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ZURICH, SwitzerlandA large risk appetite at Swiss banks creates uncertainty as to how severely the financial institutions could be hurt by a sudden deterioration in economic conditions, a report on Switzerland's financial sector reveals.
Banks should be able to survive a sharp deterioration, the recently released Financial Stability Report by the Swiss National Bank points out. "However, the full extent of the banks' risk exposure, and thus, of the consequences of a deterioration in the economic and financial environment remain uncertain," the report stated.
The report points out that an unexpected sharp deterioration could be serious because, firstly, banks are experiencing significantly higher costs. "Experience has shown that banks have difficulty cutting costs rapidly if their earnings start to recede due to deterioration in economic conditions," the report said. "Secondly, there are signs that the already high appetite for risk on the part of investors, including Swiss banks, has increased yet further.
"The big banks in particular increased their risk-taking in the banking business; their exposure in trading and in foreign lending business grew considerably," according to the report. "Meanwhile, the domestically oriented banks (cantonal, regional and Raiffeisen banks) continue to bear a relatively high interest rate risk."
In a news conference in Bern announcing publication of the report earlier this month, Philipp Hildebrand, vice chairman of the governing board of the Swiss National Bank, said banks should make public more data on the risks they take to allow investors and authorities to better assess those risks.
Swiss banks could also use a bigger security cushion, as it is unclear whether equity capital they now have on hand is adequate to buffer a severe downturn, according to Mr. Hildebrand.
"It would only take a loss of 2%-3% of the balance sheet total for Swiss big banks to use up all their equity capital. Of course, a loss of this magnitude is highly unlikely. After all, Swiss banks are well-diversified, have sophisticated risk management models in place and have high risk-weighted capital ratios. This notwithstanding, such a loss cannot be ruled out," he said.
The report is available at www.snb.ch.