The Swiss Banking System

Abstract

Historically, Swiss banks developed mainly to export domestic savings and act as financial turntables for foreign capital inflows. The first banking law to provide federal supervision of domestic banks was the Swiss Federal Act on Banks and Savings Banks (1934). Switzerland built its financial sector on the belief that self-regulation is the most effective way to manage financial entities. Nevertheless, federal supervision has become tighter in the twentieth century, turning Switzerland’s financial system into one of the world’s most closely regulated. Among the formidable challenges facing Switzerland’s banking system are increasing digitalization, gaining access to foreign financial markets, engaging in sustainable finance, changing anti-competitive tax rules, dealing with volatile interest rates, managing systemically important financial institutions, and protecting the financial system from paradigm-changing events.

Introduction

Banks are as much a part of Switzerland’s international image as the Alps, chocolates, and watches. For centuries, their stability, competence, and discretion have attracted financial capital worth billions of Swiss francs to centers like Zurich, Geneva, Basel, and Lugano. Although instrumental in facilitating Switzerland’s early economic growth, pre-industrial Swiss banks developed mainly to export domestic savings and act as financial turntables for foreign capital inflows. Switzerland imported foreign capital in this turntable capacity and then exported it to finance projects in foreign countries.

Since the sixteenth century, Switzerland has had a surplus of investable funds, primarily due to its relative lack of domestic demand for real capital investments, a high saving rate, and significant inflows of foreign financial capital. Therefore, expertise in attracting funds and investing them in foreign projects became imperative. Private banks arose to manage the surplus of investable capital. During the seventeenth century, Geneva’s private banks financed much of the French court’s capital needs. Beginning around 1730, ongoing capital exports required the development of a much broader array of financial institutions.

The structure of Switzerland’s banking system, as it exists today, was created in the mid-nineteenth century, mainly between 1850 and 1880, reaching its peak in 1889. Consolidation occurred throughout the twentieth century and has continued into the twenty-first century, with Credit Suisse and UBS¹ accounting for a substantial portion of the acquisitions.

The first banking law to provide federal supervision of domestic banks was the Swiss Federal Act on Banks and Savings Banks (Banking Act, BA),² passed in 1934. It was the byproduct of multiple political, social, and economic forces, such as instability in surrounding European countries after World War I , the rise of Adolf Hitler and his National Socialist Party , excessive risks taken during the 1920s by Switzerland’s major banks, the Swiss Supreme Court’s sequestration decision, and a catastrophic reduction in global trade due to the Great Depression .³

The BA was also significant because it established federal laws protecting confidential customer information in banks (the so-called banking secrecy laws) at a time of intensifying Nazi espionage and threatened violators with imprisonment or hefty fines.⁴ Previously, general privacy rights were protected by the Federal Constitution , scattered and inconsistent cantonal regulations , domestic civil and commercial codes, and the determination of banks under Swiss law to provide confidentiality protections to their customers. Federal protection for confidential customer information residing in banks did not exist.

Switzerland built its financial sector on the belief that self-regulation is the most effective and efficient way to manage and control banks and related financial entities. Nevertheless, federal supervision has become tighter during the twenty-first century, turning Switzerland’s financial system into one of the world’s most closely regulated. Relatively recent economic and financial disruptions, such as the US-subprime mortgage collapse, which led to the “Great Recession” (2007–2009) and European debt crises (2008–2012⁺), incentivized Switzerland to pass and enforce stricter regulations and coordinate its efforts with foreign nations to avoid adverse spillover effects.

This chapter starts by focusing on Switzerland’s financial industry, in general, and the nation’s banking system, in particular. It looks at the formidable challenges Switzerland’s financial system has faced recently and is likely to face in the foreseeable future. Swiss banks’ margins have fallen due to low (or negative) interest rates, costly new reporting requirements, more stringent equity and liquidity requirements, and a strong franc. Looking to the future, there are other noteworthy challenges likely to continue, such as:

• Competing in increasingly digitalized markets, which will require financial institutions to navigate an assortment of interrelated issues, such as cybersecurity, FinTech competition, open banking, including open finance and embedded finance, and digital money, including blockchain banking, cryptocurrencies, and central bank digital currencies. New technologies and methods, like blockchain-based distributed ledger technology (DLT) platforms,⁵ directed acrylic graphs, distributed hash tables, and hash graphs, could change the way financial business is conducted;

• Gaining and maintaining access to foreign financial markets and managing rising regulatory costs, which will require the Swiss government and central bank to adapt their financial rules and regulations to those of other countries and international standards;

• Engaging in sustainable finance, which will compel Swiss financial institutions and their customers to understand the tradeoffs among environmental, social, and governmental (ESG) investments;

• Changing tax rules to make Switzerland globally competitive, which will mean taking a close look at the nation’s stamp and withholding taxes, as well as having the federal government and cantons react wisely to the Organization for Economic Co-operation and Development (OECD)/G20’s efforts to enact a global minimum tax⁶;

• Navigating volatile interest rates, which will require measured responses to changes in real interest rates and expected inflation;

• Ensuring the safety of systemically important financial institutions (SIFIs), and

• Protecting the financial system from paradigm-changing events, such as pandemics, wars, the failure of one or more SIFIs, or a military invasion, any one of which could disrupt supply chains and reorient global priorities.

This chapter ends by focusing on the characteristics of Switzerland’s banking system, such as:

• The value added to the nation’s economy (measured in Swiss francs),

• On- and off-balance-sheet profitability,

• Growth in assets during the past three decades,

• Rivalry and conventions,

• The universal banking system,

• Deposit insurance,

• Banking structure,

• Sources of profitability,

• Size relative to other major countries,

• Level of internationalization, and

• Major banking sectors.

Significant Challenges Facing Swiss Banks

Switzerland has established its identity as a leading global financial center, but the nation’s continued success will be based on its ability to exploit opportunities in the following areas.

Competing in Increasingly Digitalized Markets

“Digitalization” encompasses a broad spectrum of issues, including cybersecurity, FinTech competition, open banking, and digital money.

Cybersecurity

Cybercriminals have accentuated the need for all businesses, particularly financial institutions, to have adequate computer security systems to protect sensitive customer information and internal company records. Annual losses to businesses are estimated in billions of Swiss francs.⁷ Relatively recent technologies, such as 5G and quantum computing , have increased the speed with which cyberattacks can take place. At the same time, the Internet of Things (IoT)⁸ has dramatically broadened the surface area for attackers by creating new passageways and back alleys to confidential records.

Cyber terms, such as botnets, crypto-jacking, denial of service, malware, phishing, ransomware, social engineering, spyware, viruses, and worms, have become familiar to the information technology departments of virtually all companies, particularly to financial intermediaries and their cybersecurity departments.⁹ Table 3.1 defines these terms.

Table 3.1 Description of digitalization terms

Cyberattacks can disrupt supply chains, threaten day-to-day operations, and create reputational damages that might take years or decades to erase. They can cause substantial physical and financial damages, just like armored tanks, fighter planes, incendiary bombs, and automatic firearms.¹⁰ By taking control of plants, contaminating water supplies, degrading utility and sewage systems, and leaving hospitals incapacitated, cyberattacks can disable a nation’s central financial and production arteries and veins.

The United Nations (UN) has studied this issue, looking for an international approach to cyber-threats.¹¹ The Swiss Bankers Association (SBA) has joined the effort to fight this growing menace, emphasizing the need for federal support, such as through the National Strategy for the Protection of Switzerland against Cyber Risks (NCS).¹² It has recommended community-wide measures that¹³:

• Create a “Competence Center for Security,” unifying private efforts to combat cybercrime;

• Create a “Crisis Organization,” increasing Swiss banks’ cyber-resilience by generating realistic cyber-scenarios and finding ways to combat them;

• Increase user sensitivity to potential cyberattacks;

• Use cybersecurity specialists to educate the Swiss population of all ages and education levels, such as secondary schools, vocational schools, universities, colleges, and continuing education, and

• Promote collaboration within the Swiss financial community.

The cyber defense tactics used by financial institutions in the past are unlikely to protect confidential information in the future, as hackers find it easier to access and decode programs. Quantum computing, which has increased computational speeds significantly, is paving the way for malicious outsiders to access private data. Old cybersecurity strategies relied on erecting higher and wider cyber walls to defend against attacks. The new wave uses internal digital defenses to attack and neutralize computer viruses—in much the same way the human immune system uses antibodies to attack and neutralize viruses.

Insurance companies, like Swiss Re and Zurich Insurance Group, now offer fully-integrated cybersecurity, risk management, and insurance solutions, including risk evaluation and measurement, to defend against cyberattacks. Insurance solutions range from traditional commercial insurance to highly customized forms of protection that cover system and data recovery, customer claims for damages, business interruption, fraud, and theft.¹⁴

FinTech Competition

“FinTech” is an abbreviation for “financial technology.” The term is used rather broadly to describe high-tech advances that:

• Adapt, improve, or automate the speed and efficiency of financial services;

• Expand the accessibility of financial services (e.g., reach out to unbanked groups within a country);

• Enhance interoperability between and among financial services, or

• Lower transaction risks and costs.

In Switzerland, the FinTech industry has expanded rapidly, with newly developed software and mobile applications that range from simple payment apps, crowd-funding, crowd-lending, and robo-advice to highly complex DLT platforms. It is unlikely that FinTech companies will displace banks any time soon. Nevertheless, as competitive pressures from these companies intensify in the coming years, Swiss financial intermediaries will face continuing pressure to “use it or lose it.”

During the past decade, Switzerland has become a world leader in domestic-oriented and internationally oriented DLT-based and cryptocurrency-based applications. In 2022, there were nearly 400 FinTech companies in Switzerland, with about a third of them active in DLT-related projects. “Crypto Valley,” in Zug which lies in Central Switzerland, and the region around Geneva are global front-runners in developing digital technologies. Singapore, London, Amsterdam, Toronto, New York City, San Francisco, and Hong Kong are strong competitors.¹⁵

Growth in FinTech activities has brought concerns about how to regulate them. Swiss FinTech companies are not permitted to pay interest on, invest, or comingle customer funds with their own.¹⁶ They must (1) obey Anti-Money Laundering Act (AMLA) rules, (2) restrict the financial services they can offer, (3) limit the corporate forms they can take, and (4) comply with prudent risk -management rules.

The nation’s universal banking system, incubators, and accelerators have provided FinTech companies with a user-friendly environment to start and grow.¹⁷ FinTech licenses are intentionally less stringent than bank licenses. On January 1, 2019, Switzerland amended the BA, requiring FinTech licenses for companies with total deposits exceeding CHF 100 million and accepting deposits greater than CHF 1 million. These companies are neither regulated by the Swiss Financial Market Supervisory Authority (FINMA) nor required to obey Swiss banks’ capital adequacy requirements . Instead, FinTech companies must have equity , in acceptable form, equal to at least CHF 300,000 or 3% of their deposit liabilities .

In general, the FINMA’s regulatory approach to them has been “technology-neutral” to reduce obstacles to the birth, growth, and development of innovative companies.¹⁸ To this end, the FINMA has expressed its willingness to provide pre-launch FinTech businesses with case-by-case advice on an array of topics, such as business models using digital assets or tokens ,¹⁹ initial coin offerings,²⁰ stablecoins , and blockchain technology. It has also offered guidance on rules and legal interpretations. This hands-off approach is noteworthy because FinTech customers face more significant risks than their bank counterparts, whose deposits are prioritized and insured by Switzerland’s depositor protection scheme.²¹

Among the relatively recent FinTech developments are:

• In August 2019, the FINMA granted banking and security dealers’ licenses to SEBA Crypto AG and Sygnum Bank AG, two start-up blockchain service providers;

• In September 2020, Switzerland’s Parliament passed the Law on Distributed Ledger Technology (DLT-Law), which introduced “DLT-Securities” under the Swiss Code of Obligations (1911), allowing the tokenization of rights, claims, and financial instruments;

• In February 2021, ledger-based securities began;

• In August 2021, the Swiss Federal Council enacted the remaining provisions of the DLT Law, and Switzerland introduced a new stand-alone license under the Financial Market Infrastructure Act (FinMIA), called the “DLT Trading Facilities License,” to accommodate firms’ trading and post-trading activities in standardized, uncertificated DLT securities²²; and

• In September 2021, the FINMA approved the world’s first independent DLT-based stock exchange²³ and the first Swiss crypto fund (Crypto Finance).²⁴

Open Banking

“Open banking” allows regulated third-party providers to access an individual’s account data (e.g., name, account type, and transactions), product data (e.g., products and services offered by a financial institution), and payment information (e.g., to whom and where funds should be transferred). Access is permitted only with customers’ consent, and consent can be withdrawn at any time.²⁵ Consistent with Switzerland’s original (i.e., 1934) banking secrecy rules, open banking is based on the belief that ownership and control of financial information created by and for customers should belong to customers.²⁶ Therefore, open banking is a movement toward customized and integrated financial service development.

Switzerland has a market-driven approach to information sharing, which means there are (currently) no specific legal or regulatory barriers or requirements. Banks can decide with whom they wish to work and the interfaces they want to make. As a result, bank and third-party provider relations are based already on open market forces.

Examples of open banking services are

• Apps that allow “smart onboarding” for quick account and customer identity verification, auto-filling forms, income verification, and credit checks;

• Payment products that improve cash flows, lower costs, increase visibility, and reduce fraud, such as finance dashboards, auto-saving identity details, and smart budgeting²⁷;

• Access to more complete and accurate credit histories;

• Financial and cash management evaluations;

• Apps that aggregate bank accounts; and

• Online payments (domestic and international) that are quicker, less complex, and more secure.

Open banking can be viewed as entry-level access to a financial hierarchy that includes “open finance” and “embedded finance,” each at a higher level of integration than the preceding one. Big-tech companies, such as Amazon, Apple, Facebook, and Google, have entered this competitive environment by incentivizing customers to use novel payment alternatives, such as Apple Inc., which combines “Apple Pay” with the company’s “Buy Now, Pay Later” service.

Open Finance

Open finance extends open banking into other finance lines, such as insurance, investments, mortgages, pension funds, and FinTech. Customer information and data are shared (securely) among a broad array of financial institutions, matching customer needs with innovative products and services. If successful, open finance will encourage innovation, competition, and product customization. Open finance liberates financial service providers from self-developing every link in their product chains. Instead, they can use application programming interfaces (APIs) to connect their computer systems to external vendors that offer the desired finance services more efficiently or effectively.

One way to understand open finance is to picture a stack of boxes, each representing a different financial service and provider. From the pile, individuals and businesses can mix and match the services and providers they want, resulting in customized financial packages. One set of boxes in this stack of financial alternatives might be for “core services,” such as payment processing and consultancy. A second set might be for “mezzanine services,” such as foreign exchange, cross-border transfers, and compliance. Finally, another set might include “broader services,” including cryptocurrencies, digital wallets, customer identity, credit rating, and lending. Ideally, customers could have the exact combination of services and providers that best fits their needs.

