Mortgage market regulation
Mortgages are a cornerstone of the Swiss banking industry, so regulation concerning the real estate and mortgage markets is a key focus of our activities. In particular, the Swiss Bankers Association (SBA) is responsible for two self-regulation regimes that are recognised as minimum standards under supervisory law.
The mortgage business is subject to a variety of regulations governing important aspects such as planning (e.g. the Second Homes Act) and taxation (e.g. the rules on imputed rental value). Some formalities, such as public deeds in digital form, make it easier to grant mortgages, whereas others make it harder. We keep track of developments on the mortgage market and make the case for competitive operating conditions to politicians and authorities.
Specific banking regulation
The main focus, however, is on prudential regulation and the related financial stability policy considerations. The SBA regularly consults with the Federal Department of Finance (FDF), the Swiss National Bank (SNB) and the Swiss Financial Market Supervisory Authority FINMA on developments on the real estate and mortgage markets.
There is a fundamental distinction here between government measures and private-sector instruments. The central instrument on the side of the authorities and the government is the Capital Adequacy Ordinance (CAO), over which the Federal Council has the power of decision.
Article 72 of the CAO governs risk weightings for mortgage loans. The main rule is that, the higher the loan-to-value ratio, the higher the risk weighting and thus also the capital adequacy requirements for banks. The CAO also contains provisions on calculating and adjusting the lending value of properties.
In addition, Article 44 sets the standard for the countercyclical capital buffer. The Federal Council can, at the SNB’s request, require banks to hold a countercyclical capital buffer of up to 2.5% (in the form of Tier 1 capital) for their mortgage business.
For its part, the SBA is responsible for two self-regulation regimes relating to mortgages, both of which are recognised by FINMA as minimum standards under supervisory law. These are the Guidelines on minimum requirements for mortgage loans (in German) and the Guidelines on assessing, valuing and processing loans secured against property (in German).
The Guidelines on minimum requirements for mortgage loans govern the borrower’s use of own funds and set out specific limits with regard to amortisation. They are directly linked to the CAO in that a less advantageous risk weighting applies if the minimum requirements are not met. The Guidelines on assessing, valuing and processing loans secured against property, meanwhile, contain qualitative requirements for banks’ internal mortgage lending business processes. In particular, they regulate lending policies, loan monitoring and reporting.
Latest developments: Basel III Final
Mortgage market regulation is set to undergo a number of changes as a result of the final Basel III reforms. Enhancing risk sensitivity is a central theme in this respect. In particular, the revised CAO will require banks to distinguish between a number of property and use categories with regard to the risk weighting of mortgages.
The two self-regulation regimes will also be updated in line with Basel III Final, in particular by abolishing the stricter minimum requirements that were introduced for investment properties. In addition, in the guidelines on loans secured against property, the tried-and-tested requirements for assessing and valuing loans secured against property have been made more differentiated.
The Federal Council has decided that Basel III Final will enter into force on 1 January 2025. However, the Federal Department of Finance (FDF) will report to the Federal Council on the progress made with international implementation once more by the end of July 2024 at the latest.