Liquidity during a Banking Crisis: How Can Mortgage Certificates Help?

The SNB’s role in managing this crisis initially included providing emergency liquidity assistance (ELA) to create a time window to make it possible in the first place to work out a solution.

The turmoil in the US banking sector and in connection with Credit Suisse showed how important it is for banks to take liquidity precautions. Banks of any size can run into situations in which they might need a lot of liquidity very quickly. The SNB in the future therefore would like to be able to provide liquidity to all banks engaged in mortgage lending in Switzerland – not just to systemically important banks – if and when the need arises. The expansion of the SNB’s liquidity provision framework for the banking sector bears the name Liquidity against Mortgage Collateral (Liquidität gegen hypothekarische Sicherheiten, LGHS).

Mortgages account for around 85% of the domestic credit volume in Switzerland and thus constitute by far the largest illiquid balance-sheet item in the Swiss banking system. The LGHS framework makes use of this potential with the help of register mortgage certificates, which have existed and continually increased in number in Switzerland ever since the 2012 partial revision of Swiss real estate and land registry law. While the quantity of register mortgage certificates has increased, the number of paper mortgage certificates has decreased (read more about the evolution of these two types of liens in Switzerland in the latest issue of the magazine PAY).

Under the LGHS framework, the SNB accepts as collateral only mortgages that are collateralized by register certificates that are administrated by SIX on a fiduciary basis in the Terravis Nominee system.

“The standardized, automated, and scalable system enables us to transfer mortgage collateral to the SNB quickly and reliably in the event of a crisis,” Walter Berli, Head Terravis, explains. The Credit Suisse case demonstrated that this mechanism works.

After initiating a pilot phase with some individual banks in late 2022, the SNB informed the entire banking industry about the LGHS framework in July 2023. The SNB estimates that it will take one to two years for a bank to get prepared to make use of the LGHS option. During that time, banks must adapt internal processes and add transfer clauses to client agreements, and they must register the mortgage certificates in the name of SIX SIS AG in the respective land registries by means of a mass creditor subrogation.

SNB Vice Chairman Martin Schlegel emphasized the importance of LGHS at the SNB media conference on September 21, 2023, and at information events for banks: “The SNB expects banks engaged in mortgage lending to participate in this initiative. The more banks that prepare for this new option for obtaining liquidity, the greater the flexibility the SNB will have to take action if and when necessary.” This benefits not only participating banks, but also Switzerland as a whole, Schlegel said, adding that the initiative makes a broad-based contribution to the financial stability and resilience of Switzerland’s banking system.