Switzerland was once one of the poorest countries in Europe because it had generally infertile agricultural land and neither mineral resources nor access to the sea. During the Middle Ages, the lack of investment opportunities induced capital exports, some of which financed European monarchies, the earliest signs of “Swiss Finance.” This state of development lasted until the age of enlightenment, when education, technical know-how, disciplined work, an orderly social framework, and political stability made it possible for the country to prosper. For 500 years following Switzerland’s declaration of neutrality after the Battle of Marignano, the nation became a safe haven, particularly for the French nobility, resulting in a steady flow of funds from France to Geneva.

Thanks to the Industrial Revolution, large capital inflows from abroad, mainly from Germany, the United Kingdom (UK), France, and the Netherlands, benefited from Switzerland’s hard-working local labor force, which before had looked for employment opportunities abroad, mainly in foreign military service.

During the seventeenth century, the Netherlands had already developed the joint-stock company, which was the ideal legal form to collect venture capital to finance shipping. The steam engine had already been invented in the UK when Switzerland’s first modern Constitution was established, providing the legal basis for the nation’s modern corporations, banks, and insurance companies. They were instrumental in collecting local savings and importing capital (mainly venture capital) to finance roads, railways, and industries. Modern learning centers, like the Federal Technical School (ETH) Zurich, educated engineers, managers, and other skilled workers. Stock exchanges, the first founded in Geneva in 1850, collected and redirected capital flows. To facilitate cross-border transactions, Switzerland became a member of the Latin Currency Union in 1865.

The Industrial Revolution of the nineteenth century was market-driven, with little interference from the federal government, as evidenced by relatively liberal statutes for banks, insurance companies, stock exchanges, and savings institutions. It was only during the first decade of the twentieth century that Switzerland founded its central bank and created the nation’s currency, the Swiss franc. The Latin Currency Union’s collapse induced the start of a full-fledged national currency in 1927, the birthdate of what was to become the strongest currency in the world. The Swiss franc’s first stern test was only a few years later when the world suffered severe recessions and depressions during the early 1930s. The Swiss economy absorbed competitive devaluations by some of Switzerland’s major trading partners, and the Swiss National Bank (SNB) resisted devaluing the franc for almost half a dozen years at a high cost to the economy.

Thanks to the Bretton Woods gold-exchange standard, introduced after World War II, the Western World started its impressive economic recovery. Switzerland’s stable monetary environment, functioning financial system, and an economy unharmed by the war were instrumental in allowing it to become one of the world’s wealthiest and most prosperous countries. When President Richard Nixon cut the dollar’s link to gold in 1971 and the Swiss franc was free to float, its exchange rate value strengthened materially. From a fixed value of CHF 4.30 to 1 US$, the franc appreciated and became stronger than the dollar, reaching CHF 0.96 per US$ 1.00 in August 2022.

Unfortunately, the Swiss franc’s increasing strength, among other things, encouraged large Swiss banks to adopt Wall Street’s casino mentality, tempted by the chance to make a quick buck. Huge losses materialized and led to the sacrifice of financial freedoms, which were hallmarks of Switzerland’s financial, social, and economic systems. Swiss banks’ misbehavior led to a massive wave of regulations, vast losses, and the imposition of foreign rules and regulations.

The first edition of Swiss Finance was published about a decade ago. At that time, its full name was Swiss Finance: Capital Markets, Banking, and the Swiss Value Chain. Albeit slightly, we changed the second edition’s name to reflect the growing importance of digitalization. Think of how far we have come from the days when transferring information involved using handwritten messages that were copied with carbon paper and delivered by mail and, before that, by horse.

Digitalization has increased the efficiency, accuracy, and speed of financial transactions but has also amplified the risks of cyberattacks and industrial espionage. If financial success is based on “trustworthiness,” our new digital world with blockchain technology has stretched the boundaries of what might be considered “normal.” In the past, bills and coins were the trusted means of payment, with checks and credit cards following closely behind. Today, cryptocurrencies and tokens are becoming increasingly familiar as means of payment, units of account, and stores of value. Reacting to this development, central banks have entered this playing field by offering central bank digital currencies (CBDCs), which have the potential to replace banking as we know it. Even without central bank involvement, distributed ledger, blockchain, and related technologies have the power to cause paradigm changes in banking and financial interactions.

During the past decade, the world has faced considerable volatility due to:

  1. 1.

    China’s emergence as a candidate for becoming the world’s largest economy,

  2. 2.

    European debt crises,

  3. 3.

    Brexit,

  4. 4.

    Russia’s two-time invasion of Ukraine,

  5. 5.

    COVID-19 and other pandemics, and

  6. 6.

    Recent increases in global inflation.

