidiaries were reduced, the SNB writes, clearly having UBS in mind.

More Important Role for Market Indicators and Stress Tests

The SNB acknowledges that «regulatory metrics remain largely static» and wants to supplement them more with stress tests and market indicators. During the CS crisis, authorities were criticized for not paying enough attention to market indicators such as the price of CS shares or AT1 bonds or the premium for credit default swaps (CDS).

There is also a need for action regarding collateral against which banks can borrow from the SNB in a crisis. The problem during the CS crisis was not that the range of collateral accepted by the SNB and other central banks was too narrow, the SNB writes. Rather, CS was inadequately prepared for the crisis. The SNB also insists on legal measures to ensure that it can actually realize the collateral if a bank cannot repay a loan.

Higher Interest Rates Benefit Banks

The comments on the economic environment, real estate markets, and domestically oriented banks (all except UBS) are largely unsurprising. The global residential real estate market has coped well with the rise in interest rates, and in Switzerland, the cooling of the commercial property market has also been limited. However, the SNB does not give an all-clear, pointing to vulnerabilities in the global real estate market as well as in the bond and stock markets and the generally high level of debt.

Domestically oriented banks have benefited from higher interest rates. They have been able to improve their interest margin and profitability. The SNB attests to these banks' high resilience due to their high capital buffers, even in extremely pessimistic scenarios tested in stress tests.