Open finance holds a promise to accelerate the speed of new services to market and lower costs by moving away from the “do-it-yourself” (DIY) mentality. With open finance, legacy financial companies and new-to-the-market FinTechs could tap alternative revenue sources, access new customer segments, modernize their value chains, and create innovative products and processes.

Embedded Finance

Embedded finance is the most integrated and sophisticated level of the “open-banking” trinity because it makes financial service applications available to any business, network, or industry. Product and service providers could rent or lease financial services from the companies of their choice, using APIs to link their computer systems. Doing so would allow these companies to build financial services into their product offerings and brands without the associated research, development, maintenance, licensing, and compliance costs, resulting in stronger customer loyalty, new revenue streams, and access to broader and deeper customer data. The European Union (EU), via its Payment Services Directive 2 (PSD2) rules, and the United Kingdom (UK), via its British Open Banking Initiative, have already moved considerable distances toward open banking, open finance, and embedded finance.²⁸

Keys to Success

The success of open banking, open finance, and embedded finance rests on three central pillars:

• 1. The development of APIs that enable computers to communicate with each other,

• 2. Rock-solid authentication procedures, and

• 3. Competent service providers.

Customer consent is needed for third-party providers to access customers’ financial information. For that, trusted and secure APIs will be required.²⁹ Success will also require strong security and fraud prevention systems. “Strong Customer Authentication ” (SCA) has become a common term, denoting the need for reliable ways to ensure that access to data, information, and funds is restricted to authorized customers and no one else. An often-used security method is two-factor authentication (2FA), which requires customers to identify themselves with their usernames and passwords and a second layer of identification related to one or more of the following:

• Knowledge of a personal secret, such as mother’s maiden name or pin,

• Verification via something owned, such as a smartphone, or

• Physical proof, such as a fingerprint or retinal scan.

Finally, service and product providers will need proof that they can deliver on their service agreements and not threaten the broader financial community. Switzerland’s financial sector is now among the most heavily regulated in the world, highlighting the need to find reliable and scalable means (private and public) to certify competence. Doing so will require proof of interconnectivity and confidentiality and an ability to embed APIs where desired (and nowhere else), ensuring that the new competitive paths and highways do not lead to anti-competitive concentration levels.

Risks

There are potential risks associated with open banking, open finance, and embedded finance. One of them relates to transition costs. How long will it take customers to become skilled buyers, and what might be the possible costs? Other concerns center on the potential for large suppliers to dominate the market via unequal access to information, acquisitions, and price discrimination. Misuse of data, increasing financial crimes, unauthorized access to confidential information, and sharing inaccurate information are also significant concerns.³⁰

Digital Money

Digital currencies could be a financial game-changer because they have the potential to offer secure, instant, cross-border, multi-currency payments that can be programmed by smart contracts to execute transactions without human intervention. In 2022, there were more than 18,000 different digital currencies,³¹ with the most familiar ones being Bitcoin (BTC), Ripple (XRP), Ethereum (ETH), Tether (USDT), and Binance Coin (BNB).

Due to their growing use, Swiss banks need flexible strategies to meet digital currencies’ ever-changing competitive challenges. They must understand if and how this new competitive arena will encourage more intense government and central bank involvement. Paramount will be establishing customer trust and being an active part of a cultural change that will accompany the transition from using fiat currencies and financial intermediaries, as we have known them, into their digital counterparts.

Crypto-Banking

Switzerland’s financial institutions are confronted with questions about if or how they should be involved in crypto-banking. They realize that diving in too quickly could victimize them with unforeseen risks, but holding back and waiting could open a gap that will be difficult to close in the future. First and foremost, banks must prioritize their ability to transact efficient payments because payments are their main interaction points with customers. If digital currencies break or weaken that link, the future could differ significantly from the past. Digital currencies can securely, efficiently, and cost-effectively transfer funds within and between nations and currency areas. To compete, banks might offer their own digital currency services or introduce financial payment amenities with attributes not provided by digital currencies (e.g., simplifying transactions).

Cryptocurrencies

With cryptocurrencies, payment counterparties can circumvent financial intermediaries. Therefore, their proliferation poses an existential challenge to Swiss financial institutions. Currently, the Swiss National Bank (SNB) perceives unbacked cryptocurrencies, such as bitcoin and ether, as minor threats to Switzerland’s financial system and monetary policies because they are not used widely as units of account or mediums of exchange, and price volatility makes them unreliable stores of value. Nevertheless, as a sign of the times, beginning in February 2021, the Canton Zug, in collaboration with Bitcoin Suisse, began accepting cryptocurrency payments in bitcoin or ether for tax payments.³²

Stablecoins are pegged to official currencies, such as the US dollar or euro. Therefore, they are tied to the monetary policies of the respective currencies’ central banks. Because a stablecoin is not a claim against any central bank, its credibility is connected directly to the trustworthiness of the issuer.³³ A large part of the SNB’s uneasiness is focused on stablecoins that are tied to one-or-more foreign currencies because large currency inflows and outflows could affect the Swiss franc’s international value and pressure the central bank into undesired foreign-exchange-market interventions. Stablecoins linked to the Swiss franc are not perceived as threatening because the SNB has significant control over domestic monetary policies, which can be used to influence unwanted changes in interest, wage, and inflation rates. Nevertheless, as more global transactions are conducted peer-to-peer with cryptocurrencies rather than with fiat currencies using traditional financial intermediaries, Swiss financial institutions and regulators will need to develop strategies that will allow them to coexist with or directly compete against them.

Central Bank Digital Currencies

The SNB has studied the potential costs and benefits of novel cashless payment systems for years. Along with its independent efforts, the SNB has cooperated with the Bank for International Settlements (BIS) Innovation Hub,³⁴ private banks (e.g., Citibank , Credit Suisse , Goldman Sachs , Hypothekarbank Lenzburg , Natixis , and UBS ), central banks (e.g., Banque de France ), law firms, and technology companies (e.g., Accenture and R3 ).³⁵

One of the SNB’s roles is to remain attentive to financial innovations that could improve monetary policy effectiveness and payment safety and efficiency.³⁶ Therefore, central bank digital currencies (CBDCs) have come into the cross-hairs of the SNB’s interest. In Chapter 7: Swiss National Bank & Swiss Franc’s Role in Global Financial Markets, the section entitled “A Central Bank Digital Currency for Switzerland?” discusses the potential risks and benefits of CBDCs. It covers the similarities and differences between retail CBDCs (r-CBDCs) and wholesale CBDCs (w-CBDCs), account-based and value-based CBDCs , and interest-earning and non-interest-earning CBDCs. In brief:

• A retail CBDC (r-CBDC) allows access to the general public, which would permit individuals, households, and businesses to have checking accounts directly at the SNB;

• A wholesale CBDC (w-CBDC) restricts access to approved participants, such as banks and financial institutions that conduct large volume transactions, such as security trading, settlement, and management.³⁷

• An account-based CBDC allows individuals, businesses, and financial institutions to have deposit accounts directly at the central bank or indirectly, via digital central bank accounts, at commercial banks. Because these deposits would be connected directly to the depositor, the owner of account-based CBDCs would be known (i.e., they would not be anonymous or pseudonymous).

• A value-based CBDC allows users to transact directly, without the need for the central bank or any other financial intermediary. Rather than debiting and crediting users’ accounts, digital tokens³⁸ (i.e., value-based CBDCs ) would be transferred directly using devices, such as smartphones, computers, and tablets, to access e-wallets on a blockchain or other platform. In contrast to an account-based CBDC , a value-based CBDC could be designed to provide depositor anonymity or pseudonymity.

In March 2018, the Wermuth Postulate was submitted to Switzerland’s National Council, seeking a report on the advantages and disadvantages of a Swiss-franc-denominated r-CBDC. A report was published in December 2019.³⁹ In January 2020, the SNB joined with the Bank of Canada , Bank of England , Bank of Japan , European Central Bank (ECB), Sveriges Riksbank (Bank of Sweden ), and BIS Innovation Hub to study r-CBDCs’ advantages, disadvantages, and risks .⁴⁰ The group’s goal was to assess r-CBDCs’ uses in terms of “economic, functional and technical design choices, including cross-border interoperability ; and the sharing of knowledge on emerging technologies.”⁴¹ Its ground rules were simple:

• “Do no harm to the existing level of monetary and financial stability;”

• “Coexist with cash and other types of money in a flexible and innovative payment ecosystem,” and

• “Promote broader innovation and efficiency.”⁴²

Given the range of alternatives, the SNB concluded that an r-CBDC would pose the greatest threat to Swiss financial institutions because it would put the SNB in direct competition with them. Proponents believe that r-CBDCs hold the potential to make Switzerland’s payment and security-settlement system more efficient and safer by eliminating liquidity risks and counterparty default risks. Using a DLT platform, r-CBDCs could:

• 1. Create an immutable and transparent shared ledger of asset information, transactions, and ownership;

• 2. Enable operations 24 hours a day, seven days a week, and

• 3. Provide platforms for smart (i.e., self-executing) financial contracts.⁴³

An r-CBDC could offer Swiss-based and foreign-based users of Swiss francs access to broader and deeper markets with greater interoperability. If successful, an account-based CBDC could be more stable and resistant than Switzerland’s fiat-based system. It could also encourage wider involvement by serving more distant domestic and international markets and tapping into more diverse individuals and groups.

At issue is if the potential risk-adjusted benefits of CBDCs exceed risk-adjusted costs. Among the potential costs are:

• 1. Increased financial market and settlement complexity,

• 2. Legal, governance, and control obstacles, and

• 3. Interoperability problems—especially at the international level.

SNB studies have shown that a Swiss franc-denominated r-CBDC “would bring no additional benefits for Switzerland. Instead, it would give rise to new risks, especially concerning financial stability.”⁴⁴ More specifically, the SNB’s position is that an r-CBDC would not:

• 1. Make the Swiss financial system more efficient,

• 2. Result in more effective monetary policies,

• 3. Provide Switzerland’s financial system with greater stability, or

• 4. Reduce the financial crime rate (e.g., money laundering, tax evasion, and terrorist financing).

In contrast to r-CBDCs, the SNB has a more positive view of w-CBDCs. A w-CBDC would remove the SNB as a direct competitor with Swiss financial intermediaries, reducing some of the threats they might face.

Gaining Access to International Markets

After the 2008–2009 financial crisis, Swiss regulators sought to increase the nation’s exports of financial products and services and strengthen its competitiveness as a global financial center. One way of doing so was by homogenizing and updating the rules for comparable financial product offerings and providing greater customer protections. For these reasons, the Swiss Federal Parliament passed, on June 15, 2018, the Financial Services Act (FinSA)⁴⁵ and Financial Institutions Act (FinIA),⁴⁶ both of which were enacted by the Federal Council on November 6, 2019, and came into force, together with the implementation provisions , on January 1, 2020. A two-year transition period was given for full employment.⁴⁷

For years, Switzerland has tried to secure, expand, and institutionalize its bilateral relationships with the EU and the UK. Since the 2016 Brexit referendum, its negotiations have become more complicated because Switzerland must deal with the UK independently from the EU.

Cooperating with Foreign Countries and International Organizations

To continue as an international financial hub, Switzerland will need to adjust its financial rules, regulations, and standards to those of foreign nations, economic unions, and supra-national organizations, such as the Financial Stability Board (FSB)⁴⁸ and BIS .

Switzerland—UK Negotiations

On June 30, 2020, Switzerland and the UK signed the Joint Statement between the Federal Department of Finance and Her Majesty’s Treasury on Deepening Cooperation in Financial Services. Its goal was to liberalize and expand market access for both nations in the financial services area.⁴⁹ In February 2021, the UK recognized the equivalence of Switzerland’s stock exchange regulations .⁵⁰ Clearly, Brexit has made Switzerland more cognizant of the value in having an agreement focusing on the institutional framework, but it has also strengthened the opinions of opponents, who see the Brexit strategy as a paradigm for Switzerland.

Switzerland—EU Negotiations

The Markets in Financial Instruments Directive II (MiFID II) and the Markets in Financial Instruments (MiFIR) entered into force on January 3, 2018. They were significant steps toward unifying the EU’s capital markets and protecting investors’ rights. Access to EU financial markets requires the rules and regulations of non-EU nations to be equivalent to EU standards, which is why Switzerland’s FinMIA and FinSA are so closely paralleled MiFID II and MiFIR.

One area where equivalence has been (and will continue to be) important is protecting bank customer data. In September 2020, Switzerland’s National Council and Council of States passed a revised version of the 1992 Federal Act on Data Protection (FADP). The revision made Switzerland consistent with the Council of Europe’s Convention 108 on the Protection of Individuals with Regard to Automatic Processing on Personal Data⁵¹ and with the EU’s General Data Protection Regulation .⁵² This Act and its related ordinance (as yet unissued) are expected to come into force on September 1, 2023.

On May 26, 2021, Switzerland ended its bilateral discussions with the EU on the Institutional Framework Agreement (InstA) when the Swiss government refused to sign and withdrew from negotiations. InstA was intended to safeguard, strengthen, and expand Switzerland’s existing bilateral access agreements with the EU. There was hope it would streamline, consolidate, and reduce complicated inefficiencies that came with the need to update multiple bilateral agreements periodically. After Swiss voters rejected membership in the European Economic Area (EEA) in 1992, the two sides negotiated more than 120 bilateral market-access agreements covering many trade and cooperation issues. InstA would have put these bilateral relationships on a more institutional basis, which was particularly important to Switzerland’s cross-border wealth management services. The SBA reported that the nation’s banks “manage assets totaling around CHF 1,000 billion belonging to clients from the EU, generating tax income of approximately CHF 1.5 billion per year and employing almost 20,000 people (FTE) in Switzerland.”⁵³

An agreement could not be reached on three significant issues:

• 1. Acceptance of the EU’s Citizens’ Rights Directive (CRD),

• 2. Guaranteed protection of Switzerland’s relatively high wages, and

• 3. The EU’s state aid provisions, which ran afoul of Swiss cantonal laws.⁵⁴

Furthermore, InstA would have established a dispute settlement mechanism, requiring both parties to refer disagreements to an arbitration panel and to allow the European Court of Justice (ECJ) to settle all issues involving interpretations of EU law. Regarding the CRD, the agreement did not resolve Switzerland’s concerns about the free movement of persons, in general, and their effects on Swiss social security costs, in particular.⁵⁵ These issues split Switzerland politically, with unions fearful of wage compression, conservative politicians concerned about the EU’s powers, and businesses having reservations about the long-term economic effects. Opponents viewed InstA’s provisions as potential threats to Switzerland’s national sovereignty and direct democracy . Acceptance also breached the nation’s preference for settlement on a case-by-case basis (the status quo) and reinforced Swiss resistance to EU or EEA membership. Proponents viewed the agreement as a way to strengthen Switzerland’s relations with its most important trade partner and encourage a future source of economic and financial growth.

