Increasing Equity/Capital at Swiss Banks and the Influence on the Economy

According to the theory in economics regarding the ways the central bank (in this case the SNB) can influence lending of commercial banks to the private sector one comes across the practice of changing the required reserve ratio (RRR). The higher the RRR, the less commercial banks will lend to the private sector. Countries that have been using the RRR as their main monetary policy tool recently are China, India and Turkey

Currently there are efforts by regulators and politicians in Switzerland to increase the equity/capital that banks hold. I would assume that this will lead to the same effect that changing the RRR has, namely that the banks will need to lower their credit approval rates to be able to put aside equity/capital – or alternatively reduce the dividends they can pay to shareholders.

I could imagine that this could make it more difficult for the SNB to use monetary policy as they have in the past. The RRR is normally changed only in extreme cases and otherwise kept stable because it makes medium- to long term forecasts for banks more challenging and thus incites uncertainty.

Of course one must note, that banks were able to wind down their equity/capital in the past two decades. From having a nicely sized cushion it has been reduced to a mere mat in effectivness to protect in case of trouble.

Considering where Switzerland currently stands with regard to unemployment and strength of economy, it could be argued firstly that now is a good time to incease equity/capital requirements as there are signs of overheating, for example in the property market (as has been pointed out by the SNB repeatedly). So even if the increase leads to banks lending less that would be a positive cooling.

Banks can also incease their capital ratios by reducing the balance sheet size. The many QE programmes being run by central banks worldwide should make it very easy for banks to find buyers for their government bond holdings in the current environment. That’s the second argument in addition to the current strong Swiss economy for a tightening move.

The trouble with the second argument; it leads to the central banks having the risk on their balance sheet.

Kommentar verfassen

Trage deine Daten unten ein oder klicke ein Icon um dich einzuloggen:

Du kommentierst mit Deinem Abmelden /  Ändern )

Google Foto

Du kommentierst mit Deinem Google-Konto. Abmelden /  Ändern )


Du kommentierst mit Deinem Twitter-Konto. Abmelden /  Ändern )


Du kommentierst mit Deinem Facebook-Konto. Abmelden /  Ändern )

Verbinde mit %s