BERN Nov 24 Negative interest rates are vital
in the Swiss National Bank's efforts to rein in the Swiss franc,
SNB Vice Chairman Fritz Zurbruegg said on Thursday, with the
associated risks from low interest rates "manageable" for the
country's financial system.
For nearly two years the central bank has been charging
0.75 percent on deposits it holds for commercial banks beyond a
certain threshold, a step which has come under fire from banks
which see it as an additional charge on their activities.
The low interest rate environment has also reduced the
profitability from banks' business of granting loans and
financing them with deposits.
"Exceptionally low interest rates are putting pressure on
interest rate margins and this is weighing on the profitability
of Swiss banks," Zurbruegg said in remarks prepared for a
conference in Bern.
This was particularly true of domestic-focused banks, such
as the country's 24 cantonal banks, whose operations are heavily
geared towards interest business, he said.
Negative interest rates had not caused a further erosion of
banks' profitability because exemption thresholds granted by the
SNB meant most domestic banks have not been hit by the charge,
Banks have also taken on riskier loans to compensate for
lower margins elsewhere, Zurbruegg said.
"Looking to the future, ongoing low interest rates are
likely to continue weighing on banks' profitability; this, in
turn, will create an incentive for them to take on more risk,"
But measures like the countercyclical capital buffer - which
requires banks to hold capital beyond minimum requirements - has
increased the resilience of the sector, he said.
"Thanks to measures taken to date and the capital surpluses
that banks have in place, these risks are currently manageable
for the financial system."
Negative rates had helped the banking sector by maintaining
price stability and supporting the Swiss economy by easing
upward pressure on the franc, he said.
"The negative interest rate charged on banks' sight deposits
at the SNB is indispensable from a monetary policy perspective,"
"Given low interest rates around the world and the difficult
global economic situation, negative interest - coupled with the
SNB's willingness to intervene in the foreign exchange market -
serves to ease upward pressure on the Swiss franc."
Still, with interest rates likely to remain low for the
foreseeable future, "all players should remain especially
cautious and alert", he said.
"It is thus all the more important that banks put aside
sufficient capital surpluses and adopt a conservative mindset
when assessing the creditworthiness of borrowers."
(Editing by Michael Shields)