InstA negotiations between Switzerland and the EU began in 2014, so stopping talks in 2021 was problematic. Assuming the EU was not posturing for advantages in future meetings, the agreement’s failure terminated any new market access agreements between the EU and Switzerland, and it derailed revisions to existing agreements, such as new medical and machinery certifications, weaker electricity security, and reductions in Swiss researchers’ access to Horizon Europe.⁵⁶

Complying with the Automatic (International) Exchange of Customer Information Rules

Chapter 4: Swiss Bank (Customer) Secrecy & the International Exchange of Information provides a detailed explanation of Switzerland’s obligations to automatically exchange confidential bank customer information with the tax authorities of foreign nations. On January 1, 2017, Switzerland implemented the Automatic Exchange of Information (AEOI), based on the OECD’s Common Reporting Standards (CRS). The first actual exchange of information occurred in September 2018.⁵⁷ Switzerland’s bank (customer) secrecy history is fascinating because an individual’s right to confidentiality is firmly embedded in the nation’s Constitution (Article 28). This right is also strongly reinforced by Article 28 of the Swiss Civil Code ,⁵⁸ the FADP,⁵⁹ and the Swiss Criminal Code (SCC), which enables individuals to fight defamation, libel, slander, and the unauthorized recordings of private conversations and wiretapping. In 2020, FADP was revised to⁶⁰:

• Provide stronger sanctions for intentional violations, with fines up to CHF 250,000;

• Increase the powers of Switzerland’s Federal Data Protection and Information Commissioner (FDPIC);

• Expand information obligations, such as the requirement to inform individuals each time their confidential information (not just particularly sensitive information) is released;

• Mandate a data protection impact assessment if its processing posed high risks to the personal rights of individuals;

• Regulate personal profiling;

• Expand the scope of protected information to genetic and biometric data;

• Mandate the creation of a data processing directory;

• Protect only the private data of natural persons and not legal entities, as was previously the case;

• Require companies to design data protection into the company systems from the early planning and design stages; and

• Require rapid reports to the FDPIC on any high-risk security breaches, regardless of whether they are accidental or illegal or involve the destruction, deletion, or alteration of confidential information.

Bank customers’ right to privacy became a Swiss federal law in 1934 when the BA made unauthorized information disclosures punishable by imprisonment or fine. Before that, Switzerland’s Constitution, cantonal laws (civil, commercial, and criminal), and internal bank procedures were the primary sources of protection. Further protection was offered in sensitive industries, such as health care, pharmaceuticals, energy, telecommunications, and finance. Exceptions to these confidentiality rules evolved to deter or prevent illegal financial behavior, such as tax fraud, tax evasion, criminal mismanagement, insider trading, financing terrorism, unlawful association, money laundering, bribery, corruption, and market or price manipulation.⁶¹

The international exchange of information has moved Switzerland from bilateral double taxation treaties to multilateral agreements that provide for automatic exchanges of bank customer information. Today, Swiss banks adhere to the SBA’s “know-your-customer rules”⁶² to prevent financial crime . In March 2021, the nation enacted anti-money-laundering legislation.

Swiss financial institutions must sort, report, monitor, evaluate, retain, and audit the identities of foreign contractual parties, controlling persons, and beneficial owners. They must also report individuals’ addresses, countries of residence, tax identification numbers, reporting institutions, account balances, and capital income. Doing so has prompted these financial institutions to build sophisticated and costly back-office infrastructures. Banks have been required to develop criteria for recording, limiting, and supervising the legal and reputational risks related to money laundering and terrorist financing. Furthermore, they must report customers perceived to be associated with a crime or qualified tax offense and identify risk categories for money laundering, focusing particular attention on high-risk groups, such as customers from corruption-prone or politically unstable countries.

Even though time and experience have given banks a better understanding of their responsibilities, confusion has put them in precarious, uncertain, and sometimes conflicting positions. For example, when is the disclosure of customer information “illegal?” When are bank employees “entitled” to report it? When is it a “duty” for them to report? When do bank employees have reasonable grounds to report customer activities? The BA made it a crime for bank employees to divulge confidential bank customer information, but the AMLA made it a “duty” for employees to report their suspicions of money laundering when there were “reasonable grounds” to suspect that a customer’s assets were related to criminal or terrorist activities. The SCC “entitled” bank employees to report suspicious activities as long as they were “serious” and based on “observations” that the assets originated from a felony or an aggravated tax misdemeanor in terms of Article 305^bis in the SCC.⁶³

Engaging in Sustainable Finance

Environmental, social, and governance (ESG) issues (also called sustainability issues) have become prominent in the financial industry since the mid-2010s due to their potential opportunities and risks. Social concerns about climate change, social inequality, and corporate misconduct have led investors, regulators, and rating agencies to look seriously at ways to redirect financial capital flows toward environmentally friendly and sustainable investments.⁶⁴ The Paris Climate Protection Agreement , United Nations’ 2030 Agenda for Sustainable Development , and EU Sustainable Finance Action Plan are just three examples of global actions to direct capital flows toward sustainable investments . International organizations, such as the BIS , ECB , and European Banking Authority, have supported this effort with insightful analyses.

The possibility that ESG might transform global finance has led politicians, central bankers, and financial regulators to consider how best to deal with these issues. Financial institutions worldwide are developing strategies to identify risks and price them into an increasingly uncertain future. Because ESG problems, such as climate change, are medium-to-long-term challenges, financial institutions’ planning must be the same, weaving ESG into their risk-management strategies, business and scenario plans, and internal control systems. The changes brought on by ESG could affect financial institutions’ entire stakeholder value chains, including customers, suppliers, outsourced vendors, and employees. Potential reputational damage, customer defaults, asset impairment, disclosure considerations, external reporting requirements, and compliance costs are all in the mix of concerns. ESG considerations could become a standard part of loan due diligence and follow-up for banks. Similarly, the possibility that many companies in the same industry might fail at once will provide a new dimension to financial institutions’ concentration, exposure, and stress-testing analyses.

Despite the enthusiasm surrounding ESG, critics argue that⁶⁵:

• There is no firm evidence that ESG efforts have had a significant positive impact relative to what would have happened in their absence; in short, ESG is just a “marketing ploy”;

• Data on ESG investments are unregulated and therefore unreliable and incomplete (e.g., companies raising their ratings by outsourcing ESG-unfriendly activities or selling them to a different owner, who behaves the same);

• The lack of transparency and control allows green investment funds to be siphoned into other areas;

• Unclear standards and inconsistent methodologies make company ratings subjective and capricious;

• Much of the ESG enthusiasm comes from fund managers and investment companies that earn relatively high fees from them; and

• ESG problems require long-term solutions but investors in need of short-term profits have much shorter time horizons.

Ultimately, ESG efforts will be successful only if they bring new capital to companies that offer environmentally friendly, sustainable, and governance-enhancing solutions. For socially conscious investors, this will require more accurate ESG disclosures to identify companies that are leaders and laggards. Significant progress might also come from unbundling “E” from “S” from “G” because solutions to problems such as climate change, pollution, waste, natural resource scarcity, income inequality, the distribution of voting rights, information disclosures, accounting accuracy and transparency, gender diversify and equity, employee grievance policies, and regulatory compliance are so meaningfully different. Separation would enable investors to identify, for example, companies making progress on “E” but not so much on “S” and “G.”⁶⁶

Switzerland and ESG

Since 2018, the SBA has made “sustainable finance” one of its strategic priorities, with the hope that the nation’s political, financial, and social systems will work together to make Switzerland an international hub for this rapidly rising financial sector.⁶⁷ Swiss banks are integrating ESG guidelines into their business strategies , operations, and lending practices, as the world turns its attention toward sustainability funds , green bonds , impact investments, active shareholder engagement, micro-finance, sustainability bonds, and transition bonds.⁶⁸ Swiss regulators have also taken notice. For example, the FINMA requires financial institutions to identify, describe, and assess climate-related financial risks and the managerial and strategic measures to deal with them. Switzerland’s disclosure requirements conform increasingly to internationally accepted recommendations of the G20—FSB Task Force on Climate-Related Financial Disclosures (TCFD ).

ESG guidelines and practices are not new to Switzerland. The nation has been issuing sustainable financial instruments since the 1980s. Its first sustainable investment management company was established during the 1990s.⁶⁹ Since then, Switzerland has become a global leader in creating and marketing sustainable financial instruments .⁷⁰ The nation supports the implementation of the United Nations’ 2030 Agenda for Sustainable Development ⁷¹ and the UN Framework Convention on Climate Change (Paris Agreement).⁷² Switzerland also works and coordinates with national and international organizations and agreements, such as the G20-FSB’s TCFD, Federal Office for the Environment (FOEN ), Paris Agreement Capital Transition Assessment (PACTA), United Nations Environment Programme—Finance Initiative (UNEPFI), and Net-Zero Banking Alliance .

Swiss banks are in the process of aligning their investments with ESG guidelines, such as those stated in the UN Principles for Responsible Banking (PRB)⁷³ and the UN Principles for Responsible Investment (PRI)⁷⁴. They are also disclosing sustainability information consistent with international standards, such as the Global Reporting Initiative (GRI ). In April 2019, the SNB and the FINMA joined the Network for Greening the Financial System (NGFS),⁷⁵ a voluntary, consensus-based group of central banks and regulators that makes sustainability recommendations and shares best practices. Its goal is to encourage and attain ESG targets, which were created at the Paris “One Planet Summit” in December 2017.⁷⁶

“Sustainable finance” is a term with many facets. Among the most important for Switzerland are:

• 1. Consulting and asset management for private wealth management clients;

• 2. Providing ESG loans that use Swiss capital markets to fund sustainable projects; and

• 3. Looking internally to see what might be done to promote clean energy and nature-conservation projects, reduce greenhouse emissions, and invest in resource-efficient infrastructures.

The common denominator of these facets is their beneficial impact on the nation’s environment.

Consulting for Private Wealth Management Clients

Switzerland’s most significant potential for making a positive global impact in the ESG area appears to be through its wealth management consulting and advising services. The idea is that investors will evaluate firms based on a broader range of factors—not just commercial performance but also their environmental, social, and governance records, which is why rating indices may become more critical. Swiss wealth management services are enormous relative to its international lending and capital market activities. The nation manages about 27% of global cross-border private wealth, putting it first among all competitor nations.⁷⁷ In 2020, 18.3% of the funds managed by Swiss funds were placed in sustainable investments, with Swiss pension funds and insurance companies investing as much as 31%.⁷⁸ Switzerland’s wealth managers administered CHF 716 billion worth of sustainable investments,⁷⁹ and those investments inside Switzerland accounted for 21% of all the assets managed, about double the global average of 11%.⁸⁰

As the global leader in wealth management, Switzerland provides specific and holistic advice to wealthy customers who invest globally. Even though these consultants do not make final decisions on the investments chosen, they have an essential role in steering the content and direction of discussions that make them. The SBA has published guidelines for wealth managers, explaining ways to identify customers’ ESG preferences (if any), introduce and discuss ESG investing, and explain why sustainable finance should be highly prioritized.⁸¹ The SBA realizes that changing the investment culture will take time but believes it is worth the effort to become a global hub in the sustainable investment area.

Taking a Look Internally

Like any country, Switzerland has a vested interest in promoting sustainable investments. Nevertheless, in a referendum held on June 13, 2021, voters rejected an amendment to the Federal Act on the Reduction of Greenhouse Gas (CO₂ Act), which would have reduced greenhouse emissions in line with the nation’s commitments under the Paris Climate Agreement.⁸² Passage of this act might have encouraged climate-friendly behavior, and the proposed carbon tax would have discouraged energy use.

Using a global study by the Boston Consulting Group and Global Financial Markets Association (GFMA) as a basis for its analysis,⁸³ the SBA identified ten Swiss sectors that were responsible, in 2019, for producing 87% of the nation’s total emissions (i.e., 40.4 megatons, which is 40.4 million metric tons of carbon dioxide equivalent).⁸⁴ It explained how these sectors might reduce their greenhouse gas emissions, their costs, and possible sources of needed financing. Reducing greenhouse gas (GHG) emissions in these ten sectors is the goal of Switzerland’s 2050 Net Zero Initiative .

One potential problem Switzerland might encounter is how to finance ESG projects without sacrificing other priorities, such as mortgages and business facilities. By the SBA’s estimates, domestic banks can finance 83% of its funding requirements, and an additional 8% could come from the Swiss capital markets. About 7% of these investments might be state-subsidized public goods, such as mass transportation.⁸⁵ Any remaining funding (less than 2%) might come from blended (i.e., public–private) partnerships. Switzerland’s climate-control loans would be only about 11% of the amount lent each year for mortgages and business loans, and less than 2% of the annual Swiss franc bond issues.⁸⁶

Switzerland’s 2050 Net Zero Initiative should stimulate new business opportunities and plant potential challenges. The hope is that prospects will spring from the depth and diversity of new loans. Still, landmines could materialize if ESG investment expertise is spread too thin over the wide range of businesses and regulations.

Rather than using bans, subsidies, or regulations, the SBA’s preferred route to sustainability is via a carbon tax on all fossil fuels, which would incentivize the development of low-carbon technologies and investments. Due to their positive externalities, sustainable investing could warrant proactive government measures, such as preferential interest rates, reward programs, and loans for public infrastructure.

Sustainability Risks for Banks

Climate change could pose financial risks for Swiss banks if it threatens borrowers’ abilities to repay their legacy loans. These business failures could also infect the broader financial system. To the extent that Swiss financial institutions are less indebted than other nations, they should be proportionately less affected by these risks. At the same time, their interconnectedness with highly indebted nations increases the need for prudent management of sustainability-related loans.

Keys to Success

In the end, Switzerland’s success in the ESG area will require:

• Transparency, making the potential risks and returns of ESG financing and investing clear;

• Assurances that ESG services can meet global standards so they can be exported;

• Access to foreign capital markets;

• Political rules and regulations that are clear, simple, and conducive to market development;

• Investors embracing the idea that their real economic investments have an externality connected to the global economy; and

• Political assistance and pressure, such as the Swiss Federal Council’s decision in August 2021, requiring climate reporting by large Swiss companies.

Changing Tax Rules to Make Switzerland Globally Competitive

Banks in Switzerland have made progress in their attempts to abolish the nation’s stamp duty and reform its withholding tax.

Stamp Tax

Switzerland’s Stamp Tax is imposed by the Swiss Confederation when securities (e.g., shares, bonds, funds, and structured products) and particular types of warrants are issued or traded. This tax has put Switzerland at a competitive disadvantage relative to its principal global competitors, but its abolition could eliminate a meaningful source of government revenues. At the same time, increased capital market activity could create new jobs, raise incomes, and boost tax revenues from other sources. Abolishing the stamp tax will become increasingly important if the OECD’s efforts to tax digitalized economies succeed. The Swiss Council of States and National Council have supported the abolition of stamp duties on new issues, trades, and insurance premiums but only on a staggered basis and with no replacement. In summer 2021, Switzerland’s Parliament decided to abolish this tax on new equity issues, but in a February 13, 2022 referendum, the Swiss population voted against its abolition.

