Saron has been substituted for Libor as the reference rate in Switzerland. But like tofu offered as a meat substitute at a butcher shop, it's a slow seller.
Since the beginning of the year, «Saron» has replaced the disgraced Libor as the reference rate in Switzerland, but so far it hasn't been a hit in the mortgage market.
At a traditional media event hosted Thursday evening by the Swiss National Bank, directorate member Andrea Maechler spoke at length about the changeover to the new benchmark rate.
The transition from Libor, which was used since the late 1970s, to Saron was a challenge for regulators and made lots of people nervous, as was reported in finews.com last year. Recall that Libor fell out of favor after the 2008 financial crisis when it became apparent traders were manipulating Libor in their favor.
Now, the reference rate is calculated by the Swiss SIX stock exchange as an independent body, which prevents collusion.
The Transition
«The available indicators suggest that the Swiss franc markets have coped very well with the transition,» said Maechler, who was one of the people responsible for the transition.
Still, the work is not finished and it is now up to financial market participants to increase the attractiveness of the new reference rates, she explained. But one market appears to need some prodding.
It is precisely in one of the most important areas, mortgages, that Saron products are currently lagging. With rising inflation and higher interest rates on the horizon, home buyers are moving to longer maturities to hedge against those twin uncertainties. As such, it isn't the new reference rate that is blamed per se.
But even in the face of rapidly rising inflation and the threat of weak growth, the SNB appears not to be overly alarmed, and last week once again left interest rates unchanged.
Variable Rate Products
Variable rate Saron products that track and are linked to interest rate changes are clearly in less demand, as a Comparis analysis recently showed. Even though the current view is that Saron mortgage rates won't unduly spike, they are nevertheless «losing popularity in the current political and economic environment.»
For the big players in the mortgage business that actively promote Saron, like the Raiffeisen Group, this is certainly a damper.
Thought Experiment
In a thought experiment, Maechler attempted to illustrate the benefit of a reference rate to a mortgage borrower. «In the absence of reference interest rates, quarterly interest payments would depend on the outcome of bilateral negotiations between the borrower, and the lender,» she explained.
The result of these repetitive and opaque negotiations would discourage a large number of banks and prospective homeowners from entering into adjustable-rate mortgage contracts, she further found.
But for now, it's the upcoming interest rate turnaround, so far on hold in Switzerland, which is slowing down the variable-rate Swiss mortgage business.
