The size, growth, and global importance of Swiss financial markets result from their ability to exceed the expectations of investors with primary needs, such as safety from political prosecution, currency losses, and excessive taxation. The nation’s reputation and stability have benefitted from a reliable legal system, trustworthy public institutions, and freedom from political, economic, and social uncertainty.

Financial Center Switzerland

At the center of the “Finanzplatz Schweiz” is the SIX Group, a leading financial infrastructure provider that offers a fully integrated and automated platform for electronic securities and post-trading activities. The SIX Group’s self-regulatory structure and private ownership allow it to stay at the forefront of technological developments and react decisively to fast-changing ecosystems in its four business units, exchanges, securities services, financial information, and banking services.

The SIX Group manages Switzerland’s entire securities and payment value chain. It disseminates financial information, provides reporting services, processes card-based and interbank payments, offers services for retail payments, and is breaking new ground with the world’s first end-to-end exchange for digital assets. The SIX Group competes in a global environment, where success depends on effective risk management and state-of-the-art handling of financial instruments.

These strengths form the basis for the Swiss financial industry’s value-added services, most notably in private banking. The capital-intensive infrastructure and harmonized regulatory environment enable Swiss financial institutions to compete internationally despite their home country’s diminutive geographical size. Continued success of the SIX Group is essential for Switzerland’s financial center and deserves all the political support it can gather.

Swiss Banking Secrecy

Banking secrecy is inevitably prone to misuse, and the press regularly reports financial improprieties connected to the activities of Swiss bankers. Switzerland is not the only country with bank secrecy laws. It is fair to say that all nations with developed financial markets have laws protecting bank customers’ confidentiality. The difference is that, for years, Switzerland has been one of the most steadfast enforcers of its bank secrecy laws. Like other countries, Switzerland takes a tough stand on illegal activities, such as money laundering, tax fraud, and financing terrorism. Illegal acts do not enjoy Swiss banking secrecy rights, and perpetrators are prosecuted, just as they would for any criminal offense.

Switzerland continues to be the largest administrator of private funds globally, and many of these funds still benefit from traditional Swiss banking secrecy, as do all Swiss residents. Although privacy protection remains an essential element of Switzerland’s investment offerings, the efficiency of private banking services, continued improvements of Switzerland’s value chain, and adherence to the basics of financial safety and prudence will be the most crucial factors for Switzerland’s future role in banking.

Switzerland’s banking secrecy practices have been shaped by the interplay of three major forces: the nation’s constitution, laws governing the disclosure of bank customer information, and forceful international pressure toward transparency. Switzerland has taken significant steps to exchange information with other countries automatically. Most recently, the invasion of Ukraine by Russia has led to a massive increase in cooperation among Western countries, resulting in Switzerland adopting all European sanctions against the aggressor, with interesting implications for the future of Swiss banking secrecy. It remains to be seen how Switzerland will continue to balance these trade-offs and whether the country can stay true to its heritage as a defender of privacy amidst ever-increasing international pressures.

Swiss Banking

Historically, Switzerland's universal banking system developed mainly as a service to clients, but that development changed dramatically with the acquisition of American investment banks by Swiss financial institutions. During the past three decades, these acquisitions, along with rapid movements into derivatives and securitization, have changed the institutions’ risk profiles and cultures, leading to massive losses among investment banks, also in Switzerland. Big Swiss banks had to cut their investment banking exposures and refocus their activities on their traditional strengths, chiefly global wealth management, based on a state-of-the-art market infrastructure.

More than 13 years after the US-led financial crisis hit home, some banks are still in the middle of this transition, with no end in sight. Despite this, the industry seems to have found its footing, with a diverse ecosystem of banks servicing increasing levels of healthy business activity.

Strong global trends, such as digitalization, sustainability, and recently rising inflation constantly change the banking ecosystem and its competitive landscape. Digitalization will not only lead to significant changes in how traditional banking services are provided but also introduce new kinds of assets and competitors with the ever-present need for cybersecurity. Sustainability is a global issue that cannot be solved in a small country, compounding the need for Switzerland to stay open and access international markets while doing what it can to contribute to productive solutions.

A major driver of the banking sector has been massive regulation, resulting from the financial crisis of 2008. The Basel III capital standards became effective in 2012 and were gradually implemented into Swiss law. They require banks to keep sufficient capital to back credit, market, operational, and other risks. For systemically important banks (SIBs), the standards contain additional requirements regarding capital and liquidity provisions. Many banks maintain capital and liquidity buffers substantially higher than the legal minimum.