Withholding Taxes

For years, Switzerland imposed a tax on the interest earned from Swiss-franc-denominated securities issued in Switzerland. This tax helped defuse criticism that Switzerland was a haven for tax-dodging foreigners, who could reclaim this tax only if their home countries allowed deductions for foreign-paid taxes. Enactment of the AEOI has removed one of the primary reasons (i.e., tax evasion) for imposing this tax.⁸⁷

Switzerland’s withholding tax inhibited the nation’s ability to compete in international equity markets, forcing Swiss banks to make Swiss-franc-denominated issues in foreign countries. This competitive disadvantage was especially evident relative to the UK, the EU, and the United States (US). Recent competition from Asian nations, such as Singapore and Hong Kong, has raised the stakes even more. In 2021, the SBA reported that “the total volume of bonds issued by Swiss companies is around CHF 500 billion, but three-quarters of this were issued in other countries with no withholding tax. Swiss companies do this to remain competitive.”⁸⁸

In April 2021, the Swiss Federal Council proposed withholding tax reform to the Swiss Parliament. If adopted, it would abolish the withholding tax on domestic interest payments without replacement, hopefully reviving the Swiss capital market by encouraging companies to move their financing activities to Switzerland and issue their fixed-income securities on the Swiss market. The proposed change removed the withholding tax on bonds and individuals outside Switzerland but retained it on interest paid on private individuals’ bank accounts in Switzerland.

Global Minimum Tax

The movement toward a global minimum tax (GMT) for businesses has been the result of four significant forces:

• 1. Global digitalization;

• 2. Tax-rate competition among inefficient governments trying to entice multinational companies to relocate;

• 3. Difficulties identifying the nexus between tax authorities and taxpayers, and

• 4. Disagreements over whether services should be taxed where they are produced or consumed.

In 2013, the OECD and G20 proposed a framework addressing these four influences with hopes of an agreement on a minimum tax rate for multinational companies. Their efforts resulted in a two-pillar solution.⁸⁹ Pillar I (explained below) was adopted by OECD members on November 24, 2016, and came into force in July 2018. Pillar II came into law in 2022. On January 12, 2022, the Swiss Federal Council agreed to the basic tenants of the Base Erosion and Profit Shifting Project (BEPS), joining more than 97% of the OECD /G20’s other members.

To implement the GMT, Switzerland must successfully introduce a constitutional amendment approved by a popular referendum. The referendum is scheduled for June 2023. After that, a temporary ordinance on these rules would begin on January 1, 2024, giving the GMT a legal basis and allowing it to follow Switzerland’s normal legislative process. Under the Swiss rules, cantons would be given independent authority to decide how their taxes might differ.⁹⁰

Pillar I of the OECD’s “Two-Pillar Solution” reallocated taxing rights, instituted a new profit allocation method, and implemented nexus (i.e., connection) rules for market jurisdictions, which determine the rights of jurisdiction to a tax allocation. Pillar II proposed a minimum tax rate of 15% but only on multinational companies with gross revenues (i.e., turnover) exceeding EUR 750 million.⁹¹ If a member country decided on a tax rate below the minimum, other countries would be permitted to tax the undertaxed income. Switzerland’s Federal Council proposed the minimum tax rate only for companies within the scope of the GMT agreement (i.e., called “in-scope” companies).

Because Swiss federal and cantonal taxes are already low relative to other nations, the GMT could be an opportunity for Switzerland to attract multinational companies that find themselves in countries needing to raise their tax rates to GMT levels.⁹² Any increased revenues from the minimum global tax would give cantons , with authority to administer it, incentives to reduce locational disincentives and increase locational benefits, such as lowering and simplifying tax rates on personal income, property, and wealth, and improving physical infrastructures. Switzerland might also find opportunities in so-called substance-based carve-outs, which are investments in assets, ESG projects, factories, and research labs, which would be written off and, therefore, excluded from the minimum tax rate , along with a portion of the wages and salaries paid.

Navigating Volatile Interest Rates

The SNB accepts interest-bearing and non-interest-bearing deposits of banks.⁹³ Under normal conditions for central banks , the interest rate on interest-bearing deposits is positive, but Swiss and global instability put the nation’s nominal interest rates on a rollercoaster ride.

Switzerland’s Falling and Negative Interest Rates

Between 2007 and 2023, global economic volatility, political uncertainty, and diminishing growth prospects increased the demand for safe Swiss franc-denominated deposits and financial investments. Among the sources of volatility were the US-subprime mortgage failure and subsequent “Great Recession” (2007–2009), Greece’s and Europe’s sovereign-debt problems (2008–2012), and Russia’s invasion of Ukraine (2014). Growth in European countries fell, and prospects for continued Chinese growth grew dim. These forces increased foreign financial capital flows into the Swiss franc, raising its value. To discourage these inflows and lower the Swiss franc’s euro value, the SNB lowered its LIBOR target and intervened in the foreign exchange market, increasing the nation’s monetary base. These actions did little to reduce foreign demand for Swiss francs. In December 2014, the Bank imposed a negative interest rate equal to −0.25% on bank sight deposits at the SNB,⁹⁴ and in January 2015, it reduced this rate to −0.75%, together with decreasing the three-month LIBOR target range from −1.25% to −0.25%.⁹⁵

Switzerland’s financial institutions pay interest only on deposits above SNB-determined exemption thresholds. The SNB can reduce the direct burden of negative interest rates on banks by raising the exemption. At the end of 2020, approximately CHF 221 billion in financial institutions’ sight deposits at the SNB were subject to negative interest rates, on which the SNB earned CHF 1.4 billion.⁹⁶ These revenues were about CHF 561 million less than the SNB earned in 2019, in large part due to an increase in the exemption threshold in April 2020 from 25 to 30.⁹⁷

The SNB’s exemption threshold is calculated by subtracting a financial institution’s cash holdings in the previous reporting period from the moving average minimum reserve requirements during the last 36 reporting periods, multiplied by the threshold factor (see Table 3.2). Since 2019, this exemption threshold has been updated daily.⁹⁸

Table 3.2 Calculation of the SNB exemption threshold Footnote

Swiss National Bank, 113th Annual Report: Swiss National Bank: 2020, https://www.snb.ch/en/mmr/reference/annrep_2020_komplett/source/annrep_2020_komplett.en.pdf (Accessed on August 24, 2022).

The loss of bank revenues from negative interest rates has caused criticism, skepticism, and concern about their effectiveness and risks as monetary policy tools.¹⁰⁰ In particular, they have been criticized for:

• Penalizing small savers, even though Swiss banks rarely charged them negative interest rates;

• Causing income redistribution from savers to borrowers and from the financial sector to the export sector;

• Reducing the return and investment alternatives facing pension funds, which have regulatory requirements compelling them to hold a high proportion of bonds (in general, 20–50%); and

• Increasing investors’ risk tolerances to earn higher returns by shifting asset allocations toward more speculative, higher-yielding investments, such as real estate and investment properties.

Normal conditions call for positive interest rates. The SNB realized that its exit from abnormal conditions, which negative interest rates represented, would need careful planning.¹⁰¹

Switzerland’s Rising Interest Rates

In 2021, conditions changed. Switzerland’s inflation rate rose and, by 2022, exceeded targeted levels, at rates not seen in 14 years. More than a decade-and-a-half of excessive monetary base growth to stimulate the sluggish economy and stabilize the Swiss franc exchange rate led to demand-pull inflation. Furthermore, the COVID-19 pandemic (2021+) and Russia’s invasion of Ukraine (2022) caused cost-push inflation. In its June 2022 meeting, the SNB raised its policy rate by 50 basis points to −0.25%, the first rate hike since 2007. Similar rate hikes were made worldwide. Increased financial and economic volatility raised Switzerland’s real rate, and expected inflation rose due to demand-pull and cost-push forces. The SNB’s contractionary monetary policies in mid-2022 were efforts to reduce inflation and expected inflation to take some of the pressure off the nation’s rising nominal interest rates.

Protecting the Financial System from Paradigm-Changing Events

During the first quarter of the twenty-first century, Switzerland suffered economic fallout from the US-subprime mortgage collapse and resulting “Great Recession,” European Debt Crises, Brexit, COVID-19 pandemic, natural disasters, political upheavals, and wars in foreign countries, such as Ukraine. The nation fortified its financial system by buttressing financial institutions’ equity (capital) and liquidity requirements, limiting bank exposures, and restricting the range of financial institutions’ organizational structure choices. When the economy faltered, the Swiss government boosted spending, and the central bank eased monetary policies.

Systemically Important Financial Institutions (SIFIs): Too Big to Fail

Due to the 2007–2009 financial crisis, the Swiss government, the SNB, Swiss banks, and the SBA worked together to protect the domestic financial system from the failure of SIFIs, such as large banks, insurance companies, and asset managers. Due to their size and intimate interconnections with other financial intermediaries, the resulting effort came to be known as “Too Big to Fail” (TBTF).¹⁰²

The SNB was charged with determining which financial institutions qualified as SIFIs. To date, only Switzerland’s “big banks” and three large domestic banks (i.e., PostFinance,¹⁰³ Zürcher Kantonalbank (ZKB), and Raiffeisen Group) have qualified. Globally connected UBS and Credit Suisse are called “global systemically important banks ” (“G-SIBs”), and the three large domestic banks are called “domestic systemically important banks ” (D-SIBs). The threat that market turmoil might cause insolvency and disorderly failures of these SIFIs resulted in additional capital requirements, with a priority put on the protection of domestic deposits and loans.¹⁰⁴ It also set into motion plans to split up domestic businesses and restrain their expansion abroad.

Amended Liquidity Requirements

Liquidity Coverage Ratio and Net Stable Funding Ratio

In reaction to the US-subprime mortgage breakdown and subsequent Great Recession (2007–2009) and European debt crises (2008–2012), Switzerland improved its financial institutions’ short-term and long-term liquidity. Short-term liquidity was addressed in 2015 by revising the Liquidity Ordinance (LiqO) to include a Liquidity Coverage Ratio (LCR), whose purpose was to ensure that banks had at least a quantitative minimum of liquidity to meet their short-term (i.e., one-month) payment needs. The LCR followed Basel III standards,¹⁰⁵ and the FINMA retained the right to increase it if conditions warrant them. This ordinance was amended and turned into ordinary law in September 2021.

Net Stable Funding Ratio (NSFR)

On September 11, 2020, the Swiss Federal Council amended the LiqO, implementing the Net Stable Funding Ratio (NSFR) to boost banks’ resilience to crises and ensure long-term liquidity.¹⁰⁶ The NSFR came into force on July 1, 2021, aligned with EU , United States, and Basel III standards . It complemented, rather than substituted for, the LCR requirement because the NSFR focused on natural hedges, matching the maturities of financial institutions ’ assets and liabilities —particularly, long-term assets and liabilities . The NSFR’s “Available Stable Funding ” (ASF) rule requires banks’ long-term liabilities plus equity to be greater than or equal to their Required Stable Funding (RSF), which equals liquidity-adjusted assets or exposures.¹⁰⁷

Stricter Capital Adequacy Requirements

Leverage Ratio

At first, the LCR was imposed only on SIFIs, but an enhanced LCR requirement was extended to non-SIFIs on January 1, 2018. Currently, the required LCR is 3% of total capital for non-SIFIs and 4.5% for SIFIs. A maximum of 1.5% of this requirement can be met using additional Tier 1 capital.¹⁰⁸ Switzerland’s Capital Adequacy Ordinance (CAO)¹⁰⁹ requires SIFIs to hold a maximum of 1.5% of the LCR .

Going-Concern Versus Gone-Concern Capital

The more capital a financial institution has relative to its assets, the more resilient it is to unexpected losses from ongoing business activities. Under Switzerland’s new rules, SIFIs needed more “going-concern” and “gone-concern” capital, which together comprise a bank’s total loss-absorbing capacity (TLAC). Going-concern capital ensures that financial institutions have sufficient equity to support their ongoing operations and remain solvent. If a financial institution is not a “going concern,” it is insolvent or “gone.” Therefore, “gone-concern capital” is what a financial institution must repay depositors and senior creditors if it becomes insolvent. G-SIBs must hold 100% of their going-concern plus gone-concern requirements as TLAC.

Going-concern capital requirements for all SIFIs consist of three parts:

• 1. A base requirement on risk-weighted assets (RWAs) equal to 12.86%, plus a buffer that could increase the total capital requirement to 14.3% and a leverage ratio of 4.5%¹¹⁰;

• 2. Additional equity that is dependent on the financial institution’s size and exposures in the domestic lending and deposit markets; and

• 3. Countercyclical capital buffers.

For non-SIFIs, Swiss rules set the minimum equity ratio equal to 8% of risk-weighted assets. Domestic SIFIs’ gone-concern capital is set at a minimum level of 40% of the going-concern capital, and the two largest banks (UBS and Credit Suisse) must hold gone-concern capital equal to 62% of their going-concern requirements.¹¹¹

For non-SIB-designated banks, the leverage ratio requires Tier 1 capital equal to at least 3% of total (non-risk-weighted) assets. SIBs must hold as much as 10%, but the additional equity requirements on SIFIs have varied. For example, at the end of 2020, Credit Suisse had to add 1.44% to its RWA ratio and 0.5% to its leverage ratio. UBS needed to add 1.08% to its RWA ratio and 0.375% to its leverage ratio. Raiffeisen banks added 0.36% and 0.125%, respectively, to their RWA and leverage ratios. Neither ZKB nor PostFinance had additional equity requirements.

Countercyclical Buffer

The Swiss government was given the power to implement a countercyclical capital buffer between 0 and 2.5% of risk-weighted assets. For banks with balance sheets equal to or greater than CHF250 million, the buffer was set at 2.5%, but the SNB retained the power to increase this countercyclical buffer to address special situations, such as a real estate bubble. Initially introduced in 2013, this buffer was set at 2%.

Concentration Risks

Non-SIFIs and SIFIs must limit their concentration risks. For non-SIFIs, the standard upper limit is 25% of Tier 1 capital.¹¹² SIFIs have a concentration ratio limit of 15% of Tier 1 capital .¹¹³ Starting on June 1, 2016, Switzerland required G-SIBs to build a gone-concern buffer. This requirement was calibrated to equal going-concern capital (i.e., 14.86% of risk-weighted assets ). Initially, these rules applied only to G-SIBs, but they were extended to D-SIBs in 2019 and 2020, with certain modifications and a phase-in period until 2026.

