Why Is Switzerland So Rich

Published Date: 02 Nov 2017

With the researches we have done so far, a few facts and figures about Switzerland and its economy have come up in highlights.

Firstly, it seems that Switzerland is a prosperous and stable country as its economic situation appears to be strong and wealthy. Its unemployment rate is one of the lowest in Europe It is one of the richest countries in the world in terms of GDP per capita in both financial and non-financial assets . Even when we take into account the high cost of living, Switzerland is still high above the list.

How come such a small country with not much natural resources is so rich and prosper?

Thanks to its highly skilled labour force, Swiss economy is leading in the production and export of the high-skilled labour intensive products of chemical, pharmaceutical ,scientific and precision instrument industries. .Its economy benefits from well-developed service sector (financial services and tourism).The independence of the country of the EU,strong national currency ,geographic location and neutrality of its foreign affairs affect positively economy of the country.

The financial system of the Switzerland is based basically on 2 biggest banks(remarkably internationally large banking sector) ,UBS and Credit Suisse,( 55 % of entire balance sheet total )(see the chart below ). Another important contributors are 3 large insurance companies that have mainly focus their main activity on re-insurance, which makes the country the 4 th largest world reinsurer.

Multiple banks ,insurers and pension funds have rather small impact. Financial system accounted for 23 %of the Swiss gross national product in 2011, 12% of all employees, generated around 20% of Switzerland’s value added.( Swiss State Secretariat for Economic Affairs (seco))

The low risk of losing of assets and high level of protection of privacy made Switzerland account to 27 % of cross-border private wealth management worldwide , which makes the country the world market leader .

Share of assets under management in international private banking, 2011

Source: Boston Consulting Group, 2012

 

Switzerland

27%

United Kingdom

25%

Luxemburg

6%

Caribbean

13%

Singapore and Hong Kong

13%

United States

8%

Other

8%

Why financial services are attractive in Switzerland?

- banking secrecy-Since the implementation of banking law, bankers face up to six months in prison and a fine of up to 50,000 Swiss francs for private information of the account holders coming to public.Such information in the exceptional cases of legal processes(e.g tax evasion,tax fraud)

- geographically advantageous location (the center of Europe);

- high-skilled labour

- fiscal attractiveness of the offshore zone-the residents are obliged to pay 35 % tax on the earnings on the interest on deposit,on the other other hand,non residents are free of paying any taxes if their net wealth is above 2 million $) unless the money is invested in the swiss companies . Also bank clients who are EU citizens pay a withholding tax on the interest made by certain investments.

Why Switzerland is financially stable?

-  political stability

-  strong swiss franc

- international independence

- low risks -protection of the clients by Swiss Bankers Association's , Depositor Protection Agreement (guarantees receiving the deposited amount in case of bank failure ) and Swiss Banking Act as well as increased Insurance for the depositors since 2008 .

- high capital adequacy

To show the real stability of the Swiss financial system it is important to have a look on its situation at times of the financial crises.

Having one of the world highest share of gross domestic products accounted for financial services ,Switzerland was still able to deal with substantially less government assistance than other comparable countries.

Source: "After the financial crises Swiss financial market policy" Federal department of finance 2010

What is basically the differentiation feature of the economy of Switzerland and which actually played substantial role at tie of crises is its openness to competition, openness of its labour market, strong tax revenues and budget surplus ,moreover, good management of the Swiss National Bank.Talking about the later one it is important to emphasize attention on its immediate reaction (first 3 weeks) and its essential work on stabilizing the short-term(3 month) interbank interest rates ,which has immediately increased as crises collapsed .How did they do this?Basically by providng liquidity in the economy,that decreased the interest rate and stimulated the lending facilities.Due to immediate monetary policy response the need for fiscal stimulus was rather small comparing to other countries(0.6% of GDP in 2009 and 2010.)

Mostly the "Big-2" were severely stroken by the financial crisis and have downsized substantially(40%-UBS and CS -25%).Still they are continue to be in the list of SIFIs worldwide,meaning that their financial solidity is important for maintaining stable economic situation worldwide.Moreover,such banks are Too-Big-To-Fail which ensures governmental guarantees for such banks in case of risk to solidity.The problem posed after the experience of the Island at time of the Financial crises,whether at case of large scale problems of liquidity "Big-2" will not become as well Too-Big-To-Save.

