Swiss banks have mastered the challenges posed by negative interest rates rather successfully so far. This may be about to change with the onset of a restructuring process in the mortgage lending industry.

The slogan is plain speaking: «From people to people instead of banks» – Hypotheko yesterday launched its crowd-lending platform, aimed at bringing mortgage lender and taker together. Cutting out the banks.

Hypotheko is but the latest in a string of startups bidding to take a share of the mortgage industry – Finovo, Crowdhouse and Swisslending being other known companies. They all rely on heavyweights from the insurance industry as well as pension funds.

Banks Are Struggling to Keep Up

The run on the mortgage industry is a direct result of the negative interest rates charged by the Swiss National Bank (SNB). The country's monetary authority charges for cash deposits in a bid to keep the Swiss franc from rising further against major trading currencies as the euro and the dollar.

The negative rates are making loans cheap for credit takers. Mortgages however remain an attractive proposition for institutional investors even at the current level of interest charged. Bonds for instance can't compete with mortgages in terms of what yield they generate.

The banks however are struggling to keep up with the cut-price mortgages offered by the new players in the market. They raised their rates charged for a mortgage after the SNB decision in January 2015 to do away with the franc peg to the euro, compensating for the interest charged on their cash deposits without having to penalize those customers who have only small savings to rely upon.

Capital Requirements

The tradeoff worked quite well – until now. The margins in the mortgage business are narrowing with the entry of new players, according to a board member of a large Swiss bank. And the banks are increasingly unable to compete given the capital requirements they face for hedging against bad loans.

«Banks aren't competitive anymore in the financing of large Swiss office properties,» a top banker told finews.ch in an interview. The new players, insurers and pension funds have taken over instead. The manager is convinced that banks soon won't be able to rely on the healthy income from mortgage lending.

For sure: Swiss banks still hold more than 90 percent of all mortgages. No reason for panic, it would seem.

New Realities – New Answers

But these statistics belie the shifts that are taking place in the industry. Bankers say that the non-banking lenders today are taking more than 10 percent of the new mortgages.

The new realities have prompted a reaction from established players, not least of those relying heavily on income from mortgages. Raiffeisen Switzerland recently launched the idea of lowering the capital demands on mortgage takers, making it easier for first-time buyers to get a mortgage. The bid was met by a wall of resistance from other banks which don't want to increase the risk of bad loans.

Which Way Out?

UBS has chosen a different avenue to react to the changes. It launched Atrium, its own mortgage platform, where institutional investors and credit takers are meeting up. That way, the bank at least can earn a commission. Both UBS and arch-rival Credit Suisse have lost market share in mortgage lending in the past years.

Another way to respond would be to finally charge savers for cash holdings on bank accounts. But the banks seem uncertain about the likely fallout from such a move, both economically and politically. If the banks instead increase the risks in the mortgage business by lowering the capital requirements on home-owners, the central bank may yet face the charge that it has destabilized the Swiss financial system. And thus failed in its fundamental task.

One thing's for sure however, the banker told finews.ch: «Things won't remain they way they are in 2017.»