Franc ceiling to stay put: bank

RISK PROTECTION::Though rates are not expected to rise any time soon, the Swiss central bank has warned banks need to amass capital against risk

Bloomberg

Mon, Aug 12, 2013 - Page 15

The Swiss National Bank (SNB) will abolish its franc ceiling once it starts raising interest rates, vice president Jean-Pierre Danthine said.

“The day the SNB decides to raise rates, there can no longer be a restricting minimum exchange rate,” Danthine said in an interview published on Saturday in Le Matin Dimanche and Sonntags Zeitung newspapers. “Today the absolute priority is the cap, which we will keep in place as long as necessary.”

Danthine’s comment about the ceiling remaining in place comes after SNB president Thomas Jordan said last month he had no intention of scrapping it anytime soon. The SNB imposed the cap of 1.20 per euro (US$1.60) on the franc in September 2011, citing the need to ward off deflation and a recession. The bank had already cut its benchmark interest rate to zero.

The bank will not raise rates this year or next, according to the median estimate of Bloomberg’s monthly economic survey published on Friday.

Swiss house and apartment prices have soared in recent years, with mortgages kept cheap by the SNB’s loose policy. The SNB has repeatedly warned of overheating, and the government is requiring banks to hold more capital as a buffer, to guard against rising defaults.

Danthine said it was still too early to say whether the buffer would prevent the property market from overheating. He said borrowers might be overextending themselves and could be ill-prepared for an increase in interest rates.

“Our studies show that on average a rise in interest rates would have a negative impact on banks,” he said. “Banks have chosen a high-risk profile, probably because they believe the period of low-interest rates will last. We highlight the fact that they may underestimate the risks.”

Danthine also said that it was his “hope and conviction” that Switzerland’s two biggest banks — UBS AG and Credit Suisse Group AG — would succeed in amassing capital so as to solve the dilemma of banks that are too big to fail. “We’re not at the end of the road yet, but we’re working on it assiduously.”