SWITZERLAND: An Introduction to Banking & Finance
The banks in Switzerland are generally doing well, despite the continuing challenging national and international environment. The continued low (and negative) interest rate environment and strong competition led to significant pressure on margins. Regulations relating to capital and other regulatory requirements, increased standards in compliance matters across the field, and tax transparency and related efforts are driving up costs. Measures to continuously enhance the protection of systems against cyber-attacks also impact the profitability. Further to this, digitalisation continues to have a strong influence on the general banking climate and accelerated structural change in the sector. It is still unclear how conditions will change for the Swiss banks as a result of the UK's decision to leave the EU (Brexit). It is in this difficult environment that the Swiss banking sector continues to run through a fundamental change to be fit for existing and future challenges and to remain on the top as regards competitiveness.
II. Key Figures
Pursuant to the current Global Financial Centres Index (GFCI) ranking, published in September 2018, both Zurich (9th place) and Geneva (27th place) continue to rank among the leading global financial centres.
Switzerland's financial sector continues to be an important contributor to the Swiss economy. According to key figures published in October 2018 by the Swiss State Secretariat for International Financial Matters, the Swiss financial sector's share in Switzerland's gross domestic product (GDP) in the year 2017 was 9% and the Swiss financial sector's nominal added value (Wertschöpfung) without insurance services was about CHF31.05 billion (as compared to CHF34.58 billion in 2012).
According to the Swiss banking barometer 2018 (published by the Swiss bankers association in August 2018), at the end of 2017 the banks in Switzerland managed total assets of CHF7,291.8 billion. Compared to the previous year, domestic customer assets rose by CHF119 billion (+9.3%), while foreign customer assets even increased by 10%. Overall, this corresponds to an increase in the assets managed in Switzerland of CHF641 billion (+9.6%). The share of foreign assets under management is slightly below 50%. With a market share around 27.5%, the Swiss banking sector remains the global market leader for cross-border private banking.
In 2017, aggregate annual profit amounted to CHF9.8 billion (2016: CHF7.9 billion) and aggregate net income was CHF62.5 billion (-0.1%). The banks paid CHF2.2 billion in taxes.
Lending by the banks in Switzerland to companies and private individuals is intact. The domestic credit volume was over CHF1.13 trillion, which represents a slight 2.1% rise compared to the previous year. At 2.68% in 2017, the growth of domestic mortgage lending more or less remained constant as compared to the previous year (+2.66%). This is likely due in part to the measures introduced by the banks in the mortgage lending segment, including the amendments made to self-regulation.
III. Business Models
The Swiss banking system is based on the model of the "universal bank," which means that a licensed bank may provide all banking services, such as credit business, deposit and custody business, asset management and investment advice, payment transactions, securities transactions, underwriting business or financial analysis.
Rising regulatory costs, pressure on margins and investments in technological developments are, however, accelerating structural change and consolidation in the sector, which is also reflected in the KPIs: for the 2017/2018 reporting period, the number of banks in Switzerland decreased further. At the end of 2017, a total of 253 financial institutions were licensed as bank (as compared to 261 in 2016). Among these institutions are four so-called "large" banks (Credit Suisse and UBS and their Swiss subsidiaries Credit Suisse (Schweiz) and UBS Switzerland), 24 cantonal banks, 62 regional banks, 99 foreign banks, including branches of foreign banks, and 43 banks specialised in exchange, securities and asset management business. In addition, Switzerland's Raiffeisen group consists of 270 independent cooperatives spread over Switzerland.
IV. Regulatory Environment
The Swiss banking sector was shaped by the wave of global regulation that followed the financial crisis. Both national and international efforts aimed to provide the financial system with greater stability and to reduce the risks for customers, counterparties and governments. Swiss financial market regulation has followed the trend towards regulatory convergence, whereby Switzerland, in its implementation of international guidelines as one of the first movers, has taken a comparatively more flexible approach in some areas, and a stricter approach in other areas, depending on the area of regulation and its relevance for the Swiss financial sector and Swiss economy as a whole.
The regulatory frameworks that are particularly relevant for Switzerland's banking sector can largely be divided into four groups: banking regulation, consumer protection, tax and anti-money laundering, and financial market infrastructure. In the past years, Swiss banking regulation in particular has seen major developments. FINMA transposed the Basel III capital and liquidity requirements into Swiss law relatively quickly by amending the Swiss capital adequacy ordinance (CAO) and issuing a variety of circulars with implementing provisions, in part far exceeding the minimum requirements set out by Basel III (what was often referred to as the "Swiss finish"). Switzerland closely follows developments at the Basel Committee on Banking Supervision, with the CAO being amended in order to provide for a leverage ratio of 3% for all banks (in force since January 2018) and revised risk distribution provisions (in force since 2019).
In recent years, Switzerland has been a forerunner with regard to specific regulation of systemically relevant banks (i.e. Credit Suisse, UBS, Zürcher Kantonalbank, Raiffeisen Group and PostFinance). The so-called too-big-to-fail (TBTF) package comprises measures such as stronger capitalisation, stricter liquidity requirements, improved risk diversification and organisational measures, including resolution planning, that guarantee systemically important functions for the economy such as payment transactions, even in the case of the threat of insolvency. The result of this TBTF regulation is a differentiated regulatory landscape in Switzerland, with significantly higher supervisory requirements for the systemically relevant banks, and even higher standards for the two G-SIBs Credit Suisse and UBS, that are reassessed at regular intervals.
