28 Sep Rock-solid banking sector responds to COVID-19 by rapidly adding liquidity to the Swiss economy
Jörg Gasser, CEO, Swiss Bankers Association, explains how banks are supporting businesses and why the sector is focused on digitization and sustainable finance
Switzerland has forged an impeccable reputation in the financial industry, with one of the most competitive financial centers in the world. The financial sector is Switzerland’s third-largest industry, accounting for nearly 10 percent of gross domestic product (GDP). As CEO of the Swiss Bankers Association (SBA), the umbrella organization that acts as the voice of the country’s banks, can you give us an overview of Swiss banking, the sector’s performance in 2019, and the key strengths and main competence areas of Swiss banks?
Switzerland is a top-tier international financial center. We are a global hub for investment management, which is one of the most important segments within Swiss banking. Investment management, or the professional management of assets for institutional and private customers, oversees assets worth $3.6 trillion. In total, banks in Switzerland have $7.3 trillion of assets under management.
Switzerland is also the world leader in global cross-border wealth management, with a market share of 27 percent and assets of $2.4 trillion. This is as much as the second and third placed financial centers, Hong Kong and Singapore, combined. Cross-border wealth management is one of the Swiss financial center’s leading areas of expertise.
After a pronounced slump in the wake of 2008’s global financial crisis, the earnings of Swiss banks rebounded. Between 2011 and 2018, they increased from $62 billion to $67 billion. Today, Swiss banks’ annual value creation is considerable, amounting to $35 billion, or 5 percent of GDP.
The Swiss banking sector employs 144,000 people directly and, if we take into account the entire value chain, this number adds up to about 250,000. The banking sector contributes $4.6 billion in taxes a year, which is more than 3 percent of total Swiss tax revenue. It is not the largest contributor to the country with regard to economic power but it remains one of the most important sectors and enables the strong Swiss economy to thrive.
One key success factor for Switzerland is the size of the country. Being geographically small means that we can easily and directly interact with the different stakeholders: government, regulators, public sector, society at large or inside the industry. All of the key players know each other and can manage problems in a straightforward way. That was—and still is—a large plus during the COVID-19 crisis.
Our Swiss educational system is excellent with very high standards. This is crucial for a service-oriented economy. Thanks to our high-class universities and large talent pool, Switzerland is one of the most innovative countries in the world. This is a cornerstone of our expertise in banking. As a result, Switzerland’s financial hub offers one of the deepest and widest arrays of products and services to domestic and international clients.
Our financial system is very much concentrated between Zurich, Geneva and Ticino; we have created an infrastructure and an ecosystem that is very well connected and effective. Switzerland maybe small but it has an extremely open economy and this is important to note. Due to our relatively small home market, we have a highly connected and export-oriented economy. Access to the European and global markets is crucial in order to keep and grow the quality and size of our economy and financial center.
During the COVID-19 crisis, Switzerland has clearly demonstrated its agility and leadership, rolling out one of the fastest and most efficient loan schemes in Europe for small- and medium-sized enterprises (SMEs) and offering interest-free credit overnight. How would you describe the role and contribution of Swiss banks toward cushioning the socioeconomic impact of the pandemic and how has this SME emergency loan scheme been implemented?
As I mentioned earlier, because of its small size, Switzerland can be fast and agile. Swiss banks are closely connected with their clients—in this case SMEs. This closeness worked like a seismograph during the crisis—the banks immediately realized where the problem was and what kind of issues SMEs were facing in light of COVID-19. At the same time, there was efficient communication between government entities including the Ministry of Finance, the Swiss National Bank and the regulator, the Swiss Financial Market Supervisory Authority. We saw very quickly that the problem was about liquidity—we had to provide liquidity to SMEs through bridging loans in order to help them survive until the economy picks up again.
Within roughly 10 days, the SME loan program from the government and banks kicked off with a guaranteed volume of $42 billion . As of today, around 125,000 credit facilities with a total volume of around $16 billion have been granted to Swiss SMEs quickly and in an non-bureaucratic way. The Minister of Finance and the most important banks sat virtually around a table and discussed what could be done. The SME loan program was then executed by the banks with support from the government, the central bank and the regulator, which granted some regulatory reliefs. It was simple and straightforward. The goal set out by the Minister of Finance was that these loan facilities be available within 30 minutes for each client.
The loan program to provide liquidity to the Swiss economy works very well. Now, the question is how we can mitigate the effects of the global economic crisis in the long term. Banks and their SME clients discuss how they can manage the situation on the demand side, particularly for export-oriented firms. The Swiss franc traditionally appreciates in crises and that poses a major challenge to those businesses. Stabilizing export-oriented SMEs, which are focused on a forward-looking business model, is one of the issues.
Another major issue that is currently being discussed at a political level is how to manage the debt. The $16 billion of the loan program is guaranteed by the government, and that is only one part of it. The government’s economic support programs together amount to approximately $42 billion. This will result in a state deficit at the end of this year. The big discussion right now is how to manage this. Switzerland, however, is financially very solid and can bear it. Even in an extremely severe economic scenario, the Swiss debt-to-GDP ratio would be far below the Maastricht criteria that apply for European countries.
Everyone remembers the 2008 Lehman Brothers’ bankruptcy and the global financial crash that followed. How would you assess the impact of the pandemic on Swiss banks and to what extent is the industry better prepared after the 2008 global financial meltdown?
The financial stability of the banks has sharply increased since the 2008 global crisis, which is a logical reaction to what happened. For the time being, and from our point of view, financial stability is not an issue for Swiss banks. I think this is the most important point.
