Swiss Bank Funding Costs Rise Despite Easing Monetary Policy

Amid an evolving financial landscape, recent developments in Swiss bank funding costs have become a central topic for both banks and policymakers, as these costs directly influence borrowing conditions and the effectiveness of monetary policy in Switzerland.

Since the beginning of 2024, the Swiss National Bank (SNB) has reduced its policy rate by a total of 1.75 percentage points, which has broadly resulted in falling market interest rates and lower borrowing costs for Swiss households and businesses. However, the cost for banks to secure funding in financial markets has not decreased as quickly as general interest rates, resulting in a relative increase in bank funding costs, measured by so-called “swap spreads.” This divergence is significant because swap spreads capture the additional cost banks face over and above the baseline market rate, reflecting factors such as liquidity and credit risk.

Three main drivers are behind this sustained elevation in funding costs. First, global factors, including a rise in foreign government bond yields and reduced central bank demand for government securities, have raised the liquidity premium banks must pay to secure long-term funds. Second, the Swiss banking sector has experienced structural shifts, notably following the takeover of Credit Suisse by UBS. This event prompted more clients to seek relationships with domestically focused banks, swelling their demand for market-based funding and contributing to upward pressure on spreads. Third, recent changes in regulation and liquidity management—such as increased minimum reserve requirements and stricter standards for systemically important banks—have made liquidity provision more challenging for institutions, pushing them to maintain larger liquidity buffers and search for more stable, long-term funding sources.

Despite these challenges, the elevated funding costs have had a limited impact on overall credit provision. Swiss banks have responded by mildly increasing loan rates relative to funding costs to preserve their interest margins, yet credit growth—particularly in mortgage lending—remains robust and in line with expectations. In summary, while funding costs are higher, there is no evident credit crunch, and the SNB’s monetary policy transmission via the credit channel remains intact, as proven by the pick-up in lending and continued support for price stability.

These developments highlight the resilience and adaptability of Swiss financial institutions, and underscore the importance of monitoring funding markets closely, as even amid rising funding costs, the core objectives of monetary policy are being achieved in Switzerland.