For internationally active systemically relevant banks, Switzerland has already implemented the Total Loss-Absorbing Capacity (TLAC) requirements of the Financial Stability Board (FSB) as of July 2016, subject to phase-in and grandfathering provisions until 1 January 2020. Under the revised regime, global systemically important banks (G-SIBs) are subject to two different minimum requirements for loss-absorbing capacity: G-SIBs must hold sufficient regulatory capital that absorbs current operating losses to ensure continuity of service (going concern requirement) and they must issue sufficient loss-absorbing debt instruments to fund restructuring without recourse to public resources (gone concern requirement). The going concern requirement applicable in 2020 for a G-SIB consists of (i) a base requirement of 12.86% of RWA and 4.5% of leverage exposure; and (ii) a surcharge, which reflects the G-SIB’s systemic importance. For the two Swiss G-SIBs, Credit Suisse and UBS, this currently translates into a going concern requirement of 14.3% of RWA, of which the minimum CET1 component is 10%, and 5% of leverage exposure, of which the minimum CET1 component is 3.5%. The gone concern requirement of a Swiss G-SIB is equal to its total going concern requirement, that is in 2020, a base requirement of 12.86% of RWA and 4.5% of leverage exposure, plus any surcharges applicable to the relevant G-SIB, but not including any countercyclical buffers. The gone concern requirement should primarily be fulfilled with eligible bail-in debt instruments that are designed to absorb losses after the write-down or conversion into equity of regulatory capital of a G-SIB in a restructuring scenario, but before the write-down or conversion into equity of other senior obligations of the G-SIB. In addition to bail-in debt instruments, the gone concern requirement may further be fulfilled with other capital instruments, including CET1, additional tier 1 capital instruments or tier 2 capital instruments, to the extent such tier 2 instruments are still issued. Further, from 2019 onwards, domestically active systemically relevant banks (Zürcher Kantonalbank, Raiffeisen Group, PostFinance) will also be subject to a gone concern requirement – but only up to 40% of that of G-SIBs.
Furthermore, Switzerland has eased certain restrictions for fintech firms in line with the Swiss authorities' commitment to foster innovation in the financial sector. Following an amendment to the banking ordinance, firms are allowed to accept funds for settlement purposes for a period of up to 60 days (the previous practice was seven days) and the acceptance of public funds up to CHF1 million is no longer classified as operating on a commercial basis and thus in principle exempt from authorisation, allowing firms to try out a business model before they are finally required to obtain authorisation if they grow larger. By the same token , from 1 January 2019, companies operating outside the core banking activities can, with a special licence, publicly accept deposits of up to CHF100 million (consolidated), provided they neither invest, nor pay interest on these funds.
The regulatory changes relating to financial services are driven by the desire to align Swiss investor protection to international standards, such as MiFiD II, as well as to preserve market access for the cross-border securities business, in particular with the EU. Against this background, several legislative initiatives have been enacted. On 1 January 2016, the Swiss Federal Financial Market Infrastructure Act (FMIA, FinfraG) entered into force and introduced, inter alia, regulations applicable to the OTC derivatives market. On 15 June 2018, the new Swiss Federal Financial Services Act (FFSA, FIDLEG), which will regulate the provision of financial services generally and the prospectus requirements for public offerings and admission to trading of securities, as well as the new Swiss Federal Financial Institutions Act (FFIA, FINIG), which, inter alia, will subject (independent) asset managers to licensing requirements and prudential supervision for the first time in Switzerland, were adopted by the Swiss Parliament. Both new federal acts are expected to enter into force in 2020.
In relation to tax and money laundering, Swiss banks that participated in the Programme for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks that was issued in 2013 jointly by the US Department of Justice and the Swiss government to settle issues in connection with the potential involvement in tax offences of US persons continued to provide information to the DOJ (to the extent legally permitted) under the cooperation clauses contained in the NDAs that they concluded with the DOJ. Other non-US regulators and authorities also continue enforcement action against certain Swiss banks. In addition, the DOJ continued to follow the leads and insights gained during the Swiss Bank Programme and sought to target individual institutions (both banks and non-banks) that it suspected to have links to non-compliant (i.e. non-taxed or undeclared) client assets.
Since January 2016, aggravated tax misdemeanour has been defined as a new predicate offence to money laundering. Aggravated tax misdemeanour is defined as tax fraud relating to direct taxes (income tax, profit tax etc.), provided the tax evaded in any tax period exceeds CHF300,000. Measuring the relevance of the introduction of the new tax-related predicate offence is difficult, but according to the Money Laundering Reporting Office Switzerland (MROS), of the 2909 reports made to MROS in 2016, only 34 related to the predicate offence of aggravated tax misdemeanour. The automatic exchange of information (AEOI) with countries abroad for information regarding taxable persons became the new international standard for the resolution of the tax issues. The US took a first unilateral step in this direction with its Foreign Account Tax Compliance Act (FATCA), which came into effect in July 2014. Switzerland signed a respective intergovernmental agreement with the US in 2013. As of 1 January 2017, Switzerland has implemented the AEOI with other countries in accordance with the global OECD standard. Respective bilateral agreements as well as an agreement with the EU have been signed with a number of OECD and non-OECD countries and further agreements are currently being negotiated. Switzerland started to exchange information with the respective countries as of 1 January 2018.
Furthermore, FINMA, as well as its US and UK counterparts that supervise the foreign operations of the large Swiss banks, have continued to focus on compliance issues related to market conduct.