SIFIs are also required to draw up recovery/emergency plans, specifying the precautionary measures they have taken and would take if a financial crisis led to insolvency or illiquidity. The possibility of transferring essential functions to a group company (a “service co”) to assure business continuity must also be addressed in these recovery/emergency plans. The FINMA required each G-SIB to establish a service connected to their emergency/recovery plans.¹¹⁴

Responding to the Covid-19 Pandemic

In 2020, the COVID-19 pandemic prompted Switzerland’s government, its financial intermediaries, the SNB, and the SBA to address the resulting economic and financial fallout. In February, the government banned social events with more than 1,000 participants,¹¹⁵ imposed cross-border restrictions, and implemented a sizeable fiscal rescue package. The SNB supported the economy by providing quick, reliable, and ample liquidity to financial institutions .¹¹⁶

Federal Government Support

In March 2020, the Swiss Confederation announced a CHF 42 billion support package, focusing on replacing lost wages, extending short-term loans to businesses, backing non-profit cultural institutions and clubs, deferring social security payments, and granting forbearance on repayments of government loans. On March 25, 2020, the Federal Council adopted the COVID-19 Joint and Several Guarantee Ordinance¹¹⁷ and then refined and turned it into ordinary law in December 2020 (i.e., the COVID-19 Joint and Several Guarantee Act ).¹¹⁸ This plan gave the Swiss government lending power that resulted in about 139,000 credits with a volume of CHF 17 billion.¹¹⁹ More than 80% of these loans were to small and medium-sized enterprises (SMEs) with ten or fewer employees. These government bridge loans were interest-free, fully guaranteed up to CHF 500,000, and gave participants immediate access to credit facilities that were secured by four recognized guarantee organizations.¹²⁰ For loans between CHF 500,000 and CHF 20 million, the federal government guaranteed 85%, per company, and banks guaranteed 15%.¹²¹ In the future, the Swiss government may need to borrow to finance the resulting expenditure gap, but due to recent-year budget surpluses and the hope that Switzerland’s debt brake will continue to deter budget deficits, retiring this debt does not appear to be a significant future problem.

SNB Support

In May 2020, the central bank launched its SNB COVID-19 Refinancing Facility (CRF),¹²² created to mitigate the coronavirus’ economic impact on the Swiss financial system . CRF allowed Swiss financial institutions to finance their liquidity needs with quick, covered loans. The SNB assisted in other ways, such as increasing the SNB’s negative-interest-rate threshold factor from 25 to 30, in order to keep banks from passing through negative interest rates to small savers. Following a request from the SNB, the Federal Council lowered the countercyclical capital buffer (a component of the Basel III regulatory framework) to 0%, thereby relaxing the capital requirements for mortgage loans.

Swiss Banks in the Broader Swiss Economy

The financial sector is Switzerland’s most important service industry, contributing roughly 12% to the nation’s GDP, with the banking and insurance industries supplying about 54% and 46%, respectively, of the total.¹²³ Between 1990 and 2020, the Swiss financial sector’s gross value added grew from 7% of GDP to 13.9% and averaged about 12% from 2008 to 2020.¹²⁴

Switzerland’s financial sector provides full-time jobs for approximately 350,000 people, with the banking and insurance sectors accounting for 66% and 34%, respectively, of the total. Together, they comprise slightly more than 8% of the nation’s total workforce.¹²⁵ The discrepancy between the relatively low portion of Switzerland’s workforce employed in financial services (i.e., about 8%) and the industry’s larger share of GDP (i.e., 10%) is explained by the relatively high level of employee productivity.

The contributions of Switzerland’s financial services sector to the nation’s well-being are enhanced by considering its indirect impact, which includes jobs created and output produced to supply the financial sector employees when they spend their incomes. The financial services industry’s indirect contributions to employment amounted to approximately 55% of its direct full-time employment.¹²⁶ This sector is also a significant taxpayer, contributing about 13% of the public sector’s tax revenues.¹²⁷

From 1990 to June 2022, the nominal value of Swiss banking assets grew at a compound annual rate of 4.1% (see Fig. 3.1), almost two percentage points faster than Switzerland’s nominal GDP. Switzerland is one of the most intensively banked countries in the world.¹²⁸ In 2020, it had a total of 243 banks, 2,477 branches, and 6,901 ATMs, serving a population of 8.637 million people, which is approximately one branch office for every 3,500 inhabitants.¹²⁹ In its trade with foreign nations, Switzerland’s financial services sector has perennially been one of the most significant contributors to the nation’s invisibles surplus in the balance of payments. Between 2000 and 2021, it added an average of nearly CHF 17 billion to Switzerland’s current account.¹³⁰

Fig. 3.1

(Source Swiss National Bank , Monthly Banking Statistics, https://data.snb.ch/en/warehouse/BSTA#!/cube/BSTA@SNB.MONA_U.BIL.AKT.TOT?fromDate=1987-09&toDate=2021-09&dimSel=KONSOLIDIERUNGSSTUFE(U),INLANDAUSLAND(T),WAEHRUNG(T),BANKENGRUPPE(A40) [Accessed on August 26, 2022]. *See Table 3.8 in Appendix for data by the year)

Swiss Bank assets: 1990–June 2022 (Millions of Swiss francs) (Consolidation level: Parent company )

Swiss Banking and Deposit Insurance: An Overview

Since the 1990s, Switzerland’s banking structure has undergone profound changes due to economic, political, and technological forces, such as deregulation, the integration of financial markets, internationalization, digitalization, computerization, the elimination of many cartel agreements, and the enactment of legislative reforms. These changes have affected the sources of banks’ profitability, their risk-mitigation strategies, their sizes relative to other Swiss industries, and their level of internationalization.

Swiss Banking Rivalry and Conventions

Since World War II, Switzerland’s banking system has been dominated by its two “big banks,” UBS and Credit Suisse, but since 2016, the number of big banks has increased to four: UBS, UBS Switzerland AG, Credit Suisse, and Credit Suisse (Switzerland) Ltd. Smaller financial institutions have competed by providing businesses and individuals with a wide variety of useful and efficient financial services, partnerships, and instruments. Most Swiss companies have more than one banking relationship and use their multiple affiliations to extract the best terms, such as variations in the range, efficiency, safety, and quality of financial services.

Price competition has become increasingly more important among Swiss financial institutions. In the old days, the Swiss banking system had a tradition of strong mutual agreements that eliminated or substantially reduced price competition. These formal and informal agreements were an outgrowth of inter-connected family businesses, joint military service, professional organizations, social club memberships, and university educations that reduced competition by homogenizing and personalizing potential business competition.

Bank conventions covered a gamut of banking activities from fixed syndicates that provided underwriting services for Swiss-franc-denominated foreign bonds to advertising restrictions to uniform dividend payments to standardized fees (and conditions) for services, such as documentary credits, custody, and foreign exchange transactions. The agreements and conventions also fixed brokerage commissions and permitted many, otherwise inefficient, financial institutions to survive. These practices became obsolete in the globalized, modern-day competitive banking environment.

Switzerland’s former bank conventions were identified as anti-competitive in a 1989 report by the Swiss Cartel Commission, which recommended their abolition. Because the SBA had a hand in creating them, it worked to eliminate most of the remaining anachronistic practices and has remained committed to fostering a competitive market domestic and global environment. As a result, the Swiss banking sector has replaced its cartels and conventions with active head-to-head competition, causing its prices and costs to become keenly competitive.

Swiss Universal Banking

Since 1934, Swiss banks have operated under the Federal Act of Banks and Savings Banks (aka, Banking Act, BA) and subsequent revisions. The BA has been responsible for regulating crucial elements of financial institutions’ management quality, organizational structure, liquidity, and capital adequacy. It includes significant provisions for protecting confidential bank customer information. As strict and confining as the BA has been in some areas, it has not restricted the types of activities in which Swiss banks can participate. In short, this key Swiss law does not distinguish between commercial and investment banking activities. As a result, Swiss financial institutions have no clearly defined lines of functional responsibility. Technically, they enjoy “universal banking” privileges and can participate in almost all lines of financial business at any location within the country.

Despite universal banks’ freedoms, it is practiced only by a small portion of the Swiss banks, mainly the “big banks” and the larger cantonal banks. The remaining financial institutions specialize, more or less, on lending and portfolio management, usually in narrow regional locations.

Over time, the financial industry has segmented itself into contestable pockets with varying degrees of competitiveness. This segmentation process has been evolutionary, as high relative profits in one area and declining profits in others have spirited movements of funding, individuals, and interest to and from different business lines. Along with these movements have come regulations to address newly perceived needs.

Swiss Deposit Insurance

Customer deposits of Swiss banks are “privileged” over other bank liabilities. The BA requires all Swiss banks and securities dealers to have these preferential deposits insured by esisuisse, which is a collective scheme that protects customers up to CHF100,000 per depositor.¹³¹ Members agree to provide the required funds to customers within one month of an insured bank’s insolvency , and when the insolvent bank is liquidated, esisuisse members distribute the proceeds.¹³²

On December 17, 2021, Switzerland’s Parliament accepted the Federal Council’s proposal to strengthen BA protections and promote financial market stability. Under the new rules and regulations, which are scheduled to enter into force on January 1, 2023:

• The bank liquidator will pay deposit insurance not exceeding CHF 100,000 per customer per bank to depositors within seven working days of a declared bankruptcy;

• Bank contributions to deposit insurance will be 1.6% of the system-wide guaranteed deposits, with a minimum draw of CHF 6 billion; and

• Banks will invest half of their insurance collections in safe, liquid securities and deposit these securities permanently with a third-party custodian.¹³³

Swiss Banking Structure

The SNB separates Switzerland’s domestic banking industry into nine major institutional categories: (1) big banks, (2) cantonal banks, (3) regional and savings banks, (4) Raiffeisen banks, (5) stock exchange banks, (6) other banking institutions, (7) foreign-controlled banks, (8) branches of foreign banks, and (9) private banks.¹³⁴ Different banks have different roles, depending on the financing, advising, and information needs of their customers. Table 3.3 provides a brief overview of Switzerland’s most important banking-related financial institutions .

Table 3.3 Brief descriptions of Switzerland’s nine bank categories

Table 3.4 shows that, between 2000 and 2021, the number of Swiss banks fell by 35%, from 375 to 239, a loss of 136 banks. Regional and savings banks, foreign-controlled banks, and stock exchange banks accounted for more than 89% of the shrinkage. The changes shown in Table 3.4 resulted from bank mergers, spin-offs, new formations, and structural changes that caused bank reassignments to different categories. For example, in 2020, Neue Aargauer Bank merged with Credit Suisse (Switzerland) Ltd., causing its business to be reassigned to the “big banks” category instead of “regional and savings banks.” Similarly, some “private banks” changed their legal status in 2014 and were reassigned to the “stock exchange banks” category. Important to note is the category called “Raiffeisen banks,” which includes all 220 banks in the Raiffeisen group.

Table 3.4 Number of banks in Switzerland: 2000–2021

Figure 3.2 shows that, between 2010 and 2021, the number of bank employees in Switzerland fell dramatically by 17%, from 108.0 thousand to 90.6 thousand employees. The reduction was mainly due to industry consolidation, stricter domestic regulations, and outsourcing tasks to less expensive nations.¹³⁵ Big banks accounted for only 25% of total employment in 2021, compared to 37% in 2010. Stock exchange banks nearly doubled their employment share from 8 to 15% over these ten years. Cantonal banks increased their employment share from 16 to 20%, which offset most of the portion lost by foreign banks (i.e., from 20 to 15%). Raiffeisen banks increased their employment share by almost 40%, from 8 to 11%. Regional banks remained at about 4% of the market, and private banks declined from 4.4% of banking-sector employment to less than one percent (i.e., 0.7%).

Fig. 3.2

(Source Swiss Bankers Association , Swiss Banking: Banking Barometer 2022, Number of Staff at Banks in Switzerland, Undated, https://publications.swissbanking.ch/banking-barometer-2022/number-of-staff-at-banks-in-switzerland (Accessed on August 30, 2022). The original data is sourced from the Swiss National Bank. *See Table 3.9 in Appendix for data by the year)

Staff at banks in Switzerland (domestic): 2010–2021 (total staff and percent by bank category)

Sources of Swiss Banks’ Profitability

Swiss banks earn net income (or suffer losses) from activities that are presented on their balance sheets (i.e., on-balance-sheet activities) and activities that are not shown on their balance sheets (i.e., off-balance-sheet activities). As illustrated in Fig. 3.3, from 2005 to 2021, the interest spread of their on-balance-sheet positions (i.e., what they earned in interest on assets minus the interest they paid on liabilities) accounted for 34–45% of total earnings. Therefore, more than half of their net income came from off-balance-sheet sources, such as trading commissions and income and portfolio management fees. In general, these net revenue sources increased with market volatility. Between the early 1990 and 2021, Swiss banks’ off-balance-sheet returns varied between 55 and 66% of total returns. In large part, on-balance-sheet activities lost ground due to:

Fig. 3.3

(Source Swiss Bankers Association, Swiss Banking: Banking Barometer 2022, Net Income, https://publications.swissbanking.ch/banking-barometer-2022/net-income [Accessed on August 30, 2022]. The original data is sourced from the Swiss National Bank. Figures prior to 2011 come from Henri B. Meier, John E. Marthinsen, and Pascal A. Gantenbein, Swiss Finance: Capital Markets, Banking, and the Swiss Value Chain, John Wiley & Sons, 2012. *See Table 3.10 in Appendix for data by the year)

Net income by banking activity (percent and Swiss franc total): 2005–2021

• 1. Switzerland’s universal banking system,

• 2. Its focus on portfolio management, and

• 3. A general trend in banking away from lending and toward securitization.

As seen in Fig. 3.3, returns on Swiss banks’ trading activities were negative in 2008, chiefly due to the US Great Recession and global financial crises, which reduced their securitization activities and forced them to moderate the risks of their off-balance-sheet positions. These problems highlighted the critical role that interbank liquidity plays in a well-functioning financial system. Failure or reluctance to lend among banks (usually reflected in reduced credit lines) sparked an illiquidity contagion, proving that liquidity problems can pose systemic threats even if the banking system is solvent. The SNB’s low-interest-rate strategy to address the global financial crisis (2007–2009), European debt crisis (2008–2012), and COVID-19 pandemic (2019–2022) all contributed to the compressed interest spreads.

On-Balance-Sheet and Off-Balance-Sheet Assets and Liabilities

Balance sheets record the book value of a company’s assets and liabilities. If asset values exceed liabilities, the company has positive equity and is solvent. As their name indicates, off-balance-sheet activities do not appear on a financial institution’s balance sheet because they are linked to services, such as asset management, underwriting, brokerage, foreign exchange transactions, and gold trading. They also include fiduciary accounts¹³⁶ and derivative -related positions.¹³⁷ Other off-balance-sheet activities are joint ventures, special purpose vehicles, research and development partnerships, and operating leases. These activities are recorded in the footnotes of intermediaries’ financial statements.

Switzerland’s “on Balance Sheet” Assets and Liabilities

Switzerland’s on Balance Sheet Assets

Figure 3.4 shows the evolution of Switzerland’s nine categories of financial institutions from 2005 to 2021 for their on-balance-sheet assets. Big banks’ assets relative to total banking assets fell from 68 to 44%; Cantonal banks, Raiffeisen banks, and stock exchange banks more than doubled the nominal value of their assets, significantly increasing their market shares. Cantonal banks’ assets grew nominally by 121%, raising their share of total assets from 12 to 20%. Raiffeisen banks grew by 163%, and stock exchange banks grew by 154%, increasing their market shares from about 4 to 8%.¹³⁸

Fig. 3.4

(Source Swiss National Bank, Balance Sheet Total, Development by Bank category, https://data.snb.ch/en/topics/banken/chart/babilentbguach [Accessed on August 26, 2022]. *See Table 3.11 in Appendix for data by the year)

Portion of total bank assets by bank category: 2005–2021 (Parent company perspective [survey: comprehensive year-end statistics])

Regional and savings banks, which were about 3% of total assets in 2005, and foreign-controlled banks, which were about 8% of total assets that year, grew in absolute terms but remained a relatively constant portion of total bank assets. Foreign bank branches made significant gains, increasing their assets by more than 597%, but because they were such a small portion of total assets, their market shares increased only from 1 to 3%.

