Switzerland remains a solid location for financial and corporate investments. While the country officially went into recession in early 2009, the Swiss economy recovered quickly. Switzerland has not experienced a severe credit crunch as seen in other parts of the world: positive action, some of it in response to the crisis and some of it long-planned, has maintained stability in the country’s financial system.
As well as measures and legislative activity regarding the stability of the finance industry, tax reliefs for families and additional funding of unemployment insurance, the federal government has implemented certain stabilisation measures for the overall Swiss economy in three steps. The cost-effectiveness of these measures was split over the fiscal years 2008-10.
These three-step stability measures covered, most importantly, the labour market (short-term work compensation for enterprises, and the prevention or mitigation of youth and long-term unemployment), but also contained stimulus measures regarding, for example, the export risk guarantee, infrastructure projects (road, railway), high water protection, environment protection, green energy, and the refurbishment and maintenance of buildings. As of May 2011, the unemployment rate is at a low 2.9 percent.
Switzerland hosts, since its formation in 1930, the world’s oldest international financial organisation, the Bank for International Settlement (BIS), which acts as bank for the most important central banks. Switzerland is a member of the Basel Committee on Banking Supervision. Other prominent international organisations such as the International Committee of the Red Cross, the World Trade Organisation, the World Intellectual Property Organisation and the World Economic Forum are also located in Switzerland.
International attraction
Switzerland attracts foreign companies and (ultra) high-net-worth individuals and employees for reasons such as free capital flows, open markets – including the labour market – legal, political and economic stability; as well as its strong, independent currency, high legal certainty, effective protection of social and economic privacy and high personal quality of life.
Businesses are supported by the country’s pragmatic regulation of its financial services industry, reasonable taxation, excellent educational systems on all levels, and availability of skilled employees (both Swiss and foreigners). Furthermore, the real estate market is robust.
For example, the Society for Worldwide Interbank Financial Telecommunication, which counts among its members the 2,500 largest global banks, has established in Switzerland a new operating centre for processing all European wire transfers.
And it is not just finance firms, such as hedge fund managers and insurers, which are increasingly moving to Switzerland. Industrial firms are also looking to the country when establishing their European or global headquarters, operation centres, research entities or manufacturing or trading sites – including Procter & Gamble, Kraft and Cadbury, McDonald’s, Cargill, Transocean, Sempra Energy, Amgen, Google, Yahoo and Ebay.
Autonomy
Switzerland is not a member state of the European Union or the European Economic Area, but of the European Free Trade Association and Organisation for Economic Co-operation and Development. This renders Switzerland the autonomy to regulate its financial services industry as it deems appropriate.
Swiss financial market regulation is based on two pillars: supervision of the market actors such as stock exchanges, banks or securities-dealers, with a focus on the secondary market rather than regulating the primary market; and self-regulation. Already since 1977, based on self-regulation promulgated by the Swiss Bankers Association (SBA), Swiss banks have adhered to know-your-customer rules and implemented and constantly improved means to identify account holders and beneficial owners.
Switzerland introduced legislation to penalise both insider trading and money laundering in 1990; further legislation, including the Anti-Money Laundering Act – which came into force in 1998 – translated the recommendations of the Financial Action Task Force on Money Laundering into national law.
Market surveys such as the Swiss Financial Centre Watch show that the Swiss financial market has experienced a veritable boom, not so much due to banking and insurance but mainly due to new financial services providers such as hedge funds, private equity firms, venture capital firms, independent asset managers and trust companies. There has been no private equity crisis at all in Switzerland.
Switzerland is one of the world’s leading financial centres; supervised, since 2009, by the Financial Market Supervisory Authority (FINMA). Incorporating the former banking, insurance and anti-money laundering authorities, the new body streamlines financial regulation, making auditing and enforcement uniform across different financial sectors. Despite its start during one of the busiest periods for financial regulators, FINMA has coped well.
Another important pillar of the Swiss financial center is the SIX Group, which provides financial infrastructure services to national and international participants. SIX Group was formed at the start of 2008 through the merger of the three main Swiss infrastructure providers. SIX Group’s fields of business therefore include securities trading (SIX Swiss Exchange), securities services (SIS) and financial information and payment transactions (Telekurs).
In good company
There are many Swiss financial intermediaries of international weight. Most – notably UBS and Credit Suisse – provide not only global asset management, but also investment banking services, and are able to advise large international enterprises on a global scale. Zurich Financial Services and Swiss Re are very strong global (re-)insurers. Glencore, which went public in May 2011, and Mercuria are among the world’s leading commodities traders; XStrata is a leading global mining enterprise.
Switzerland is also a stronghold for pharmaceutical enterprises, such as global players Roche and Novartis, as well as more niche biotech companies. The country is the home base for large nutrition companies such as Nestlé, and hosts Swatch, Rolex and other luxury watch manufacturers. It hosts a number of companies that are not only listed at SIX, but also on the New York and London stock exchanges.
Mitigating bank risks
Overall, Swiss banks are in a comparatively strong position, having avoided the worst of the sub-prime crisis and the collapse of Lehman Brothers. The deposit guarantee for Swiss investors was increased from CHF 30,000 to CHF 100,000 ($90,000) in December 2008 by the Swiss parliament, which is a clear and meaningful sign to boost business confidence. The insurance comes from the banks themselves, which are required to hold assets in Switzerland that amount to 125 percent of the protected deposits. It’s a typical Swiss solution that, to every extent possible, no taxpayer money is involved.
Furthermore, in the aftermath of the financial crisis, FINMA took the initiative to mitigate systemic risks of large Swiss banks that are systemically important for the Swiss economy. It has also proposed measures strengthening the resilience of such banks, thus limiting the economic impact of a crisis in the financial system and promoting financial stability.
This initiative is embedded in the global framework, in particular of the Basel Committee on Banking Supervision, which issued new rules (Basel III) in September 2010. Switzerland will implement the Basel III proposals within the internationally agreed time frame.
These revised rules would be applicable to all banks regardless of their systemic relevance, but banks with higher systemic importance should maintain a higher solvency. It is currently planned to require large international banks to have a capital of 19 percent of their risk-weighted assets; i.e. the 4.5 percent RWA minimum capital requirements under Basel III, the capital conservation buffer of 8.5 percent RWA, and a progressive surcharge of 6 percent RWA based on current calibrations. The necessary legal changes are currently being debated in the Swiss federal parliament.
Staiger, Schwald & Partner, founded in 1964 and with offices in Zurich, Berne and Basel (notary office), is a Swiss business law firm advising top-quality domestic and international clients. Its professionals advise companies, financial institutions and high net worth individuals in national and international M&A, venture capital, private equity, corporate and finance transactions, banking, capital markets, insurance and any type of commercial project. Driven by personality and commitment, they are dedicated to the client’s goals.
Mark-Oliver Baumgarten is a partner at Staiger, Schwald & Partner and head of the banking, finance and capital markets team
For more information Tel: +41 58 387 80 00; Email: mark-oliver.baumgarten@ssplaw.ch; www.ssplaw.ch
