Jörg Gasser
Switzerland is a small country that packs an outsized punch. Ranked 132nd out of 194 by size, the alpine state is 20th in terms of gross domestic product (GDP) and second by GDP per capita. Covering just a tiny fraction of the globe, it hosts a quarter of the world’s cross-border assets and is a financial centre of global importance.
How such a small nation achieved such status is a tale of determination, perseverance, adaptability and innovative flair. As an open and liberal economy with a vibrant export sector and strong international ties, Switzerland’s success rests on its political and social stability, low inflation and centuries of neutrality that have turned the Swiss franc into an international haven and enhanced the country’s reputation and attractiveness.
Living with a strong currency has forced business to be efficient and innovative. The country invariably scores highly in comparative studies of international competitiveness and innovation, as well as more subjective measures of ease of doing business and quality of life. A highly regarded education and training system provides a deep pool of talent, further enhancing competitiveness, particularly in sectors, such as banking, dependent on premium service.
Understandably, Switzerland’s banks have become keener to make their voices heard and see their strengths and advantages highlighted. On December 7, 2020, the government and the financial sector launched 'finance.swiss', an information portal promoting the country’s financial centre, allowing readers to learn about its unique strengths.
Supported by regulation
Having a relatively large number of banks, many conducting international as well as domestic business, has fostered competition, capped costs and enhanced efficiency, while stimulating innovative products and service. A stable, but demanding, regulatory environment has helped. Our regulators even stretch Swiss banks beyond international rules as a safety measure, acknowledging the systemic importance of the financial sector in our economy.
Close regulation has contributed to the increase in the stability of Swiss banks since the 2008 crisis. Many have reviewed their business models and are not as big as they were, but are much more agile. Legacy issues concerning cross-border taxation have been addressed and business models adjusted successfully to fit a more transparent world. Despite the positive effects of regulation on the solidity and integrity of our banks, however, it remains a constant challenge to find the balance between regulation that makes us safer and over-regulation that weakens us by stalling competitiveness.
Top priorities
Digitalisation remains a work in progress but is being tackled. Swiss banks have pushed digital and technological developments, and reacted to disruptive pressure from new fintech competitors. Accelerated innovation has helped to contain, and even reduce, costs that have been rising, not least because of constant new compliance and regulatory requirements. Switzerland is also a leader in cryptocurrencies, with many start-ups and others concentrated in the ‘Crypto Valley’ around Zug and the financial centres in Zurich, Geneva and Lugano.
Take sustainability. Switzerland is a global hub for managing institutional and private client assets. Swiss investment managers based domestically look after SFr3.9tn ($4.4tn) of assets for private and institutional clients and a further SFr2.3tn in assets for private wealth management clients. That makes sustainability a priority. Switzerland has been a pioneer here and looks set to become an international hub for sustainable financial flows and services. This is a great opportunity for our banks, and I am confident they will respond.
Still more are joining international transparency initiatives regarding the risks associated with environmental, social and governance (ESG) factors and expanding their services recognising ESG criteria, sustainability bonds and other ESG instruments. Already, around 30% – with a steep upward trend – of the assets in Swiss investment management are aligned to ESG criteria (compared with a 15% global average). The remaining non-aligned 70% leaves a lot of potential – and work to do – for our banks. The Swiss Bankers Association has already compiled guidelines for integrating ESG considerations into the client advisory process in response to clients’ growing demands. We take our responsibilities very seriously here.
Inadequate market access
A much bigger challenge, I admit, concerns market access. Much of our financial centre is a de facto export industry. Access to key markets, especially the EU, is crucial. Yet despite Switzerland’s location at the very heart of Europe, our banks have extremely limited access to the EU.
That is surprising considering that more than 60% of assets managed in Switzerland originate from foreigners, many from the EU. EU clients are estimated to account for assets under management of roughly SFr1tn. The activities of Swiss banks encompass the management of assets entrusted to them by EU-domiciled clients and of EU-based collective investment schemes, providing institutional asset management for pension funds in the EU, and selling Swiss financial products into the region. Yet our lack of access hinders our banks’ ability to serve EU clients out of Switzerland. That includes the 40-odd EU banks domiciled in our country.
EU banks, by contrast, have always had access to Switzerland. This one-way street is a disadvantage for banks in Switzerland and for EU clients and investors. EU businesses and consumers are less able to tap into services and investment opportunities that are available outside the region.
Open financial markets
Economists recognise that open markets benefit all sides. And reciprocity is a fundamental principle of such markets and of good neighbourly relations. Trade restrictions and protectionism offer only short-term benefits for domestic suppliers by shielding them from competition. In the long term, however, stifling competition hinders innovation, expertise, service quality and pricing. Market protection leads ultimately to a welfare loss.
Fragmentation also means inefficient capital allocation and periodic liquidity problems. Such suboptimal market conditions are part of the reason why the European financial system is falling behind globally. What is clear to me is that granting Switzerland improved market access would contribute to the fight against fragmentation and is in everyone’s best interest.
Closer co-operation with the EU would also provide benefits in sustainable finance. ESG risks ignore national borders, making an international response urgently necessary. Swiss banks are following closely European regulatory efforts here. But attempts to promote and regulate sustainable finance would pack a much more powerful global punch were non-EU financial centres, like Switzerland, involved. Moreover, closer co-operation with mutual market access between EU and non-EU financial markets would help the financial sector to meet the Paris climate goals. The International Platform on Sustainable Finance initiated by the EU is a welcome first step here.
Switzerland is interested in further developing its relationship with the EU. While our country’s specific industry and political realities must be understood, we are convinced that mutually beneficial solutions are possible. The key lies in striking the right balance between regulatory independence within each jurisdiction and economic integration. And we are not the only non-EU country that believes the shortcomings of the current equivalence system must be overcome. Brexit has focused attention on the need for improved equivalence, institution-specific approaches or combinations to accommodate all sides.
Mutual market opening
Brexit also spells new opportunities for closer financial relations between Switzerland and the UK. Last June, the goal of mutual recognition and market opening between Europe’s two largest financial centres was incorporated into a declaration of intent on strengthening future bilateral relations in finance. The ideas agreed outline ambitious liberalisation and an expansion of mutual market access in banking, asset management, insurance and capital markets, including financial market infrastructure. Recognition of each other’s regulatory and supervisory framework is a part.
I am encouraged by the progress made. It shows the spirit of open markets is alive and well. This is a good precedent for unblocking the unresolved market access process at EU level, and I keenly hope more will follow.
A small country with a large economic footprint, Switzerland has to advocate for open markets and financial centres, emphasising the benefit for all. By building on our strengths and good position, by staying open and competitive, and by constantly getting better, we can actively represent our interests with confidence and intensify our good relations with our neighbours and the world.
Jörg Gasser is CEO of the Swiss Bankers Association.