For nearly a decade, central banks dramatically increased their nations’ or currency areas’ monetary bases to stave off recessions, but in 2022, inflation has reared its ugly head, forcing monetary authorities and governments to pivot, reversing or moderating their expansionary policies, with unknown consequences.

Currency values have fluctuated with intense pressures. As early as 2012, the euro crisis prompted Mario Draghi, European Central Bank President at the time, to say, “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”Footnote 1 After that, “whatever it takes” became a catchphrase for nations facing debt crises and central banks trying to save their currencies from staggering depreciations or appreciations. For Switzerland, the franc’s appreciation forced the SNB to face the difficult choice of intervening and causing rapid increases in the nation’s monetary base or allowing the franc to rise. Intervention to lower the franc’s value would have increased potential inflationary threats, but allowing it to rise could have priced Swiss goods and services out of international markets.

As was the case a decade ago, we continue to believe that “unencumbered capital markets allocate financial resources to their best value-creating uses for the growth and prosperity of the world.” We agree that some restrictions must be placed on the actions of private financial market participants. We also believe that Swiss taxes and limitations on investments by pension funds, insurance companies, and mutual funds have diverted capital from areas that contribute most to Switzerland’s long-term growth and development. The economic value of “venture capital” and “start-ups” is now well-recognized, which is why these two expressions have become common household terms.

Ten years ago, we criticized Switzerland as a nation where economic and financial policies were reactive more often than proactive, “responding to urgent needs rather than anticipating them.” Critics may argue that the same is true now, but we believe Switzerland has made progress liberalizing access to its financial system, gaining entry to foreign financial systems, and taking a leading role in developing blockchain assets. Swiss banking secrecy, as the world once knew it, is gone for non-Swiss residents but remains vital for Swiss residents.

A decade ago, we described Switzerland as a nation “caught on the horns of a dilemma, forced to decide if it should stick with customs and practices that made it a financial powerhouse during the twentieth century or adapt to a new world paradigm.” We were wrong. The idea that Switzerland had a choice was overstated because the nation had little or no choice if it wanted to remain relevant. Given the size and force of international financial and trade flows, political or financial hesitation would have overwhelmed Switzerland, making it a backwater island for international trade and finance. The Swiss public has earned significant rewards from its world-class financial system. The benefits have been clear, but looking forward, so are the risks of not keeping pace with major global competitors, particularly with the significant growth of Asian countries.

Switzerland’s relatively high labor costs continue to force the nation toward goods and services that require technological innovations and away from unsophisticated bulk products. For this reason, we again stress the need for continued venture capital investments, understanding that patience is needed because their payoffs often come more than a decade in the future. Exposure to international competition has helped Switzerland increase the skills and competence of its financial institutions, but it has also led to the adoption of Casino-like mindsets that can lead to financial disasters.

During the past 20 years, global competition among banks, insurance companies, and broader capital markets has intensified. Financial intermediaries, such as banks and insurance companies, now offer similar products and merge, benefiting from each other’s comparative advantages. Over-the-counter and exchange-traded financial derivatives compete with insurance companies and other financial institutions. Switzerland’s banking, insurance, and capital markets bear strong witness to this worldwide convergence trend. Financial evolution has drawn together financial products and institutions and intensified competition among insurance/reinsurance companies, investment banks, commercial banks, and an array of shadow-banking institutions. Customized products have become more standardized, and standardized products have become more customized, leaving the competitive intersection up for grabs.

During the past four decades, Switzerland’s financial system has been transformed from a disconnected assortment of trading, clearing, settlement, and payment systems into a wholly integrated and fully automated electronic securities trading and post-trading infrastructure operated and managed by the SIX Group.

Chapter 2: Finanzplatz Schweiz (Finance Center Switzerland) explains the origin, governance, and operation of the SIX Group, which is responsible for connecting financial market participants in Switzerland, Spain, and worldwide. It describes how the SIX Group’s four major business areas (i.e., Exchanges, Security Services, Financial Information, and Banking Services) have fortified and enhanced Switzerland’s domestic and international securities and payment value chain. Significant improvements have been made in trading, clearing, settlement, custody, security administration, payment transactions, debt instruments, derivatives, exchange-traded funds and products, sponsored funds, crypto-structured products, and tax services for equities. The SIX Group has encouraged financial innovations, reduced costs, improved market access, promoted collaborations, and created a shareholder structure based on the “user-owned, user-governed” principle. Chapter 2 highlights why “Finanzplatz Schweiz” (i.e., Finance Center Switzerland) is not a destination but a journey, which Switzerland began about four decades ago and continues today. It explains why keeping pace with changing global demographics, financial trends, and payment systems will take careful and concerted steps, particularly with the threat that DLT platforms could make existing fixed assets (e.g., buildings, computers, and software) and human resource skills obsolete.

