Swiss banks told to rein in lending or face restrictions as bubble fears grow

Switzerland's central bank has a message for lenders: act now to stem surging credit growth or face further restrictions.

The government, at the urging of the Swiss National Bank, last week ordered banks to hold additional capital as a buffer against risks posed by the country's biggest property boom in two decades. The amount, set at 1 per cent of banks' risk-weighted assets tied to domestic residential mortgages, can be increased to as high as 2.5 per cent.

"The measure is a warning shot at banks that were overgenerous with their credit lending," said Janwillem Acket, chief economist at Julius Baer Group in Zurich. "The government and the SNB want to tell banks to be more restrictive or we'll tighten the reins further."

Governments from Singapore to Dubai are seeking measures to cool overheated property markets after central bankers lowered interest rates to stimulate their economies. While Swiss policymakers in July toughened rules on mortgage lending to avoid a repeat of a housing collapse that crippled the economy in the early 1990s, the SNB requested the buffer after "imbalances intensified further" in the second half.

The measure will be imposed on all Swiss banks as well as subsidiaries of foreign banks operating in the country. Lenders will have to add about 3 billion francs (HK$25 billion) to comply with the new rules, which will be enforced from September 30, according to the government. Policymakers will "continue to closely monitor developments" and "regularly reassess the need to adjust the level", the SNB said.

Property prices have surged in Switzerland as investors funnel money into one of Europe's most stable economies amid the sovereign debt crisis and record-low interest rates. The SNB has kept borrowing costs at zero after introducing a franc ceiling of 1.20 versus the euro in September 2011 to stop investors from piling into a currency perceived as a haven.