Swiss Banks Risk Significant Losses From Commercial Real Estate, Watchdog Finma Says

(Bloomberg) — Swiss banks face a “significant loss potential” in the event of corrections on property markets, financial regulator Finma said.

Many lenders have a large proportion of investment property loans in their mortgage portfolios, which involve higher risks than lending for owner-occupied housing, the regulator said in a press release on Wednesday. 

“The risk weightings of higher loan-to-value investment properties will now be significantly higher than before,” Finma said. The supervisor considers a “correction on the property and mortgage market as one of the main risks for the Swiss financial market.”

The changes will take effect from the beginning of 2025. The watchdog has been conducting stress tests on the institutions’ exposure in recent months.

Limited space and slow construction have so far shielded Switzerland’s expensive real estate market from the price corrections seen in other countries. Still, officials keep warning that prices have increased more than warranted by market fundamentals.

BOE Warning

Finma’s comments echo a warning by the Bank of England earlier on Wednesday, which said that risks to the global real estate sector are creating a danger to financial stability. Commercial real estate prices could fall further leading to a loss for lenders, the central bank’s Financial Policy Committee said, fueling concern that commercial-property landlords may fall behind on their mortgage payments.

In Switzerland, mortgages account for around 85% of domestic credit volume, according to the Swiss National Bank.

In this context, Finma called on banks to be prudent in monitoring their portfolios.

“Finma frequently observes, for example, that the projected interest rate is set too low or the affordability limits too high,” the regulator said. “In addition, many banks grant too many ‘exception to policy’ loans,” referring loans that do not comply with banks’ own lending criteria. 

“This contradicts prudent lending practices and is therefore neither in the spirit of the regulation nor the self-regulation in the sector,” according to Finma

The new risk weightings will come into force on January 1 together with the final implementation of global capital rules known as Basel III.

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