Private banks invest clients’ funds, which are recorded off balance sheet and do not enter into these calculations, except for the relatively small amount of assets owned by private bankers and private banks. This fact, plus the steep decline in Switzerland’s private banking activity, accounts for their share of total assets falling from 1% to nearly zero. During these 16 years, the assets of “other banks” rose by more than 6,731%, driving their portion of total assets from 0% in 2005 to 6% in 2021.

Figure 3.5 shows that between 2010 and 2021, Swiss banks’ liquid assets grew from 4% of total assets to almost 20%. Receivables from financing securities transactions rose from virtually nothing in 2010 to about 5% of total bank assets. The amounts due from other banks fell by almost 15%, from slightly over 22% to about 7% of banks’ assets. Swiss banks’ deposits were reduced primarily due to increased market volatility and stricter regulatory requirements, particularly regarding capital adequacy. Worldwide, banks sought to mitigate risks by reducing their interdependencies and vulnerability to contagion from other financial institutions. Because interbank assets are the counterpart to interbank liabilities, this asset reduction was reflected pari passu with Swiss banks’ liabilities.

Fig. 3.5

(Source Swiss National Bank, Selected Assets—Annual, https://data.snb.ch/en/topics/banken/chart/babilaapouach [Accessed on August 26, 2022]. *See Table 3.12 in Appendix for data by the year)

Selected assets of banks in Switzerland: 2010–2021 (As a percentage of total assets)

Between 2010 and 2021, mortgage loans increased by approximately 43%, mainly due to:

• 1. Inexpensive real and nominal mortgage rates, which hovered between 1.3 and 1.4%;

• 2. Historically low returns on interest-bearing securities;

• 3. Real estate-related assets offering relatively safe returns. For decades, mortgages have been a dominant part of Swiss banks’ assets.

Cantonal banks have been lending leaders in the mortgage area, responsible for slightly more than 37% (see Fig. 3.6). Big banks (26.9%) and Raiffeisen banks (about 18%) have also been heavy mortgage lenders. Since 2010, cantonal and Raiffeisen banks have increased their interest in mortgage lending, which contrasts with big banks and the regional and savings banks, causing a reduction in their market share. In 2021, nearly 93% of Switzerland’s domestic mortgage loans were classified as “senior,” reinforcing Swiss banks’ interest in using collateral to mitigate the risk on these loans.

Fig. 3.6

(Source Swiss Bankers Association, Swiss Banking: Banking Barometer 2022, Balance Sheet, Shares of Domestic Mortgage Market in 2021, https://publications.swissbanking.ch/banking-barometer-2022/balance-sheet [Accessed on August 30, 2022]. The original data is sourced from the Swiss National Bank)

Bank shares of the mortgage market: 2021

Figure 3.7 shows that, in 2021, somewhat less than 90% of domestic Swiss franc credit was composed of mortgages and therefore secured by a down payment. Of the remaining loans, slightly more than 3% were secured, leaving less than 7% unsecured.

Fig. 3.7

(Source Swiss National Bank, Financial Stability Report: 2021, Domestic Bank Credit by Type of Borrower and Loan, p. 32, https://www.snb.ch/en/iabout/pub/oecpub/id/pub_oecpub_stabrep [Accessed on August 30, 2022]. *See Table 3.13 in Appendix for data by the sector and type of domestic bank credit)

Swiss Bank mortgages, secured loans, and unsecured loans: 2021

Swiss Banks’ on Balance Sheet Liabilities

Between 2010 and 2021, customer deposits (i.e., the sum of sight, time, and other customer deposits) accounted for between 51 and 67% of Swiss banks’ liabilities (see Fig. 3.8). A solid increase in sight deposits, from 21% of liabilities to 41%, more than offset the fall in time deposits. Sight deposits rose as a natural consequence of the nation’s recovery and sustained growth, along with the SNB’s expansionary monetary policies, which increased the nation’s monetary base and bank lending. The decline in time deposits resulted from Switzerland’s low nominal and real interest rates, providing a disincentive for savers to lock funds into low-yielding deposits for fixed periods. Liabilities among banks declined steadily from 2010 to 2021, from 16.4 to 13.4% of total liabilities, due to the general decline in interbank business, particularly with banks in Switzerland. Trading portfolio liabilities fell slightly, from 2% of total liabilities to 1%, mainly reflecting decreases in big banks’ foreign liabilities.

Fig. 3.8

(Source Swiss Bankers Association, Swiss Banking: Banking Barometer 2022, Balance Sheet, Breakdown of Liabilities, https://publications.swissbanking.ch/banking-barometer-2022/balance-sheet [Accessed on August 30, 2022]. The original data is sourced from the Swiss National Bank. *See Table 3.14 in Appendix for data by the year)

Liabilities of banks in Switzerland: 2010–2021 (by bank category as a percentage of total liabilities)

Swiss Banks’ Off-Balance-Sheet Assets and Liabilities

Swiss banks offer their domestic and foreign customers a variety of off-balance-sheet services. The main ones are asset management, fiduciary accounts, underwriting, brokerage, foreign exchange, and gold trading. Between 2010 and 2020, off-balance-sheet returns accounted, on average, for 63% of Swiss banks’ net revenues (see Fig. 3.3). As a result of these services, the impact of Swiss banks on investment markets is more significant than their balance sheet totals imply.

Asset Administration/Management

Switzerland has developed a competitive advantage in private banking and asset management. In 2021, it was the world leader in cross-border wealth management,¹³⁹ with almost half of its managed assets originating abroad.

Switzerland’s wealth management expertise has not come at the expense of providing highly efficient financial services to the domestic economy. Credit is readily available to individuals, companies, institutional investors, and public-sector entities. Looking to the future, if Switzerland’s labor costs remain high relative to other countries, it will need to compete on the technological frontiers of finance, which will require risk capital in amounts comparable to (or exceeding) global competitors.

Unlike US and UK asset managers, who have focused on institutional investors, Swiss banks and investment specialists have concentrated on private customers (i.e., wealthy individuals), who require relatively higher levels of customer service. Switzerland’s investment philosophy has been rather conservative, with a high priority put on capital preservation. Big Swiss banks have competitive strengths because of their branch networks, direct access to domestic and international exchanges, and underwriting power. Still, the smaller, private banks have been successful using their tradition, experience in personalized service, and discretion to compete.

Assets Under Management

Assets under management (AuMs) are the securities and precious metals that banks hold in custody accounts for their customers plus their fiduciary liabilities to customers. At the end of 2021, total AuMs were CHF 8,830 billion (see Fig. 3.9) with¹⁴⁰:

Fig. 3.9

(Source Swiss Bankers Association , Swiss Banking: Banking Barometer 2022, Assets under Management, https://publications.swissbanking.ch/banking-barometer-2022/assets-under-management [Accessed on August 30, 2022]. The original data is sourced from the Swiss National Bank. *See Table 3.15 in Appendix for data by the year)

Assets under Management of Banks in Switzerland: Domestic and Foreign: 2010–2021 (Billions of Swiss francs )

• 1. Securities holdings in bank custody accounts equaling CHF 7,937.8 billion¹⁴¹;

• 2. Amounts due to customers, excluding sight deposits, totaling CHF 783.7 billion¹⁴²; and

• 3. Fiduciary liabilities equal to CHF 108.8 billion.¹⁴³

Between 2010 and 2021, Swiss banks’ AuMs grew by approximately 4.4% per year, ending at CHF 8.8 trillion, with foreign AuMs growing at a yearly rate of less than four percent (i.e., 3.6%) and domestic AuMs growing by 5.3% (see Fig. 3.9). The increase in AuMs since 2010 has been due mainly to global economic and financial growth and Switzerland’s relative stability in a volatile global marketplace.

For accounting purposes, Swiss banks’ AuMs are measured in Swiss francs, but many customers’ accounts, particularly foreign clients, are held in non-Swiss currencies, such as the US dollar and euro. Therefore, any Swiss franc appreciation reduces Swiss managers’ AuM growth. Another major factor influencing Swiss banks’ AuM growth has been stricter reporting requirements, particularly complying with the OECD’s AEOI rules. Despite these factors, domestic and foreign AuMs grew by CHF 2.01 trillion and CHF 1.3 trillion, respectively, between 2010 and 2021.

Fiduciary Deposits

Fiduciary deposits are customer funds placed with banks in Switzerland and invested in the bank’s name but with depositors remaining the ultimate beneficiaries and risk bearers. For this reason, they are neither assets nor liabilities of these banks. In 2005, fiduciary deposits equaled nearly CHF 380 billion and rose during the next two years to CHF 483 billion. From then on, fiduciary deposits fell progressively to CHF 4.9 billion in 2021. Figure 3.10 shows fiduciary deposits falling from 2005 to 2021 at a compound annual rate of almost 4%.

Fig. 3.10

(Source Swiss National Bank, https://data.snb.ch/en/topics/banken/chart/batreuhwuach [Accessed on August 29, 2022]. *See Table 3.16 in Appendix for data by the year)

Swiss fiduciary transactions by currency: 2005–2021 (billions of Swiss francs)

Swiss-franc-denominated fiduciary investments were a minority of total fiduciary accounts, varying from a low of 2% in 2018 to a high of 10% in 2019. The most popular currency was the US dollar, ranging in dominance from 44% (2008) to 79% (2018). The euro was the second most popular, varying from 6% (2018) to 38% (2008). Japanese yen and precious metals never amounted to more than 1%, and the “other currencies” category ranged from 10 to 20%.

The sharp decline in fiduciary accounts between 2007 and 2008 reflected investors’ reaction to extremely low Swiss franc, US dollar, and euro interest rates and declining US dollar and euro exchange rate values. Because fiduciary funds are invested mainly in money market financial instruments, relative changes in short-term rates reduced the Swiss franc value of the US dollar and euro. In 2008, fiduciary funds managed by banks in Switzerland decreased by almost 21%, with Swiss franc and dollar funds falling by approximately 23% and 27%, respectively.¹⁴⁴ This trend continued into 2009 and cratered in 2015. In 2009, Swiss franc and dollar fiduciary accounts fell by more than 30%, while euro accounts fell by more than 41%.¹⁴⁵ Between 2007 and 2015, fiduciary funds fell by more than 76%.

Swiss financial intermediaries classified as “foreign banks” and “other banks” accounted for most fiduciary deposits. Foreigners favor these deposits because they are free from Switzerland’s 35% withholding tax (if invested outside Switzerland) because they are invested in the name of a bank but at the client’s risk. This tax treatment is consistent with the fundamental philosophy behind Switzerland’s tax system, which does not apply the extra-territoriality concept.

Gold Trading

Swiss banks participate actively in the purchase and sale of gold. Gold exchanges can be physical (e.g., coins, ingots, and medals) or non-physical (e.g., futures, forward, and option contracts). The physical gold market is divided into primary and secondary categories. The primary market caters to the manufacturing industry and the secondary market to investors. Most wholesale trades are cleared through London, New York, and Shanghai, which accounts for about 90% of the over-the-counter (OTC) market.¹⁴⁶ Of the worldwide gold exchanges, the New York Commodity Futures Exchange (COMEX), Shanghai Gold Exchange (SGE) , Shanghai Futures Exchange (SHFE) , and Multi Commodity Exchange of India Ltd . (MCX) are the world’s largest. Gold is also traded as securities backed by this precious metal.

The Zurich Gold Exchange was founded in 1968 by the Union Bank of Switzerland, Swiss Bank Corporation (SBC), and Credit Suisse. Its formation was a reaction to the UK’s decision to temporarily close its gold window due to the US dollar crisis. The Zurich Gold Exchange snowballed, eventually capturing nearly 70% of the world market. This surge slowed and stopped abruptly between 1980 and 1986 when the Swiss government imposed a tax on these transactions. By 1987, Zurich’s world position had fallen to 40%. Reinforcing this decline were conscious efforts of gold producers, such as South Africa and the former Soviet Union, to diversify their distribution channels. Since then, Switzerland’s big banks have moved much of their gold trading from Zurich to London, where Zurich paired with New York to form a robust secondary market. While still a significant participant in the physical bullion trade, the Swiss gold market is a mere fraction of what it once was. In part, Swiss banks’ comparative international advantage in gold bullion trading was based on specialized services in conjunction with Switzerland’s banking confidentiality laws, but these protections have been weakened dramatically during the past half-decade—especially for non-Swiss residents.¹⁴⁷

Underwriting

The Swiss banks have underwriting and placement power in all major domestic and foreign (including euro)¹⁴⁸ bond and equity markets . Due to the nation’s relatively low interest rates , liberal capital export policies, efficiency in underwriting , and ample placing power, Switzerland is among the leaders in placement activity.

The issue market for Eurobonds is fiercely competitive with narrow margins and high volumes. In general, competition has become so intense that these financial instruments are profitable only if attached to cross-currency swaps. Switzerland’s high withholding taxes on domestic Swiss bond issues have created incentives to issue Swiss-franc-denominated securities in foreign nations (i.e., the euro-Swiss franc market). Investors have purchased Swiss franc-denominated assets (mainly short-term and medium-term) and avoided paying the relatively high (35%) Swiss withholding taxes. Because the SNB has not officially approved Swiss franc bonds issued abroad, there is no significant market for Swiss franc Eurobonds.

The Swiss capital markets are commonly used to raise funds for private companies, public authorities, and supra-national organizations, such as the World Bank. These service fees have contributed to Swiss banks’ profitability without significantly changing their balance sheet ratios.

Derivatives

Derivatives are traded on exchanges and OTC markets, where Swiss banks often act as counterparties to their customers’ transactions. Figure 3.11 shows that between 2005 and 2021, Switzerland’s OTC derivatives market followed a roller-coaster path,

Fig. 3.11

(Source Swiss Bankers Association, Swiss Banking: Capital Market Products, Outstanding Derivative Financial Instruments, https://publications.swissbanking.ch/swiss-banking-trends-en/capital-market-products/ [Accessed on August 29, 2022]. The original data is sourced from Swiss National Bank. *See Table 3.17 in Appendix for data by the year)

Outstanding derivative financial instruments: 2005–2021 (Billions of Swiss francs)

• 1. Increasing by 67% between 2005 and 2011, from CHF 31.8 billion to CHF 53.1 billion,

• 2. Falling by 54% between 2011 and 2015, from CHF 53.1 billion to CHF24.6 billion,

• 3. Rising by 23% between 2015 and 2019, from CHF 24.6 billion to CHF 30.4 billion, and finally,

• 4. Falling by 11% in 2020 from CHF 30.4 billion to CHF 27.0 billion and 5% in 2021 from CHF 27.0 billion to 25.6 billion.

