Swiss government tells banks to hold more capital for Swiss home mortgages

ZURICH, Jan 26 (Reuters) – The Swiss government will require banks to hold additional capital for residential mortgages from the end of September, it said on Wednesday, as it aims to head off the mounting risks from the country’s booming property market.

Prices have surged in Switzerland in recent months, where rock-bottom interest rates have stimulated massive lending by banks and increased borrowing by hopeful home owners.

Prices for a typical three-bedroom house in Zurich have risen to nearly 2 million Swiss francs ($2.17 million), leading to fears of a property bubble which would burst if interest rates rose and made repayments unsustainable.

The government made the decision to reactivate the buffer, following a recommendation by the Swiss National Bank, citing the potential damage the country’s banking sector and the economy overall such a collapse could trigger.

The cabinet said it had decided to reactivate the countercyclical capital buffer so that banks will be required to hold additional capital amounting to 2.5% of their risk-weighted positions that are directly or indirectly backed by residential real estate in Switzerland.

The buffer previously stood at 2% of the relevant risk-weighted exposures before it was deactivated in March 2020.

It was removed at the onset of the coronavirus pandemic to give banks the maximum leeway to lend to companies with cash flow problems during the crisis.

But the SNB said the reasons for the deactivation no longer existed, with no signs of companies experiencing a credit tightening.

“Both the volume of mortgage lending and prices for residential property have risen more strongly than can be explained by fundamental factors such as rents and income,” it added.

“Affordability risks have remained persistently high, and in the residential investment property segment they have continued to rise.”

The central bank said it would continue to monitor developments on the mortgage and real estate markets and to assess whether further measures were necessary.

($1 = 0.9200 Swiss francs)

(Reporting by John Revill; Editing by Michael Shields)