However,there was no evidence of the credit crunch .According to SNB’s survey of 20 major banks ,it was found that that the conditions of lending has not been tightened due to the fact that major contribution to the credit is accounted for the mortgages.

In connection with financial crises more severe capital requirements(liquidity and leverage ratio requirements) were put on 2 main banks.However ,under the regulations of Basel 2 the capacity of this banks to absorb losses without any external support remained low with credit default swap rates high after the crisis. So upon realizing that such regulations were not enough Basel 3 introduced in 2011 and implemented during 2013-2016) was introduces with much higher minimum capital ratio with emphases on common equity .Also capital surcharge requirements were introduces.However,as such legislation is going to be finally implemented only by the end of 2019 the risk of the low level of loss absorbing capital is remaining the major source of alarm.The links between Swiss banking system and that of countries suffering from the sovereign debt crisis right now(Greek,Italy,Spain,Portugal) is low and is amount for 1 % of balance sheet (2011),nevertheless they are exposed for indirect effects.

Moreover, special regulations where put on "Big 2 " .Such regulation increase the capital requirements and they encompass as well resolution plans for 2 banks,allowing for more choise of options for the authority rather than rescue the whole financial sector at times of difficulties.Whats more,improved risk diversification is taken care of.

Talking about the future prospects for the banking , it is estimated the annual increase of 1.8 % by 2015 .This is due to the lower margins maintained by Swiss banks in accordance to even more strict regulations most focus on the taxes assets and more severe competition in the market.However,the emerging markets give the opportunity of increase in the asset management services.Ass well the opportunity is seen in the increasing commodity trade finance.

The challenges are also estimated in connection with continuous fiscal discussion and pressure from the EU as well as US.Possible increase in the number of services provided to the local companies can also be the opportunity as well as increasing market share in trade finance due to the export orientation of the country.Another opportunity is corporate financing,data storage in addition to the technical infrastructure.

One of the problems currently faced by Switzerland is lending growth which is above trend.The Basel requerements mention above which are to be introduced in few years encompass the capital buffer,which should be used as a countercyclical tool to stabilize situation.But as the time pass it can be to late to stop the continuous mortage lending growth,which is already had the annual growth overlapping GDP and is one of the biggest indicators in OECD countries.The possibility of the increase in the interest rates on the loans is the source of the major concern.Since 2008 and on the interest rates on the loans were extremely low which triggered the demand on the housing and prices respectively(immigration factor involved).In certain cities as Zurich,Geneva,Zug such housing bouble might have already exist.So the regulation of the government on loan to value ratios as well as debt to income are essential these days.

Bibiliography:

1.http://www.efd.admin.ch/dokumentation/00737/00782/02109/index.html?lang=en

"After the financial crises Swiss financial market policy" Federal department of finance 2010

2. http://www.thedailybeast.com/newsweek/2008/12/06/the-swiss-way-to-beat-a-crisis.html

"The Swiss way to bit the crises" The daily best 2008

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OECD economic surveys:Switzerland January 2012

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Swiss banking "Summary:Banking in transition –future prospects for banking in Switzerland" a joint study by the Swiss Bankers Association and the Boston Consulting Group on the Swiss banking centre September 2011

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Credit Suisse "Swiss Financial Center:Opportunities and Challenges"Dorothee Enskog 13.11.2012

6.Financial stability board(2010),"Reducing the moral hazard by systematically important financial institutions"

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"Macroprudential Supervision of Financial Institutions :Lesson for SCAP" Hirtle,Schuermann,Stiroh 2009

8. http://www.imf.org/external/pubs/ft/scr/2009/cr09164.pdf

International Monetary Fund (2010 "Switzerland;Stuff report for the 2009,Article 4 mission"

9.Swiss Commission of Experts(2010) "Final report of the Commission of Experts for limiting the economic risks posed by large companies"

10. http://www.snb.ch/en/mmr/reference/stabrep_2011/source/stabrep_2011.en.pdf

Swiss National Bank(2011), Financial Stability Report 2011