Over the past few years, the growth of credit volumes has been significant, with the result that credit volumes relative to gross domestic product (GDP) have reached new historical peaks in Switzerland. Together with persistently increasing real estate prices, this spells out conditions that may lead to subsequent financial instability. How can we understand these recent developments in credit volumes? And can this understanding form a basis for predicting the likely future evolution of this variable in Switzerland?

Clearly the credit-to-GDP ratio cannot grow indefinitely because otherwise the cost of servicing of the debt would end up exhausting the whole of GDP. The recent development must therefore either be viewed as a structural adjustment to a new plateau, or as a cyclical upswing to be followed by a later correction.

Although structural factors can possibly explain a high level of credit-to-GDP in Switzerland in international comparison, they are unlikely to rationalize the most recent upward move in this ratio. By contrast, cyclical drivers appear highly plausible in the current circumstances. Specifically, the long period of ultra-low interest rates feeding into and being reinforced by rising real estate prices, combined with the potential for some behavioral biases, have a higher explanatory power.

The lessons from this analysis are crystal clear. The recent developments in the credit market translate for the Swiss economy into a state of high vulnerability requiring caution and the exercise of responsibility by all concerned. The activation of the countercyclical capital buffer and the adoption of other prudential measures have to be seen in this perspective.