The Swiss government reactivated a requirement for home equity lenders to pad their capital, as the alpine nation's real estate market heats up.

Switzerland will require banks to hold another 2.5 percent of additional capital against residential mortgages, the Swiss government said in a statement on Wednesday. The government followed a recommendation from Switzerland's central bank, which has been sweating an overheated property market fueled by ultra-cheap lending for years, echoed by banking regulator Finma.

The Bern-based watchdog called Swiss mortgage lending «too big to fail», in its separate statement. «Finma sees risks in particular in the residential buy-to-let market, supervisor Jan Bloechliger said.

«With a volume of over 1.1 trillion, the Swiss mortgage market is larger than the balance sheet of a systemically important large bank,» he said. Switzerland has five so-called SIBs: UBS, Credit Suisse, Raiffeisen, Postfinance, and Zurich's cantonal bank.

Pandemic Capital Relief

Banks are taking increasingly bigger risks in home loans, against the backdrop of growth accelerating even in a pandemic, noted Bloechliger. The Swiss National Bank will consider further measures in a bid to cool mortgage lending, it said in its own statement on the move.

The last buffer – two percent – was removed nearly two years ago at the behest of the central bank when the pandemic broke out. Banks deserved «maximum latitude» for lending to small business, the SNB and Finma had argued at the time.

Fear Of Sudden Reversal

Now, policymakers are worried that an unexpectedly sharp rise in interest rates – in negative territory in Switzerland since 2015 – would spark a severe correction in property prices. The SNB said the additional capital layer will help «maintain the banking sector’s resilience, and strengthen it where necessary.» 

The government signaled it isn't too worried about lending to small business drying up. «Compared to the start of the pandemic, the economic situation has improved and the uncertainty about companies' access to credit has decreased considerably,» it said. «At the moment, there are no signs of a corporate credit crunch.»