Higher minimum reserve requirements could cut Swiss banks' return on equity by about 30 basis points according to our estimates. However, given that their current level of central bank reserves far exceeds minimum requirements, we don't think Swiss banks will struggle to meet the higher reserves overall (see chart). Together with the relatively limited impact on profits, we see the impact on Swiss bank ratings as neutral.
What's Happening
The Swiss National Bank (SNB) has raised its minimum reserve requirement for banks to 4.0% from 2.5% of short term, Swiss franc liabilities. This constitutes the maximum according to Switzerland's National Bank Act and will be effective from July 1, 2024. In addition, banks will need to fully include domestic on-demand deposits in their minimum reserve calculations, instead of 20% previously. Along with the SNB's move to stop paying interest on banks' minimum reserves, we expect this could end up costing Swiss banks around Swiss franc (CHF) 600 million in lost interest income. This equates to 2.6% of 2022 net income or an average decline in RoE of 26 bps. However, these estimates assume that banks take no action to offset the losses. In 2023, the central bank's losses amounted to CHF8.5 billion ($9.3 billion) on its Swiss franc positions, most of which came from the interest paid on banks' sight deposits (CHF7.4 billion).
Interest on Swiss minimum reserve requirements
Since Dec. 1, 2023, the SNB no longer pays interest on banks' minimum reserves. Deposits at the central bank that exceed the required amount 25x only bear interest that is equal to the SNB's base rate (28x before December 2023). If a bank deposits a larger amount of cash, the SNB would knock off 50 bps to encourage them to use interbank markets instead.
Why It Matters
The SNB is the only major central bank that has announced a hike in its minimum reserve requirements for banks of late. In contrast, the European Central Bank decided against such a move as part of its operational framework review last month (see “Eurozone Banks: ECB's Operational Framework Review Backs The Status Quo,” published March 14, 2024). We don't expect the SNB's measure by itself to materially tighten Swiss banks' liquidity positions, and believe that the impact on profitability will likely be limited. As such, we consider this to be neutral for Swiss bank ratings. However, we see this as part of a broader and continuous move by the SNB to tighten Swiss banks' funding conditions. This will ultimately force banks to adapt their funding profiles and will be an area to watch in 2024 and 2025.
What Comes Next
Now that the SNB has normalized its minimum reserve requirement at 4%, we expect it to maintain its focus on policy rates. The SNB was one of the first central banks to lower its policy rate to 1.5% from 1.75% in March 2023. Our economists expect Swiss policy rates to stabilize at this lower level, and inflation to stay around 1.5% in 2024, then reducing to 1.1% by 2027. We therefore might see tighter funding conditions affecting Swiss borrowers over time.
Related Research
- Economic Outlook Eurozone Q2 2024: Labor Costs Hinder Disinflation As Rate Cuts Loom, March 26, 2024
- Eurozone Banks: ECB's Operational Framework Review Backs The Status Quo, March 14, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Lukas Freund, Frankfurt + 49-69-3399-9139; lukas.freund@spglobal.com |
| Secondary Contacts: | Nicolas Charnay, Frankfurt +49 69 3399 9218; nicolas.charnay@spglobal.com |
| Giles Edwards, London + 44 20 7176 7014; giles.edwards@spglobal.com |
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