The Swiss National Bank asserts that domestically focused banks are well-positioned to withstand major economic shocks due to strong profits and capital buffers.

The Swiss National Bank (SNB) believes that the domestically focused banks are well positioned overall. Thanks to their profits from recent years and capital buffers, they should be able to bear the economic impact of potential major negative shocks.

In view of their exposures, mainly focused on the mortgage business, these banks are particularly vulnerable to a significant rise in interest rates combined with price corrections on the Swiss real estate market, according to the “Financial Stability Report 2024” published by the SNB on Thursday.

In such a scenario with interest rate shocks, these banks would suffer considerable credit losses, according to the SNB. In addition, income from the interest business would decrease, as the higher financing costs would exceed the positive contribution of higher interest income. The resulting impact on the banks’ earnings would erode a significant portion of their capital buffers.

“However, most of these banks would be able to absorb these losses even without countermeasures, such as reduced lending or a build-up of capital,” the SNB believes. The sectoral countercyclical capital buffer plays an important role in this respect. This requires banks to hold additional equity in the event of cyclical risks.

According to the SNB, domestically focused banks also retained a significant portion of their profits in 2023, thereby further increasing their overall loss-bearing capacity. “Overall, the capital buffers of these banks are substantial and high by historical standards,” writes the SNB.

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