The second important issue is digitization. Over the last ten years, and even more so in the last few years, the banks focused on adapting their business models and pushed digital and technological developments. Swiss banks have always been very competitive and they saw emerging pressure from new fintech firms. This accelerated innovation within the banks and they started to reinvent their business models. They knew that they could not afford to be sluggish. The regulatory pressure was high, technological pressure weighted on their business models and the fact that it was increasingly difficult to export their products also made them very competitive. From this point of view, they were very well prepared. I believe that their innovative power even grew under pressure.
I think the banks came out stronger from the crisis 10 years ago. They are not as big as they were prior to the crisis, but they are more agile, much stronger and rock solid.
Over the past 10 years, the industry has been through a lot. Never before has the financial sector undergone such rapid and fundamental change, with digital disruption on the one hand and abrupt changes in regulation on the other. Do you think the crisis will further accelerate transformation in the banking environment, and what are the main threats and opportunities for Switzerland’s banking sector?
Sustainable finance is a top priority for us and Switzerland is on course to become a premier international hub for sustainable finance. It is a great chance that also poses some challenges—it is clearly an opportunity for our banks but it requires them to adapt their business models. Switzerland is ready to seize this chance. From a wealth management point of view, where we are a global heavyweight, there is huge potential.
Digitization is another chance that comes with some challenges. Rapid technological development is putting pressure on traditional banks. Fintechs are developing new methods and offers, cryptocurrencies are also an important player and a driver of innovation and technological development. Banks adapt to these developments and integrate them to their internal processes and client offerings. Digitalization can become a threat for those who are not able to integrate the digital world into their business.
The third issue that remains a challenge for Swiss banks is market access. Our banks have extremely limited market access to the European Union. This impacts their ability to provide services to their European clients. Market access and mutual recognition of rules and regulations is always an issue if you have international clients. It is important for banks to be compliant, especially when you are active in cross-border wealth management with clients from all around the world. The assets you are attracting need to be fully compliant with international and all applicable national standards. We do not want to have a financial center that is in any way perceived as being non-compliant with regard to money laundering, corruption or assets that are not properly taxed. This belongs to the past and will never return.
The fact that Switzerland fully implemented automatic exchange of information was not nearly as disastrous as some comments or media predicted, quite the contrary. Assets under management even increased after the introduction. Some assets left Switzerland and moved to other jurisdictions, maybe because they were not properly taxed. Finally, Switzerland became more attractive for all those who are tax compliant and want to leverage the expertise of Swiss banks. In tax-compliant Swiss banking, expertise and service quality are paramount.
Digitization has accelerated in recent years. What are the most noticeable changes that have taken place in Swiss banks in this regard and how is the country working to enhance technological innovation and accelerate a digital shift in its financial sector?
The whole fintech sector has grown considerably. The innovative power of these small enterprises is an impetus for traditional banking and the range of services is now much broader than it was in the past. The banks incorporate new products and services, either by developing them themselves or by collaborating with fintech companies that provide their services through traditional banks. The combination of traditional banking services with new technologies is the new method.
One challenge of digitization is cybersecurity. Security is a major issue for banks and we need close cooperation between the government and the private sector to guarantee security of banking. We are working with a partnership approach to implement this. Finally, if you really want to provide seamless digital services, you need an e-identity. Switzerland is not as advanced as it should be in terms of really being able to digitize the whole service palette that we provide.
I know one of the topics that is close to your own heart is sustainable finance. Tell us about the key propositions and mechanisms proposed by SBA to promote sustainable finance and the progress that has been made toward turning Switzerland into a sustainable finance hub. Do you think Switzerland has what it takes to take the lead in this segment?
It is our goal to become one of the world’s leading sustainable finance hubs, which is a justified ambition from my point of view. The Swiss financial center is a pioneer in sustainable finance and especially with regard to wealth management where we are already a global leader. Imagine if all the money that is professionally managed in Switzerland—$3.6 trillion—was invested in sustainable financial products: this would have quite an impact.
To get there, we first need to be able to provide clients with these sustainable products and services for which we have the know-how. If you want to sell these products abroad and increase the impact, we also need access to key markets.
Another issue is about regulation; transparency needs to be improved. In order to be transparent, you need a taxonomy. We need a taxonomy that is applicable across the board globally—international and transparent standards. It doesn’t make sense for Switzerland to develop its own standards. Transparency will help grow the quality of the sustainable portfolios and services we offer. It is also very important to improve the framework conditions. If you want to provide sustainable products and services globally, they should not be too expensive. Yet in Switzerland we still have some taxes that don’t serve that purpose, as they make the export of those programs more expensive.
You are celebrating your first anniversary as CEO of the SBA. Looking toward the future, what are your plans and priorities for the post-crisis months and for the longer term that will strengthen Switzerland’s position as a leading and competitive global financial center?
We will continue with what we started a few months ago. Sustainable finance is a very important issue. We have a strong starting position but we have to adapt the regulatory and political framework to better consider the market needs for sustainable finance.
Technology and digitization will remain a very important issue for the foreseeable future. We continue to anticipate and define what lies ahead for the future of banking and how banks will position themselves to be ready to face the challenges of the future. This concerns the regulatory side where, of course, stability plays a major role. But we also need to see the opportunities that have emerged. For example, we must find ways to leverage digitization in order to increase sustainability. If we can implement this into our business models, I believe that many opportunities will open up that we can exploit and which can advance the financial sector.