* Concerns about stability of banks, economy
* Low interest rates have helped property market boom
* Most mortgages held by smaller Swiss banks
* Fear of repeat of burst property bubble seen in early
(Adds details, reaction, analyst comment)
By Emma Thomasson
ZURICH, Feb 13 The Swiss government announced
steps on Wednesday to try to dampen a housing market boom that
has been fuelled by ultra-low interest rates, immigration and
Switzerland's appeal as a safe-haven for financial investors.
The government said it is demanding banks hold additional
capital against their mortgage books to restrain an "excessive"
rise in real estate prices and "exorbitant" mortgage debt
because the central bank could not lift interest rates due to
its desire to keep a lid on the strong Swiss franc.
"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," the
government said in a statement.
The bulk of Swiss home mortgages are held by the country's
smaller banks, rather than the dominant UBS and Credit
Suisse, which are already subject to strict capital
rules imposed after the financial crisis.
"For smaller banks doing this kind of lending the impact is
much larger. Even so, growth rates in mortgage lending have come
down after banks were told to be more cautious in lending," said
ZKB analyst Andreas Vendetti.
The move may hamper consumer sentiment in Switzerland, and
by extension economic growth, by capping house prices and may
also discourage inflows of speculative capital to take advantage
of the bubble. The franc fell to 1.2377 per euro at 1145 GMT in
response. Swiss bank stocks also slipped.
The Swiss Bankers Association said in a statement it
regretted the decision, adding the capital buffer could have
unintended adverse effects such as prompting banks to increase
lending costs to businesses rather than dampening house prices.
The Swiss National Bank has had its hands tied as the bubble
has built, forced to keep interest rates at rock bottom to hold
down the franc, which had soared since the financial crisis as
investors sought shelter from the troubles of the euro zone.
Norway - another traditional safe haven - recently asked its
banking regulator to set bigger minimum capital buffers sometime
this year on lenders' mortgage accounts to try and cool its real
estate market after rising immigration and a booming economy
pushed prices to record highs in 2012.
BACK TO THE FUTURE?
Despite a deep recession following the start of the
financial crisis, a shrinking banking industry and the risks
posed to growth by the strong franc, the Swiss economy remains
in robust shape compared to many peers, with unemployment
hovering around 3 percent and a high rate of immigration.
Swiss real estate prices and home mortgage loans have grown
on average about 20 percent since 2008, but the rise has been
much stronger in and around cities like Geneva, where prices
have jumped 11 percent a year since 2007, and Zurich, where
prices have risen an average of 8 percent a year.
While that increase pales in comparison to increases of over
100 percent in Spain and 300 percent in Ireland before the 2008
crash, Switzerland is fearful of a repeat of a real estate
collapse in the 1990s that dented growth and hurt banks.
The government action comes as the result of a request from
the SNB, which has repeatedly warned of overheating home prices.
"These imbalances intensified further during the second
half of 2012, reaching levels that pose a risk to the stability
of the banking sector, and hence to the Swiss economy," the SNB
said in a statement on Wednesday, adding it will regularly
reassess whether it needs to adjust the buffer or deactivate it.
Lenders will have to hold an extra equity capital of 1
percent of the risk-weighted assets in their mortgage portfolio
by Sept. 30, which Serge Gaillard, finance department director,
said meant they needed to raise a total of 3 billion francs.
The SNB can impose a capital buffer of up to 2.5 percent.
Last year, Swiss regulator FINMA enacted rules on banks to
rein in risky lending but they have done little so far to slow
the boom, with a real estate bubble index published by UBS
jumping further into the risk zone in the fourth quarter.
UBS economists said the recent recovery in financial markets
and the lessening appeal of safe havens like Switzerland could
slow down the real estate boom in the current quarter.
"The majority of the demand, however, is domestic, which
means that without a significant increase in long-term interest
rates, the trend is unlikely to be reversed," they said.
Last year, ratings agency Standard & Poors downgraded its
outlook on nine Swiss banks with big mortgage books, among them
Basler Kantonalbank and Zuercher Kantonalbank, citing
real estate market imbalances.
(Additional reporting by Caroline Copley; editing by Patrick