Chapter 3: The Swiss Banking System focuses on recent events that have shaped the most visible part of Switzerland’s financial sector. It discusses the nine categories of Swiss banks and their structure, economic value-added, profitability, on- and off-balance-sheet activities, rivalries, universal banking system, structure, and relative international position. This chapter explains how Switzerland’s financial system has overcome significant competitive challenges and why the future portends many more to come.

Chapter 4: Swiss Bank (Customer) Secrecy & the International Exchange of Information chronicles and describes the seismic changes that Switzerland made in its bank secrecy laws and practices—practices that can be traced back more than 300 years before Switzerland was a nation. Switzerland has moved from a time when information exchanges were based on bilateral double taxation treaties to multilateral disclosure agreements that provide for the automatic exchange of bank customer information. In 1934, Switzerland’s Banking Act criminalized confidentiality breaches, but since then, the nation has moved decisively toward liberalization. This chapter explains how Switzerland’s information disclosures to foreign tax authorities have been influenced by the interplay of its Constitution, laws governing the disclosure of bank customer information, and international pressures toward greater transparency and automatic information exchanges. The nation has aimed to balance an individual’s right to privacy with the legitimate informational rights of society and third parties. These pressures culminated in 2015 when the Swiss government passed the Federal Act on the International Automatic Exchange of Information in Tax Matters (AEOIA). The first exchange of information under this act occurred three years later.

Illicit use of Swiss laws was instrumental in the nation’s decision to abolish banking secrecy protections for foreigners.Footnote 2 Tax evasion, money laundering, insider trading, market and price manipulation, organized crime, financing terrorism, and corruption (bribery) were central to these negotiations and consequent legislation. Also connected were discussions about the fair treatment of whistleblowers and the effects information disclosures might have on Switzerland’s neutrality, particularly after Russia invaded Ukraine in February 2022.

Chapter 5: Swiss Financial Market Regulators and Laws focuses on two significant areas. First, it explains the mandate, scope, organizational structure, responsibilities, and functions of Switzerland’s primary financial regulator, the Financial Markets Supervisory Authority (FINMA). Even though the SNB is not a major financial regulator, it has regulatory authority and functional obligations relative to Switzerland’s financial institutions, which are also explained. The second focus of this chapter is explaining the legal basis for Switzerland’s financial system at the federal level. Having fair, transparent, and effective financial laws is crucial for ensuring Switzerland maintains its reputation as a credible, safe, and stable destination for financial investments.

Chapter 6: Swiss Institutional Investors focuses on large financial intermediaries, such as insurance companies, pension funds, real estate funds, real estate investment companies, and mutual funds that have become enormous sources of investment capital. Important in this discussion is Switzerland’s social security system and the three pillars on which it rests, which are (1) the state-run basic benefit plan, (2) the mandatory occupational pension scheme, and (3) private savings. Due to an aging Swiss population and global GDP growth, the pool of funds managed by institutional investors during the past 30 years has grown dramatically, with multi-trillions of Swiss francs invested domestically and globally. Their swift advance and sheer size have raised serious concerns about whether Switzerland’s regulators and legal framework can properly regulate institutional investors’ activities. The stakes are high because the power to invest is the power to influence (significantly) a nation’s growth and prosperity. Funds directed toward plant, equipment, and technology investments are the basis for a nation’s long-term prosperity. Switzerland’s Parliament recognized this cause-and-effect relationship when it decided, in late 2013, to support the “Graber Motion,” recommending the establishment of a fund that would allow Swiss pension funds to invest in venture capital. This chapter also covers the competitive environment facing institutional investors, which is becoming increasingly complex because financial intermediaries are crossing traditional lines in their search for new customers. Digitalization has upped the stakes significantly, increasing this new competition’s speed, efficiency, and range.

Chapter 7: Swiss National Bank & Swiss Franc’s Role in Global Financial Markets explains the many facets of Switzerland’s independent central bank. For years, it has walked a razor’s edge, trying to provide sufficient liquidity to the market on the one side and, on the other, keeping Swiss interest rates and the franc’s international value at competitive levels. This chapter covers the SNB’s mandate, goals, responsibilities, profitability, organization, monetary policy instruments, changing asset and liability structures, and strategies. In addition, it explores issues related to environmental sustainability, FinTech, financial institutions that are “too big to fail,” and digitalization (including cryptocurrencies, central bank digital currencies). Chapter 7 summarizes the SNB’s monetary targets from 1944 to July 2022. These changing targets reflect the SNB’s goals of low inflation, with an eye toward exchange rate stability. They are aided by the nation’s prohibition on the SNB lending directly to the federal government, its intent to maintain political neutrality, and Switzerland’s resolve to keep direct democracy, moderate taxes, and fiscally disciplined governments (federal, cantonal, and municipal).

