The size of Switzerland’s big bank pose a risk to the economy

The latest financial stability report from Switzerland’s central bank highlights the continued systemic risk posed by the disproportionate size, relative to the economy, of the two largest Swiss banks and warns of the ongoing risk of losses leading to capital depletion. In time, financial services regulation is set to see significant changes, including mooted powers to regulate banks’ size and raise capital ratio requirements, but in the near term UBS will remain a concern for regulators, with attention focused on its balance sheet position and an impending US lawsuit.

At its last quarterly meeting in June the Swiss National Bank (SNB, the central bank) confirmed the continuation of its current expansionary monetary policy stance, based on its assessment that the balance of inflationary risks remained clearly skewed to the downside. Apart from leaving interest rates at an extreme low—with the target band for the Swiss franc three-month Libor at 0-0.75% and the central target at 0.25%—this means that its quantitative easing programme will continue, as will its efforts to prevent any marked appreciation of the Swiss franc. …