Throughout these fifteen years, interest rate instruments comprised most derivative products (between 62 and 73%). The combination of interest rate- and foreign exchange derivatives accounted for between 85 and 95% of the total. Credit derivatives, such as credit default swaps, rose from 5% in 2005 to 11% in 2007 but fell dramatically to 0.6% in 2020. The early years’ plunge was mainly due to volatility in the global financial markets between 2005 and 2009, due to the US-subprime mortgage breakdown, European debt crises, and their aftershocks. Throughout this period, equity derivatives were never more than about 5% of the total and fell as low as 1%. Together, precious metals and “other derivatives” never amounted to much more than about 1%.

Internationalization of Swiss Banks’ Balance Sheets

Table 3.5 shows Swiss banks’ international assets and liabilities as a percent of total assets and total liabilities as of June 2022. They ranged from 0.8% for regional and savings banks to 57.7% for big banks. International liability percentages ranged from 3.5% for regional and savings banks to 83.5% for branches of foreign banks (highlighted in Table 3.5).

Table 3.5 Assets and liabilities of banks in Switzerland: June 2022 (As a percent devoted to foreign business)

The most internationally active banks, measured by adding the percent of international assets to international liabilities, were stock exchange banks, big banks, foreign-controlled banks, foreign banks, and branches of foreign banks. Banks with the least overall global activity were regional and savings banks, Raiffeisen banks, and cantonal banks. Based on net international assets (i.e., international assets minus international liabilities), the “big banks” category was the only one in the positive range. A few relatively large cantonal banks have entered the international arena with inspired efforts to participate, but the overwhelming portion of their operations is still focused strictly on the cantonal level.

Table 3.6 shows that, from 2000 to 2021, Swiss financial institutions reduced their offices abroad marginally from 214 to 212. The most significant increases were foreign banks, a new category since 2015, which rose from 0 to 40 foreign offices, and stock exchange banks, which increased from 25 to 42 foreign offices. The most significant decreases were foreign-controlled banks, which fell from 80 to 40 foreign offices, and big banks dropped by 19, from 105 to 86. The decline for big banks was even more pronounced relative to 2010 when they had 144 foreign offices.

Table 3.6 Foreign offices of banks in Switzerland: 2000, 2010, 2020, and 2021

Switzerland’s Banking Categories

Switzerland has nine categories of banks: big banks, cantonal banks, regional and savings banks, Raiffeisen banks, stock exchange banks, other banking institutions, foreign banks, branches of foreign banks, and private banks.¹⁴⁹ Table 3.7 shows the relative size of these bank categories during the 2015 to 2021 period. From largest to smallest (rounded), big banks averaged 35% of the market, followed by cantonal banks (18%), stock exchange banks (11%), branches of foreign banks (11%), foreign-controlled banks (9%), other banks (8.5%), Raiffeisen banks (5%), regional and savings banks (2%), and private banks (less than 1%, at approximately 0.5%).

Table 3.7 Relative size of liquid assets for Switzerland’s nine banking categories: 2015–2021 (as a percent of total liquid assets)

Big Banks

The big banks are private joint-stock companies and universal banking institutions, offering virtually all commercial banking and investment banking services, including capital market transactions, securities trading, money market transactions, financial engineering, securities lending, consulting services for company mergers and acquisitions, and the implementation of these operations.¹⁵⁰ Even though they dominate the Swiss banking industry, these banks do not rank among the largest 30 banks in the world. In 2021, UBS placed thirty-fourth on Global Finance Magazine’s list of the world’s largest banks, and Credit Suisse ranked fortieth.¹⁵¹ The largest banks were in China , the Unites States, Japan, France, and the UK.

Swiss banks ranked much higher, worldwide, as wealth managers, with UBS (Switzerland) AG’s AuMs placing fourth, Credit Suisse fifth, Pictet (Switzerland) seventh, Julius Baer (Switzerland) thirteenth, and Lombard Odier (Switzerland) twenty-second.¹⁵² Swiss banks also fared relatively better in terms of safety,¹⁵³ particularly cantonal banks , such as Zürcher Kantonalbank , which ranked second worldwide, Banque Cantonale Vaudoise eighteenth, and Banque Pictet and Cie twenty-sixth. UBS ranked thirty-seventh.¹⁵⁴ These safety rankings are in stark contrast to the 1990s when big Swiss banks ranked among the safest financial institutions in the world.¹⁵⁵

Figure 3.12 shows that the big banks’ balance sheets are weighted toward amounts due from customers, mortgages, liquid assets, and their trading portfolios. The range of financial services the big banks offer is extensive and provides insight into why they are called “universal banks.” Their product offerings include deposits, commercial and consumer loans, trade and project financing, mortgages, money market instruments, foreign exchange, factoring, forfeiting, and discounting. They also provide off-balance-sheet transactions, such as portfolio management, credit lines, stock issues, brokerage services, bond and note underwriting, leasing, security custody services, fiduciary accounts, precious metals trading, documentary credits, guarantees, and derivative (e.g., forward exchange) contracts. This array of financial services has created strong financial synergies, such as linkages to asset administration, trading, placing, and underwriting, and it has allowed these financial institutions to reduce the variability of their earnings through diversification.

Fig. 3.12

(Source Swiss National Bank, Supplementary Data on Banking Statistics, https://data.snb.ch/en/warehouse/BSTA/cube/BSTA@SNB.JAHR_K.BIL.AKT.FMI?facetSel=toz_bsta_bankengruppe(begriff_bg_g15)&dimSel=KONSOLIDIERUNGSSTUFE(K),INLANDAUSLAND(A,T,I),WAEHRUNG(CHF,JPY,EUR,T,U,USD),BANKENGRUPPE(G15) [Accessed on August 29, 2022])

Asset composition of the Big banks: 2021

Within Switzerland, the big banks appear to be disconcertingly large when their total assets are compared to the nation’s gross domestic product.¹⁵⁶ In 2021, UBS’s and Credit Suisse’s assets were approximately 590% and 480%, respectively, of Switzerland’s nominal GDP.¹⁵⁷ By comparison, of the largest banks in the world, only the assets of Banco Santander in Spain (143%), BNP Paribas in France (116%), HSBC Holdings in the UK (110%), and Credit Agricole in France (104%) exceeded their nations’ nominal GDP . The disproportionate size of Switzerland’s big banks has caused significant concerns about the systemic financial risks that a failure of one or more might pose to the nation—and possibly the world.

Are the big Swiss banks “too big to fail?” This fear has led the nation’s regulators to impose special reserve and liquidity requirements on these financial institutions. Before 1994, Swiss banks’ accumulations of “hidden reserves” provided a buffer in case an economic or financial calamity caused bank assets to fall in value. In 1994, the Swiss Federal Banking Commission passed new accounting guidelines restricting their use so that bank gains and losses could not be camouflaged.

Before 2001, Credit Suisse and UBS were the only two financial institutions in Switzerland classified as “big banks.” Founded in 1856, Credit Suisse is the older of the two financial institutions, but since the 1998 creation of UBS via a merger of Union Bank of Switzerland and SBC, UBS has held the market leadership position when measured by balance sheet size and volume of business.

In May 2015, FINMA licensed UBS Switzerland AG as a new member of the “big bank” group, and in October 2016, Credit Suisse (Switzerland) Ltd. joined. This restructuring was part of FINMA’s “Too Big to Fail” recovery and resolution plans for systemically important financial institutions and part of the nation’s efforts to implement the Basel III regulations. The creation of two new banks enabled UBS AG and Credit Suisse AG to separate systemically important activities from the rest of their businesses.

UBS Switzerland AG was licensed to operate as a bank, securities dealer, and custodian bank, giving UBS AG the ability to transfer its retail, corporate, and asset management business to the new bank.¹⁵⁸ Similarly when Credit Suisse (Switzerland) Ltd . was licensed to operate as a bank, securities dealer and custodian bank, it did the same by transferring its Swiss retail and corporate customer businesses from the bank’s Swiss Universal Bank division to the new bank.¹⁵⁹

Cantonal Banks

A cantonal bank has at least one-third of its shares and votes controlled by the canton in which it resides.¹⁶⁰ These banks can be established as public, semi-private, or private stock corporations. If they are established as public corporations, their respective cantons supply the share capital , which is sometimes increased by participation certificates , offering private investors the opportunity to own shares in a bank but without the benefit of voting rights. In 1907, cantonal banks formed the Association of Swiss Cantonal Banks , promoting cooperation among its members and providing a united face externally.

At the end of 2021, Switzerland had 26 cantons and 24 cantonal banks, one for each of its cantons, except Solothurn and Appenzell Ausserrhoden. Solothurn privatized its cantonal bank in 1994, following a financial crash and costly acquisition of a local bank.¹⁶¹ Appenzell Ausserhoden sold its bank to UBS in 1996. Currently, 16 of the 24 cantonal banks are public legal entities, six are mixed-stock companies (i.e., entities under special law), and two are private companies.

In general, cantons provide unlimited guarantees on the deposits of their cantonal banks. The only exceptions are the Banque Cantonale Vaudoise, which has no guarantee, and Banque de Genève, whose guarantee is limited. In October 1999, Switzerland’s BA was revised, dropping the requirement for cantons, except those mentioned above, to provide full state guarantees for deposits.¹⁶² Of all the cantons, only the Berner Kantonalbank chose to phase out its guarantee over three years.¹⁶³

Founded in the second half of the nineteenth century, cantonal banks have been closely tied to their regional areas’ economic growth and development. During the nineteenth century, they invested heavily in Switzerland’s industrialization, but today these banks operate more like savings and loan institutions, mainly financing mortgages. Their size varies considerably, with Zürcher Kantonalbank’s assets exceeding CHF 192 billion.¹⁶⁴ Figure 3.13 shows mortgages ’ dominant role in cantonal banks ’ balance sheets.

Fig. 3.13

(Source Swiss National Bank , Supplementary Data on Banking Statistics, https://data.snb.ch/en/warehouse/BSTA/cube/BSTA@SNB.JAHR_K.BIL.AKT.TOT?facetSel=toz_bsta_bankengruppe(begriff_bg_g20)&fromDate=2015&toDate=2020&dimSel=KONSOLIDIERUNGSSTUFE(K),INLANDAUSLAND(T,I,A),WAEHRUNG(T,CHF,EM,EUR,JPY,USD,U),BANKENGRUPPE(G10) [Accessed on August 29, 2022])

Asset composition of Cantonal banks : 2021

In the past, cantonal banks escaped Swiss banking laws in several important ways. Because they did not need federal banking licenses to operate, cantonal banks were free from the rules of Swiss bank regulators, particularly concerning reserves and civil liabilities. As a result, their activities were not governed by the Federal Bank Commission (now called the FINMA), and bankruptcy proceedings could not dissolve them. Only the cantons could end them. With revisions of the BA in October 1999, supervision changed depending on the bank’s legal structure, which means cantonal banks are no longer granted the freedom they once enjoyed.

The mandates under which cantonal banks were created have undermined, in part, their ability to compete against Switzerland’s big banks. Earning profits has always been an important goal for cantonal banks, but they also have complementary economic, social, and political objectives, among which are promoting home ownership, fostering new economic activities, encouraging thrift, and supporting cantonal economic growth.

Unlike the big (Swiss) banks, cantonal banks were often restricted from pursuing alternative profit-making activities. Still, they could compete with the big banks and other financial intermediaries by paying no taxes and offering deposits to customers backed by cantonal governments’ full faith and credit. Today, the smaller cantonal banks focus primarily on savings and mortgage businesses, but the larger ones provide a complete range of services, making them virtually indistinguishable from larger universal banks.

After they outgrew the original objectives for which they were founded, cantonal banks (unfortunately) became frequent victims of political party objectives or vehicles for advancing politicians’ careers. During the 1990s, calamities and abuses at cantonal banks, such as Berner Kantonalbank and Solothurner Kantonalbank, brought the concept of a “state-run bank” under scrutiny.¹⁶⁵ The status quo of having politicians sit on cantonal banks ’ boards raised questions about the competencies required to guide banks’ operations and strategies and who should be responsible for mistakes. These discussions led to the empowerment of cantonal banks by establishing themselves as public, semi-private, or private stock corporations.

Regional and Savings Banks

Regional and savings banks are in the same basic line of business as cantonal banks but typically restrict their activities to relatively small areas or selected geographic sections within Switzerland. They earn most of their net revenues from the spread between deposit and lending rates (e.g., mortgages and corporate loans), staying away from many off-balance-sheet, fee-generating activities in which big banks are engaged. Nevertheless, there has been a trend for these financial institutions to broaden their banking services.

Regional and savings banks have been among the most vulnerable segments of Switzerland’s banking environment. Their numbers have dwindled because of their diminutive size, domestic orientation, and relatively high operating costs per transaction. In general, they are too small to take advantage of competitive economies of scale, offer too wide an array of services, and are excessively reliant on specific regions, leading to disproportionately high geographic risks. These disadvantages have become especially pronounced due to the heavy information technology costs connected to preventing the financing of terrorism and permitting money laundering activities. Between 2000 and 2020, regional and savings banks declined from 103 to 59 banks.¹⁶⁶ Many have been acquired—especially by the big banks . The FINMA recently urged regional banks to restructure themselves.

Regional and savings banks are mainly joint-stock companies, but a few have cooperative or other legal forms. Their sizes vary widely. Historically, they have financed their activities with the deposits of local customers and have lent to support local home purchases. Figure 3.14 shows the composition of their assets in 2021, with the heavy concentration of mortgages and liquid assets.

Fig. 3.14

(Source Swiss National Bank, Annual Banking Statistics, https://data.snb.ch/en/warehouse/BSTA/facets?facetSel=toz_bsta_bankengruppe(begriff_bg_g20) [Accessed on August 29, 2022])

Asset composition of regional and savings banks: 2021

In 1994, 98 of these financial institutions formed the Association of Swiss Regional Banks, called RBA Holding, to provide collective support and economies of scale for auditing, financial management services, inter-bank operations, and managing back-office business. These responsibilities were carried out by the three RBA Holding subsidiaries: RBA-Finance, RBA-Service, and RBA-Central Bank. Since 2018, the RBA has been operating under the name Entris Holding AG, which performs services for the affiliated regional banks within the Entris group, including reporting data for the “Minimum Reserves” survey.¹⁶⁷

In 2003, a group of small- and medium-sized regional and savings banks established Clientis Group, a legal community, liability association, and umbrella brand for member banks. It provides affiliates with a convenient way to exchange know-how and benefit from back-office synergies and services, such as refinancing, hedging, access to capital markets, IT, marketing, legal, compliance, risk management, marketing communication, and an ability to be rated by leading credit rating agencies.¹⁶⁸ Using Clientis, members’ services are relatively homogeneous, reducing local competition via product differentiation.