SNB and the Swiss Franc

The Swiss franc’s solidity has made the nation’s capital markets attractive. The franc has remained strong for over a hundred years, thanks to the Swiss National Bank's independence. The combination of Switzerland’s direct democracy and the SNB’s responsible management make it highly unlikely that this precious asset will be sacrificed to the playgrounds of politicians.

For a century, the SNB has been tested by many challenges. Repeatedly, the central bank has proven its willingness and ability to design and implement innovative solutions when it mattered most and focus on its primary mandate of keeping inflation low. The COVID-19 pandemic provides an ideal example. Within just a few days, in March 2020, joint efforts of the SNB, Swiss banks, the federal government, and the FINMA resulted in a financial aid package that ensured liquidity to companies hard hit by the crisis. Their efforts helped rescue the Swiss economy.

The franc’s strength and stability have been essential to Swiss and international capital markets, but this strength has come at a cost, with the export industry feeling its brunt. The Swiss franc’s strength motivated the SNB to temporarily defend a minimum exchange rate of 1.20 Swiss francs per euro between September 2011 and January 2015. Given its special nature and small home country size, the SNB walks a razor’s edge between controlling exchange rates and the money supply. It also has an open eye toward the future, actively researching digital assets and their applicability to central banking.

Looking to the future, it remains uncertain how the SNB will handle the massive increase in its balance sheet in times of rapidly rising inflation rates. With huge foreign currency reserves, a sovereign wealth fund is being discussed to manage currency risk and effectively solve this problem. Given the track record since its foundation in 1906, there is every reason to believe the central bank will succeed in its mission to manage the currency effectively.

Financial Digitalization

Digitalization has been one of the strongest currents in Swiss financial markets, and there seems to be no end in sight for the revolutionary changes it has in store. The primary job of financial markets, to transfer information, is more efficient with digital tools, which will further revolutionize financial operations. Although financial intermediaries in Switzerland are sophisticated in digitalizing their processes, it is an open question how the digital transformation of business models will shape the future ecosystem of clients, banks, insurance companies, and non-bank service providers.

The value chains of incumbent market players will be increasingly challenged by new technologies and competitors, many of whom have non-finance backgrounds. Since around 2010, open banking has cleared the way for integrating third-party applications and outsourcing services, creating ecosystems and collaborations with technology providers, such as FinTech companies in banking and InsurTech companies in insurance.

Switzerland has been one of the very few early movers globally in providing a comprehensive and solid DLT regulation. The Swiss framework furnishes a modern financial market infrastructure, transparent rules for distributed ledger technologies, new DLT securities and trading systems, transparent processes for segregating digital assets, and rules for transacting cryptocurrencies and crypto assets. These elements are an essential basis for new business models and digital innovation, and they will fuel Switzerland’s ability to keep its cutting edge in financial services.

Debt Markets

The Swiss debt market is the largest segment of the Swiss capital market. It provides a liquid and rich universe of long-term financial instruments, profiting from a stable home currency, favorable tax treatment, and reflecting the average volatility-aversion of investors. Contrary to medium- to long-term maturities, the short-term debt market is shallow compared to other developed financial marketplaces.

While the Confederation was the largest provider of new issues on the domestic bond market until the implementation of the Debt Break in 2007, this has changed. Despite the cyclicality of public issues, the aggregate volume of federal debt since 2007 suggests that the Swiss Debt Break has been successful. Yet, as the COVID-19 pandemic demonstrated, additional expenditures are possible in extraordinary situations. Since 2008, growth in the Swiss bond market has been driven mainly by mortgage bonds and issues from banks because of a booming real estate market, based on the unique safety structure of Swiss covered bonds. After 2014, new instruments for sustainable investing have continuously enriched the Swiss bond market. Although the number of these instruments has been growing considerably, their aggregate volume is still small compared to other bond market segments.

Equity Markets

From an economic perspective, Swiss equity markets are the weakest link in the country’s financial system. From their beginning, equity markets were meant to provide economies with risk capital. But the Swiss public-equity market, as reflected by stock exchange statistics, has returned more money to investors for decades than it has raised from them. The listing of foreign shares has declined massively since 2001. Despite this, the number of trades on the Swiss equity markets has increased eightfold.

Switzerland’s equity market is still young relative to others. Deregulation, automation, consolidation, and the emergence and rapid growth of derivatives have all contributed to the development of this market into one of the world’s most efficient and integrated. While there is a risk that Switzerland’s economy will decline in relative importance, that does not mean there will be less need for the country’s financial services and know-how. Switzerland is a financial turntable whose speed and capacity to function are tied to financial leaders’ ingenuity and strategic decisions, in business and government.

