The introduction of a countercyclical capital buffer on Swiss banks’ domestic residential mortgage loans is credit positive for Swiss covered bonds, Moody’s said today (Monday), with Fitch having noted that the move curbs Swiss banks’ property risks.

Following a recommendation by the country’s central bank, the Swiss government on Wednesday introduced a 1% additional capital requirement on risk-weighted exposures of domestic residential mortgages, effective 30 September 2013.

Moody’s today said that the measure, intended to restrain mortgage lending in Switzerland, is credit positive for Swiss covered bonds issued under the country’s Pfandbrief Act and on a contractual basis.

“Higher capital requirements will limit excessive credit growth and help prevent a house price bubble from forming and subsequently bursting,” said Volker Gulde, vice president, senior credit officer, Moody’s. “Increased capital buffers will also help protect banks against real estate losses that do occur.”

He said that residential mortgage loans comprise 80%-100% of the cover pools of Swiss covered bonds rated by Moody’s, and that the additional capital requirement, in addition to earlier measures, diminishes covered bond expected losses by reducing issuer default probability and losses after an issuer default.

Fitch on Thursday expressed a similar perspective on the measure, noting that the countercyclical buffer will help offset the build-up of credit risk stemming from the threat of a mortgage market bubble.

It noted that Swiss banks should be able to adjust to the additional capital requirement, by the end-September deadline given they already hold high levels of capital to meet so-called “Swiss finish” standards, which are capital requirements imposed by the Swiss authorities on top of Basel III criteria.

Depending on their size and complexity, said Fitch, Swiss banks have to comply with common equity Tier 1 ratios of between 7% and 9.2% and total capital ratios of at least 10.5%, with all the banks it rates already exceeding these minimum requirements. The additional 1% capital buffer on domestic residential mortgages should therefore not be material for them, added Fitch.

Domestic regional cantonal banks and co-operative banks will be more affected than Credit Suisse and UBS, however, it said, pointing out that risk-weighted assets (RWA) for residential mortgages accounted for 9.6% and 8.1% of total credit risk RWA at UBS and Credit Suisse, respectively, at the end of H1 2012, based on the Basel framework advance internal ratings based approach, whereas at cantonal banks, residential mortgages are typically 35% risk-weighted under the standardised approach and accounted for over 60% of their assets at the end of 2011.

The imposition of an additional capital requirement comes against a background of strong growth in the Swiss residential mortgage and real estate markets in recent years, with the Swiss National Bank (SNB) noting that mortgage lending volumes and residential real estate prices increased sharply again in the second half of 2012 despite weak economic growth and the introduction of revised self-regulation rules for mortgage financing in July last year.

Moody’s said that measures introduced last summer – restrictions on accessing pension savings for deposit purposes and implementation of certain minimum amortisation requirements on all residential mortgage loans – did not slow real estate price appreciation, which, according to the SNB, rose 12.8% between 2008 and 2011.

“The credit growth has created an imbalance in the residential mortgage and real estate markets,” said Gulde, “whereby increasing mortgage debt has outpaced the growth rate of the Swiss economy by 20% in the past 10 years, which the central bank regards as risky.”

Fitch said that the countercyclical capital buffer is “a sensible way” for banks to address unexpected losses, and that SNB can raise the requirement to a maximum of 2.5% for all domestic assets, not just mortgages.

“So there is still some degree to flexibility to help cool the property market,” it said.

Overall, however, it said that while the measures introduced by the Swiss authorities should improve the resilience of banks to a domestic housing downturn and maintain market confidence among debt investors, on their own they are unlikely to significantly slow down mortgage lending growth.

“Mortgage interest rates will still be significantly lower than in the early 1990s, the peak of the last real estate cycle,” it said, “even if the higher cost of capital were to be fully passed on to customers.”