The OECD in the latest country report on Switzerland praised the strength and resilience of its economy. One of the reform measures it proposes is not new, but a contentious issue in Swiss banking.

The Swiss economy is doing very well and has few serious problems to deal with. The OECD country report highlights the importance of a highly skilled workforce and competitive private sector for the wellbeing of the economy as a whole.

The authors of the report however indicated that Swiss growth in the past years relied strongly on construction and real estate, business that profited from the low-rate monetary policy pursued by the Swiss National Bank (SNB) to keep the currency from appreciating. The OECD said this had increased the risk for the economy.

No More State Guarantee

Looking at the stability of the Swiss financial system and the government’s finances in general, the OECD says that Switzerland ought to do away with the state guarantee for cantonal banks. The proposal is not new, as the group in 2015 had come to a similar conclusion.

But the Paris-based economists said that banks had increased the mortgage volumes since then. Cantonal banks on average have a mortgage volume equal to about 60 percent of their balance sheets. Raiffeisen and regional banks even reached rates of 70 to 80 percent.

Stress Tests Resilience

The OECD agrees that the banks would pass stress tests ordered by the SNB. If property prices however were to decline, the government finances might get into trouble because a large number of the cantonal banks relied on their state guarantee.

This in turn helped those banks to refinance their loans more cheaply, granting them a competitive advantage. The group also says that the banks might loosen their demands on prospective home owners to gain market share.

There are some signs suggesting that this is already the case. The number of mortgages granted that don’t conform with the traditional requirements for eligibility has risen over the past two years – the SNB said that 46 percent of new mortgages didn’t conform with the rules last year.

Official Restrictions on Mortgages

The OECD therefore says that mortgages ought to be officially restricted to prospective owners who can demonstrate their ability to serve their loans at even much higher interest rate levels.

Switzerland will carefully look at the recommendations, as the OECD is monitoring closely what measures countries are taking in response to its demands. For instance, only the canton of Geneva opted to remove the state guarantee following the group’s earlier recommendation in 2015.