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Where is that Y coming from? The rates of say EUR and CHF diverging?

Yes. If CHF outperforms EUR, and the mortgage payments are in CHF, a bank that has most expenses in EUR is making a profit.

You can hedge against the performance of CHF by keeping proportional revenue streams of EUR.

This theory doesn't make sense to me. Banks could simply buy foreign currency to achieve the same without the additional risk of defaulting lenders.