Jean-Pierre Danthine, Vice-Chairman of the Governing Board of the Swiss National BankICMB, Geneva, 16.04.2013
"Over the past few years, the growth of credit volumes has been
significant, with the result that credit volumes relative to gross
domestic product (GDP) have reached new historical peaks in Switzerland.
Together with persistently increasing real estate prices, this spells
out conditions that may lead to subsequent financial instability. How
can we understand these recent developments in credit volumes? And can
this understanding form a basis for predicting the likely future
evolution of this variable in Switzerland?
credit-to-GDP ratio cannot grow indefinitely because otherwise the cost
of servicing of the debt would end up exhausting the whole of GDP. The
recent development must therefore either be viewed as a structural
adjustment to a new plateau, or as a cyclical upswing to be followed by a
Although structural factors can possibly
explain a high level of credit-to-GDP in Switzerland in international
comparison, they are unlikely to rationalize the most recent upward move
in this ratio. By contrast, cyclical drivers appear highly plausible in
the current circumstances. Specifically, the long period of ultra-low
interest rates feeding into and being reinforced by rising real estate
prices, combined with the potential for some behavioral biases, have a
higher explanatory power.
The lessons from this analysis are
crystal clear. The recent developments in the credit market translate
for the Swiss economy into a state of high vulnerability requiring
caution and the exercise of responsibility by all concerned. The
activation of the countercyclical capital buffer and the adoption of
other prudential measures have to be seen in this perspective."
Pg.13 - Domestic credit in SUI: levels - Substantial increase in credit-to-GDP ratio driven by persistent strong credit growth
(Figures 2a and 2b)
Pg.14 - Credit-to-GDP: international comparison
pg.15 - Long-term development of credit-to-GDP in Switzerland
How to explain increasing credit-to-GDP ratios in general?
• Improved credit access due to structural reduction of supply side constraints (financial liberalization, innovation)
• Structural increase in credit demand (e.g. growth opportunities, cultural changes or demographic shift)
• Extended period of low interest rate
• Overconfidence and misjudgement of borrowers and/or lenders (behavioural biases)
Conclusion: the tide will turn
• Current situation in Switzerland: rather a cyclical than a
structural increase in credit-to-GDP
• Eventually, the tide is likely to turn with credit volumes
significantly undershooting nominal GDP growth
Key question: is a smooth reversal possible?
Conclusion: fasten your seat belts!
• Prolonged period of strong growth in credit and in real
estate prices indicative of financial fragility
• Prudence is key: Adoption of countercyclical capital buffer
and other prudential measures to be seen in this context