Switzerland - Money

The Swiss National Bank, the central bank and the institution which issues currency, has been successful in maintaining the arguably most stable currency in the world but also very skeptical of the benefits of integrating Switzerland with the EU or with its euro currency. With its private banks and insurance companies active globally and rated among the world's best, the Swiss financial services industry is traditionally one of the largest employers and an important export revenue source. Swiss banks, with their firm reputation for financial solidity and respect for privacy, are leaders in global asset management. More than one-half of the US$1.76 trillion in assets managed by Swiss banks are thought to be of foreign origin (according to the Swiss National Bank).

The local banking scene, however, has undergone some serious structural changes in the 1990s, following global consolidation trends. Many small local banks closed or merged and many large ones streamlined their Swiss retail networks while expanding their overseas operations.

The total number of banks dropped from 495 in 1990 to 403 in 1996 and the number of regional banks was cut by more than one-third. In 1990, the Swiss banks had also, under pressure from the federal government, to abandon a series of price-fixing arrangements they were indulging in, increasing competition for customers and funds. The domestic recession between 1991 and 1997 and the cuts in spending and borrowing it initiated helped send out of business a number of regional banks with limited deposit bases relying heavily on mortgage lending and loans for local businesses. All these developments have increased the concentration of the Swiss banking sector where the 4 largest banks, including the merged Union Bank of Switzerland (UBS) and Swiss Bank Corporation (SBC), account for half the total combined balance sheet. Nevertheless, Switzerland maintains a high bank density, with 1 branch for every 1,400 inhabitants (compared with 2,000 in Germany or 4,700 in the United States), although bank employment decreased from 127,626 in 1990 to 119,771 in 1996. In the long run, the Swiss Bankers' Association fears, up to one-third of the 1996 bank employment could be lost due to consolidation and the use of new technologies in the sector.

Zürich has traditionally been a major international banking center and its equivalent to the New York's Wall Street is the renowned Bahnhofstrasse where the headquarters of the UBS and the Credit Suisse, 2 of Europe's leading banks, as well as many smaller private banks, are located. Although the majority of the UBS staff is based in Switzerland, almost one-third of it is located internationally throughout the world; its global investment banking operations are in London, and its fund management head office is based in Chicago. Credit Suisse has an equally strong presence in both the United States and Europe. But the robust growth and restructuring of Zürich's 2 big banks has generated new opportunities for smaller competitors as well. For example, seasoned bankers that were laid off in the UBS's 1998 merger with SBC have helped the management teams of smaller banks build up their skills. Furthermore, Zuercher Kantonalbank (ZKB), the third-biggest bank in Zürich that subscribed 75,000 new customers in 1999, holds that over 30 percent of those new customers were due to the effects of the merger. And many of the even smaller banks have performed at an even better rate. Julius Baer, for instance, the biggest independent private bank in Zürich, attracted the same amount of new funds in 1998 as did UBS, more than 16 times larger. Vontobel, Zürich's second-largest private bank, increased its profits almost 2 times in 1999 and its return on equity was over 30 percent. The numbers of bank employees, previously decreasing, have stabilized, the leading banks have enlarged their international market share, and a large number of small fund management and corporate finance boutique firms have flourished.

But, in the longer term, there still may be serious threats as Switzerland's big banks and insurance companies have long since outgrown the size of their country, and Zürich's relative importance as an international financial center has decreased as business has moved to major international centers like London, Frankfurt, and New York. A united Europe, with the emergence of the single European currency, the euro, also contributes to the country's increasing financial isolation. But it is still the world's top offshore banking center for private customers, attracting many offshore affiliates of major international firms that use Switzerland as a tax haven . Its success, however, receives the attention of European officials who believe that Switzerland's bank secrecy laws and loose tax rules give it an unfair competitive advantage in attracting offshore capital and also that it is harboring major tax evaders from other countries.

Money laundering allegations and related banking scandals have disturbed the Swiss public opinion throughout the 1990s. To combat transnational organized crime, abusing the liberal Swiss banking system, and partly responding to international pressures, Switzerland gradually relaxed its banking secrecy policies and allowed foreign investigators access to bank records in cases where illegal acquisition or use of funds were suspected. In 1998, new strict money laundering laws were introduced and a significant number of high-profile international money laundering cases were investigated by magistrates in many cantons, particularly in Geneva. In the late 1990s, Swiss prosecutors investigated some serious allegations of money laundering by former top Russian officials through the Swiss company Mabetex. In January 2001, Pavel Borodin, former head of Russian President Boris Yeltsin's administration, was detained by U.S. authorities in New York on request of the prosecution and may be turned over to the Swiss judiciary. Following the Mabetex scandal, the Swiss government launched a political campaign abroad over Switzerland's reputation as a financial center, defending banking secrecy yet emphasizing its willingness to join international efforts to fight transnational organized crime. The government has even quietly encouraged the new government of Nigeria to take legal action in Switzerland to recover national assets allegedly siphoned off by the previous government. It is not certain, however, how the Swiss government will react to pressures from the EU to fight tax evasion that is not a criminal offence in Switzerland. Although unwilling to change its tax and secrecy laws, it is reassuring to many that Swiss laws on fraud and money laundering are so extensive that they effectively cover cases of major tax evasion as well.

In the mid-1990s, the Swiss Banking Association, under pressure from world Jewish organizations, agreed to search its vaults for unclaimed bank deposits allegedly containing assets belonging to Jewish victims of the Holocaust during the World War II. In 1997, the Swiss government endorsed a proposal by several leading banks and businesses to establish a memorial fund for compensating Holocaust survivors and their descendants, although many individuals and groups claimed Switzerland was not doing enough to aid the victims and their descendants. In 1998, class action suits and potential U.S. sanctions against Swiss banks prompted 3 large private banks to agree to participate in a global settlement of all claims and suits against them. The banks agreed to a settlement of US$1.25 billion, allowing Holocaust survivors and their descendants to receive compensation.

The Swiss Exchange was 1 of the 8 European exchanges to sign a memorandum of understanding, formally confirming a commitment to work towards a pan-European equity market with one single electronic trading platform for blue-chip stocks (of large and creditworthy companies renowned for the quality and wide acceptance of their products or services, and for their ability to make money), with common rules and regulations. In addition, the exchange is strengthening ties to London, Europe's leading financial center. In 1999, the exchange granted remote membership for the first time to an institution based in Britain. From its London office, the American securities firm Donaldson, Lufkin & Jenrette (DLJ) International Securities became a remote member that can participate in trading on the Swiss electronic exchange from outside the country. DLJ's remote membership followed the admission of Germany's Mees Pierson and Hull Trading. The exchange is trying to make its membership more attractive and to promote the country as a trading area, lowering its admission fee for new members to SwFr25,000 (from SwFr350,000) as the old fee was prohibitive for many brokers. The high fees were intended to pay off the expenses for installing an electronic exchange system in the 1990s.

The Swiss government sees eventual membership into the EU as a core foreign policy target over the next 10 years. However, the SNB has been skeptical of the rewards of integrating with the euro currency. Many Swiss believe that such a move would result in Switzerland

importing the risk of instability associated with the eastward enlargement of the EU. Others hold that linking the Swiss franc to the euro would be risky. If the Swiss franc remained independent, they suggest, it would gain in importance as a diversification currency for international investors.