Chapter 8: Swiss Debt Markets covers one of the traditionally largest segments of Switzerland’s financial market. The combination of strong foreign capital inflows, a high national saving rate, restrained government borrowing, and a relative scarcity of domestic investment opportunities has caused Switzerland to develop world-class investment and diversification skills capable of redirecting surplus funds globally. For years, Switzerland’s debt market has been slightly lopsided, tilted toward medium-to-long investments. The causes have been Switzerland’s tax disincentives (e.g., federal stamp and withholding taxes). In the future, it will be crucial for the Swiss government to consider carefully addressing this issue. Chapter 8 explains the distinguishing features and composition of Switzerland’s domestic and foreign debt markets and the most active Swiss-franc public issues.

Chapter 9: Swiss Equity Markets explains the growth and development of Switzerland’s markets for bearer shares, registered shares, participation certificates, and non-voting equity shares, particularly during the past three decades. This period is characterized by increased global competition, delisted foreign securities on Swiss exchanges, increased concentration by Switzerland’s largest companies, and the growth of structured products. Together, they have raised concerns about new risks and Switzerland’s ability to maintain its strong position relative to competitor nations. Chapter 9 covers the major types of investors, transactions (e.g., IPOs, secondary issues, and going private, which involves delisting shares), and sectors responsible for most public offerings. It also discusses listing requirements for Swiss equities, trading activities, and stock market performance (absolute and relative to foreign nations). Venture capital is given prominence because we believe it is the source (often not appreciated) of Switzerland’s ability to grow economically and stay relevant in global markets that are storming ahead.

Chapter 10: Swiss Derivative Markets describes Switzerland’s over-the-counter and exchange-traded markets for financial derivatives. Focus is put on the Swiss SIX Exchange and German-based Eurex. The US-led financial crisis from 2007 to 2009 dramatically influenced Switzerland’s derivative markets’ evolution. Chapter 10 explains the primary drivers of this growth and the major federal acts that regulate Swiss derivative activity. It highlights the most active derivatives in OTC- and exchange-traded markets. Derivatives have helped to tear down traditional walls that separated banking, insurance, and capital market transactions. Securitization has allowed customized contracts to be bundled, packaged, tranched, and sold in the capital markets as standardized financial instruments. They have allowed individuals facing credit risks to reduce risks by transferring them to those (hopefully) better suited to carry them. Plain vanilla debt instruments have been combined with puts and calls to create financial products with insurance-like features. Unfortunately, the growth of derivatives and structured products has also enabled companies with little or no risk exposures to increase them, resulting in the creation of financial products that bear no relationship to value creation.

Chapter 11: Financial Digitization, FinTech, and the Collaborative Economy addresses one of the newest and most dynamic segments of Switzerland’s financial markets. Digitalization, artificial intelligence, big data, machine learning, smart contracts, data analytics, distributed ledger technologies, robotics, biometrics, and gamification are just a few ingredients spurring the FinTech revolution and breaking up existing value chains. Open banking, open finance, and embedded finance are how these ingredients have been integrated into products and services, enabling customers to slice, dice, and customize them to satisfy the full range of their needs. The result has been innovative cross-selling opportunities, collaborations, outsourcing, mergers, and acquisitions that are changing the traditional structure of Swiss and global financial markets. Today, discussions of FinTechs, InsurTechs, and RegTechs are commonplace in business periodicals. Not only do customers of financial institutions have a new array of products and services available, but they also have the flexibility to decide when and how to access them. Chapter 11 identifies seven business model archetypes for the banking sector, four archetypes of strategic positioning, four key product areas, and three categories of technological approaches. The matrix of possible combinations and how they have changed over time provide a glimpse into the directions in which Swiss finance is moving. Switzerland’s 2021 launch of the SIX Digital Exchange (SDX), the first regulated digital exchange worldwide, is proof of the nation’s seriousness regarding this financial sector. SDX has been used to test central bank digital currencies and eNotes, which are short-term debt instruments based on a blockchain infrastructure.

Chapter 12: Swiss Taxes on Investments and Financing draws readers’ attention to the nation’s three-level tax system, federal, cantonal, and municipal, each getting about a third of the country’s total taxable income. Because cantonal and municipal taxes are such large portions of an individual’s tax bill, there can be considerable differences in the tax burden, depending on one’s residence within the country. Focus is put on the nation’s taxes affecting the finance markets:

  • Federal withholding taxes,

  • Federal and cantonal stamp duties,

  • Personal income and capital gains taxes,

  • Corporate income and capital gains taxes, and the

  • Value-added tax.

This book describes Switzerland’s financial markets as they exist today but refers again and again to the past to make the present more understandable. The main pillars of Switzerland’s financial foundation continue to be its political, social, and economic stability, high saving rate, sound infrastructure, and currency strength. Its well-functioning legal system stems directly from the nation’s democratic and federalist heritage.