Like Anglo-Saxon countries and in contrast to many others, Switzerland’s wealth is strongly invested in public equities, but this is not the case for venture capital, a critical portion of this market. It may come as a surprise to learn that foreigners finance most of Switzerland’s venture capital investments. Considering the country’s high labor costs, its ability to maintain income levels will only be possible by investing in cutting-edge technological developments. Doing so will require enormous investments in the form of risk capital. Venture capital measured relative to GDP increased from around 0.5 per mill (0.05%), on average, before 2010, to about 3 per mill (0.3%) in 2021. There are strong reasons to believe that current levels of risk-capital investments will be insufficient to boost future economic growth and provide a fertile ground for leveraging Switzerland’s excellent research output into marketable products.

Derivatives Markets

Due to their high growth rates, derivative markets have become central to today’s financial markets. There are lengthy discussions about structured products. Do they effectively provide needed services, such as hedging, access to specific products, and yield enhancement, or are they used mainly as a conduit to generate fees while simultaneously increasing systemic risks?

As a significant financial contributor to worldwide listings of derivative instruments, Switzerland has a vested interest in ensuring that these markets develop smoothly and provide necessary transparency and risk management tools, especially regarding over-the-counter (OTC) derivatives. The country’s success in this sector stems mainly from its ability to offer structured products at competitive prices.

Since 2016, derivatives trades have been regulated by the Financial Market Infrastructure Act (FinMIA). It introduced mandatory trading via specific venues, organized trading facilities, and made clearing via a central counterparty mandatory for trades not conducted at a trading venue (i.e., OTC trades). An ongoing issue in the future will be the extent to which insured or guaranteed financial institutions will be permitted to take proprietary risks using derivative instruments.

Institutional Investors

Unfortunately, funds accumulated in Swiss social security programs are invested mainly in low-risk financial assets, such as government bonds, notes, and real estate. These investments are considered to be safe in nominal terms but earn only modest returns and do little or nothing to increase the long-term value-creation of the Swiss economy. A job-creating economy needs future-oriented investments, which is why Switzerland's relatively meager venture capital investments, compared to other leading countries, are disconcerting.

Investments by Switzerland's institutional investors vary considerably. For example, pension funds hold approximately 30% of their assets in shares and an equal portion in bonds. Insurance companies have only 13% in shares and 42% in bonds. The assets of collective investment schemes, a rapidly growing institutional investor sector, allocate 34% of their assets to shares and 27% to debt instruments. Since 2005, their aggregate volume has increased by more than 10% per year. The message is clear. How these institutions invest their funds will significantly affect Switzerland's long-term economic health and vitality. Focusing inordinate attention on the volatility of a particular asset class rather than the long-term potential of a diversified portfolio of productivity-enhancing investments is a recipe for secular economic decline. Defining “safety” with the strictest and narrowest legal interpretations will accelerate the fall.

Swiss Tax System

Shaped by innumerable internal and external political pressures, Switzerland's current tax and Social Security systems are slightly tilted away from younger, growth-generating age groups in favor of their retired elders. Like many nations, Switzerland's tax laws favor debt over equity financing by allowing interest charges to be deducted from tax bills. Losses for ten years or more are typical of many innovative start-up companies. By limiting tax deductions on their losses to only seven years, Switzerland reduces the chances these companies will ever start and once started, survive the decade or more needed to bring them to fruition. Intended or not, an intergenerational transfer of assets and opportunities occurs when seeds for the future are consumed before they are planted.

For Switzerland to unharness its potential, it needs to make thoughtful reforms to its stamp tax, which has had a corrosive impact on young capital-intensive companies at the frontier of technological developments. These are the companies Switzerland should be going out of its way to encourage. They are the nation's future, and, for years, the stamp duty has driven these lucrative businesses offshore. The damage does not stop there. For more evidence, one only needs to look at euro-bond issues, once a leading business in Switzerland, and Swiss-franc bonds, which have been driven offshore by the stamp tax.

Outlook

Switzerland’s finance markets have prospered by adapting to strong internal and external forces, among which have been many counterproductive laws and regulations. To succeed in the future, Swiss capital markets need the productive support of authorities. Ultimately, it is not the capital markets that generate wealth but entrepreneurs. Those policies that reduce barriers to competition and support entrepreneurial risk-taking, ideally at the forefront of technological innovation, are the ingredients for future prosperity and high living standards. Currently, they are highly desirable, but they may soon be indispensable.