The Government of Switzerland has made it mandatory for all the banks of the country to hold extra capital to cover the risk of mortgage loan default. The decision comes in the wake of fears of an emerging housing bubble in the country.
The Swiss Federal Council announced Wednesday, Feb. 13, 2013, that all the banks are required to hold an extra 1 percent of their capital in order to cover any kind of risk that may occur on failure of mortgage loan payments, reports Bloomberg.
The decision was prompted by the recommendation of the Swiss National Bank (SNB).
Property prices in major cities of Switzerland are rising exponentially. Home prices shot up almost a third across Switzerland and up to 136 percent in Geneva. Experts fear that a housing bubble is just around the corner and it could affect the economic growth of the country adversely, reports Swiss Info.
"Current imbalances are still smaller than those immediately prior to the onset of the real estate and banking crisis at the end of the 1980s. Nevertheless, to reduce the risk of the Swiss economy experiencing a similarly severe crisis in the medium term, it is important that action be taken before the magnitude of the imbalances becomes so great that measures can no longer be applied preventively." SNB said in a statement.
However, the decision has been heavily criticized by bankers. The Swiss Bankers Association (SBA) called the decision a hasty attempt of overplaying the risk of a housing bubble.
SBA claimed that property prices are rising due to increase in demand for homes as more people are migrating to the country. However, it called the decision an unsuitable fix to the problem, reports Yahoo.
The government had already tightened mortgage lending rules in the country in July 2012 to evade the property boom. Another precautionary measure at this stage is deemed early and impulsive by the association. The SBA also asserted that the decision could hit lending activities of the banks, reports Swiss Info.
Homeowners and real estate analysts claimed that the move would definitely lower trade activity in the segment. There was a mixed response from the sector.