In 2018, a new association called Verband Schweizer Regionalbanken (VSRB) was established by a large majority of the regional banks. Its purpose is to protect common interests and increase exchanges among members. VSRB does so through political discussions and consultations and by maintaining contact with important counterparties, such as government officials, the SNB, the SBA, and the FINMA. The Association also informs the public about association issues.¹⁶⁹

Raiffeisen Banks

Traditionally, Raiffeisen banks have focused primarily on interest-income business by taking deposits from and making collateralized loans (mainly mortgages) to members (see Fig. 3.15). More recently, investment management has become a second important pillar of Raiffeisen’s activities. In contrast to regional and savings banks, Raiffeisen banks have had remarkable success defending and growing their small market shares. Typically, they operate in small regional areas, where it is generally unprofitable for the larger banks to do business. Raiffeisen banks keep their costs low by practical means. Twenty years ago, Raiffeisen banks spread their wings, becoming increasingly active in the larger cities. Because they are the only group of Swiss banks structured as cooperatives,¹⁷⁰ these financial institutions maintain their own legal identities but are supported and monitored by a central association, Raiffeisen Switzerland Cooperative . Whose liability pool guarantees all debts of its member banks, while the banks are jointly responsible for each other.¹⁷¹

Fig. 3.15

(Source Swiss National Bank , Annual Banking Statistics, https://data.snb.ch/en/warehouse/BSTA/facets?facetSel=toz_bsta_bankengruppe(begriff_bg_g25) [Accessed on August 29, 2022])

Asset composition of Raiffeisen banks : 2021

Membership in a Raiffeisen cooperative offers many benefits, including sharing operating tasks, reducing costs, distributing risks to the Association, and accessing broader pools of funds. The Association’s job is to provide many of the banks’ administrative tasks, such as liquidity management, risk management, equalizing cash and equity holdings, refinancing, and accounting, as well as providing research, marketing, and advice on matters relating to business management, information technology, investment counseling, personnel, and law. This way, members can take advantage of economies of scale and reduce costs below levels they could accomplish independently. To diversify away from the home mortgage market and reduce institutional risks, Raiffeisen banks have partnered with larger financial institutions, such as Mobiliar, for pension and insurance solutions, Vontobel and Leonteq for trading and investment services, and Viseca for consumer lending.

Stock Exchange Banks

Swiss stock exchange banks specialize in securities brokerage and asset management to enable and expedite security investments by private individuals and business entities—domestic and foreign. They are organized as private joint-stock companies, and their main sources of revenue are brokerage fees and interest on loans. Like other financial intermediaries, Swiss stock exchange banks are regulated by the FINMA and provide depositor insurance through esisuisse.¹⁷² In 1981, these banks formed the Association of Swiss Asset and Wealth Management Banks to represent members’ joint interests.¹⁷³

Figure 3.16 shows the asset structure of Switzerland’s stock exchange banks in 2021, with a relatively heavy emphasis on amounts due from customers (27.4%), liquid assets (25.1%) and derivatives, financial investments and instruments (21.3%).

Fig. 3.16

(Source Swiss National Bank, Annual Banking Statistics, https://data.snb.ch/en/warehouse/BSTA/facets?facetSel=toz_bsta_bankengruppe(begriff_bg_g35) [Accessed on August 29, 2022])

Asset composition of stock exchange banks: 2021

Other Banking Institutions

Until 2014, the category called “other banks” included (1) stock exchange banks, (2) other banking institutions, and (3) foreign-controlled banks. Since then, this category has not been reported separately and replaced by a new category called “other banking institutions,” which includes banks that do not fit neatly into any other category. In short, these financial institutions have no common service features or sizes.¹⁷⁴ “Other banking institutions ” include commercial banks, investment management specialists, small credit institutes, and consumer credit banks. Figure 3.17 shows their average asset distribution, 29% of which is devoted to liquid assets, another 28% to financial investments with about 25% invested in mortgage loans.

Fig. 3.17

(Source Swiss National Bank , Annual Banking Statistics, https://data.snb.ch/en/warehouse/BSTA/facets?facetSel=toz_bsta_bankengruppe(begriff_bg_g45) [Accessed on August 29, 2022])

Asset composition of “other banks”: 2021 (Not including foreign banks)

Foreign-Controlled Banks

A Swiss bank is “foreign-controlled” if more than half its voting shares are owned, either directly or indirectly, by individuals or legal entities resident or domiciled abroad (Art. 3^bis para. 3 of the BA).¹⁷⁵ Under Swiss banking law, foreign-controlled banks have, essentially, the same rights and obligations as Swiss banks, but Swiss law permits them to practice in Switzerland only if their home countries offer reciprocal privileges to Swiss banks. Moreover, foreign banks must have names that do not suggest Swiss ownership and must obey the SNB’s credit and monetary policies. In 2020, Switzerland’s foreign-controlled banks employed 13,984 people.¹⁷⁶

These financial institutions are organized as private joint-stock companies, operating as universal banks and functioning potentially in all financial fields but generally focusing on asset management or investment banking. As asset managers, foreign-controlled banks’ customers are mainly foreign (i.e., non-Swiss residents). In 1972, they formed the Association of Foreign Banks in Switzerland, including foreign-controlled banks and branches of foreign banks.

Branches of Foreign Banks

Branches of foreign banks operate mainly in the investment banking area, but some perform asset management services for foreign customers, particularly clients from countries of origin. They tend to focus on portfolio management, a fee-generating activity that is not reflected fully in their balance sheets. These banks also account for a healthy share of Switzerland’s fiduciary accounts, which offer substantial tax advantages for their home-country customers. In 2021, foreign banks controlled CHF 81.3 billion in fiduciary accounts, which was 75% of the total for Switzerland.¹⁷⁷

In contrast to foreign-controlled banks, which are independent legal entities, the legal status of foreign bank branches is subordinate to their parent companies. Nevertheless, they must have licenses to establish registered offices, branch offices, or agencies in Switzerland. In 1972, branches of foreign banks joined the Association of Foreign Banks in Switzerland. In 2020, they hired 1,161 full-time equivalent employees.¹⁷⁸

For the most part, branches of foreign banks focus on the financial needs of non-Swiss businesses and residents. They are in Switzerland mainly to follow their domestic customers’ expansion into foreign countries. Many of these banks were established when Switzerland became a major international capital market during the 1960s. Before World War II, only a handful of foreign bank branches were in Switzerland, mainly from neighboring countries.

During the 1970s, excessive worldwide liquidity in Western developed countries created intense competition among the international lenders, which reduced spreads to paper-thin levels, rendering balance sheet-based business less attractive. Increasingly, these institutions sought to supplement interest-based income with off-balance-sheet revenues. A glance at Swiss banks’ relatively healthy income statements induced many international banks to enter the Swiss markets. For some, the banking activities they conducted in Switzerland were restricted in their home countries. For these reasons, Japanese brokerage houses and banks were, until 1990, particularly prominent among the newcomers.

“Foreign Banks” ≡ “Foreign-Controlled Banks” Plus “Branches of Foreign Banks ”

The category called “foreign banks” is a hybrid containing both “foreign-controlled banks” operating under Swiss law and “branches of foreign banks” operating in Switzerland. In general, they tend to be larger than regional or Raiffeisen banks. As Fig. 3.18 shows, about 75% of their assets were concentrated in liquid assets and amounts due from customers and banks in 2021.

Fig. 3.18

(Source Swiss National Bank, Annual Banking Statistics, https://data.snb.ch/en/warehouse/BSTA/cube/BSTA@SNB.JAHR_K.BIL.AKT.FMI?facetSel=toz_bsta_bankengruppe(begriff_bg_g20)&dimSel=KONSOLIDIERUNGSSTUFE(K),INLANDAUSLAND(T,I,A),WAEHRUNG(T,CHF,EUR,JPY,USD,U),BANKENGRUPPE(A25)&fromDate=2015&toDate=2020 [Accessed on August 29, 2022])

Composition of foreign banks’ assets: 2021

Private Bankers and Private Banks

A “private banker” is a person who forms a sole proprietorship, general and limited partnership, or partnership that is limited by shares. As a group, founders may be individually or jointly liable, but at least one company member must bear unlimited liability for the bank’s commitments. Private bankers are Switzerland’s oldest financial institutions, specializing in the administration and management of portfolios for both Swiss and non-Swiss clients. To this end, they conduct all types of security activities such as trading, underwriting, and placement.

Since 2002, “private bankers” have included only financial institutions that do not actively seek deposits from the public and, therefore, are not required to build reserves, report detailed business figures to the SNB, or publish either annual or interim financial statements. As a result, there are no firm estimates of their client numbers or business volume. Private bankers compete using confidentiality, investment management skills, and international reputations for their high-quality and individualized financial services (i.e., a family, office-type approach, offering a variety of individual services).¹⁷⁹

Private bankers’ numbers have withered from 200, at the beginning of the century, to only five in 2022. The survivors are Rahn and Bodmer Co. (1750, Zurich), Bordier and Cie. (1844, Geneva), E. Gutzwiller and Cie. Banquiers (1886, Basel), Baumann and Cie. (1920, Basel), and Reichmuth and Co. (1998, Luzern).¹⁸⁰

A “private bank” is a corporation that focuses on asset management and investment advice for wealthy private clients. In contrast to a private banker, whose personal liability is unlimited, a private bank’s liability is limited by the legal form chosen.¹⁸¹ As a group, private banks are misrepresented in the official statistics, showing assets of less than one percent of total Swiss bank assets. Based on these statistics, this sector would appear to be scarcely worth mentioning, but, in this case, appearances are deceiving. These banks punch above their weight in the international arena due to their extensive (off-balance-sheet) activities.

The Swiss Private Bankers Association was founded in 1934 to represent the private professional interests of Switzerland’s private bankers. Eighty years later, in 2014, the Association of Swiss Private Banks (ASPB) was formed to represent a wider group of private bankers and stock exchange banks specializing in asset management. The ASPB was formed after four private bankers changed their legal classification to joint-stock companies on January 1, 2014, and became stock exchange banks.¹⁸²

Reichmuth and Co

One of the glaring facts emerging about Swiss private banks is the long hiatus of nearly 80 years between the creation of Baumann and Cie in 1920 and the founding of Reichmuth and Co in 1998. What significant obstacles inhibited the creation of a new private bank? Primary among the factors eroding these banks’ numbers were the deaths of vital partners, stock exchange crashes, and severe restraints of low capitalization on their activities.

Reichmuth and Co. was not founded in Zurich, Geneva, or Basel, which are considered the centers of Switzerland’s financial system. Instead, it began in Luzern, regarded as the heart of Switzerland because of its geographic proximity to Rütli, where the original three cantons formed Switzerland in 1291, and, therefore, its affinity with the hero Wilhelm Tell. The entrepreneur behind the venture, Karl Reichmuth, placed his savings and reputation on the line to start this bank, which may seem like standard fare for entrepreneurs in some countries, but, at the time, it was quite exceptional in Switzerland.¹⁸³

Portfolio Managers

Portfolio managers administer customers’ portfolios through powers of attorney and may also offer trustee services, albeit working as a trustee requires a separate FINMA license.¹⁸⁴ Aside from their skills as investment managers, customers prize portfolio managers for their independence from other financial institutions and trust-based relationships. Portfolio management companies range from single-person establishments to family offices and asset management companies. The Swiss business newspaper Finanz und Wirtschaft reports that “they manage customer deposits in Switzerland and Liechtenstein of CHF 475 to 600 billion, corresponding to a market share of around 11%.”¹⁸⁵

Portfolio managers both compete and cooperate with banking institutions. To service clients, they rely on banks to implement portfolio decisions and administer basic services, such as custody, account management, and e-banking. Most banks have separate desks to deal with external asset managers (EAMs). Some portfolio managers are associated with banks’ private banking desks, but this is rare. Cooperation is not universal. Some banks in Switzerland strictly prohibit working with EAMs because their policies are to provide these services exclusively (i.e., through internal wealth managers).

Becoming a portfolio manager is a two-step process, requiring a positive review by and affiliation with one of five FINMA-approved supervisory organizations (Sos), and afterward, successful appraisal and licensure by the FINMA, which is based on financial, personnel, and organizational requirements.¹⁸⁶ Among the financial requirements are sufficient equity and securities . Personnel requirements include irreproachable business conduct, a good reputation, specialist qualifications, and relevant personal documents, such as passports, curricula vitae, and work certificates. Finally, organizational requirements take into consideration adequate internal controls and acceptable risk management systems and models.¹⁸⁷

The FINMA continues to inspect portfolio managers’ business plans, balance sheets, income statements, and equity requirements for up to three years after receiving licensure. After that initial phase, periodic inspections are the responsibility of the respective Sos. In mid-2020, 1,934 portfolio managers notified the FINMA of their intention to apply for licenses, but by mid-2022, only 317 of them had been approved.¹⁸⁸

Mortgage Funding Institutes

Only two financial institutions are permitted to issue mortgage bonds in Switzerland, the Central Mortgage Bond Institute of the Swiss Cantonal Banks (Pfandbriefzentrale der schweizerischen Kantonalbanken AG, PBZ) and the Mortgage Bond Bank of the Swiss Mortgage Institutes (Pfandbriefbank schweizerischer Hypothekarinstitute, PBB). Both institutions are headquartered in Zurich, issue public bonds, and use the proceeds to refinance members’ mortgage loans. Because mortgage funding is such a significant part of the Swiss financial markets, we will return to these two key financial institutions in Chapter 8: Swiss Debt Markets.

Conclusion

The challenges confronting Swiss financial institutions are faced by nations worldwide trying to attain a top spot among elite global competitors. Digitalization, access to foreign markets, sustainable finance, competitive tax rates, problematic interest rates, the risks of systematically important financial institutions, and paradigm-changing events are realities of the twenty-first century that will not fade soon. The structure of Switzerland’s banking system has evolved to address these new realities and will continue to do so.

For many decades, Switzerland has had a global competitive advantage in delivering financial services, mainly due to its access to ample intellectual talent, world-class universities and research institutes, a growing spirit of entrepreneurship, and global trust in the Swiss franc. Crucial has been the nation’s relatively stable political climate, moderate tax rates, and a legal system that upholds private property and rule-of-law. Together, these attributes have given official and unofficial certainty to businesses’ and individuals’ financial transactions. So long as the nation continues to maintain these fundamentals, the chances are high that it will adapt successfully to competitive challenges on the horizon.

Appendix: Data for Chapter Tables

See Tables 3.8, 3.9, 3.10, 3.11, 3.12, 3.13, 3.14, 3.15, 3.16, and 3.17.

Table 3.8 Assets of banks in Switzerland: 1990–2022 June (millions of Swiss francs) (Consolidation level: Parent company)

Table 3.9 Staff at banks in Switzerland (domestic): 2010–2021 (total staff and percent by bank category)

Table 3.10 Net income by banking activity: 2005–2021 (percent and Swiss franc total)

Table 3.11 Portion of total bank assets by bank category: 2005–2021 (millions of Swiss francs) (Parent company perspective [survey: comprehensive year-end statistics])

Table 3.12 Selected assets of banks in Switzerland: 2010–2021 (millions of Swiss francs)

Table 3.13 Swiss mortgages, secured loans, and unsecured loans: 2021

Table 3.14 Liabilities of banks in Switzerland: 2010–2021 (millions of Swiss francs)

Table 3.15 Assets under Management of banks in Switzerland: domestic and foreign: 2010–2021 (billions of Swiss francs)

Table 3.16 Swiss fiduciary deposits by currency: 2005–2021 (billions of Swiss francs)

Table 3.17 Outstanding derivative financial instruments: 2005–2021 (millions of Swiss francs)