babu anik islam - what can decision makers learn from banking survey

Bachelor Thesis

Swiss Banking Sector: What Can Decision Makers Learn From A Banking Survey?

Babu Islam, S11475415

Banking & Finance

[email protected]

Knüslistrasse 1, 8004 Zürich

ZHAW Zurich University of Applied Sciences

School of Management and Law

Submitted to:

Dr. Bienert Horst

Winterthur, 6th June 2015

Swiss Banking Sector: What can Decision Makers Learn from a Banking Survey?

I

Declaration of authorship

The bachelor thesis must be accompanied by the following declaration, which must be

signed by the student:

I hereby declare that this thesis is my own work, that it has been generated by me

without the help of others and that all sources are clearly referenced. I further declare

that I will not supply any copies of this thesis to any third parties without written

permission by the director of this degree program.

I understand that the Zurich University of Applied Sciences (ZHAW) reserves the right

to use plagiarism detection software to make sure that the content of this thesis is

completely original. I hereby agree for this thesis, naming me as its author, to be sent

abroad for this purpose, where it will be kept in a database to which this university has

sole access. I also understand that I will be entitled at any time to ask for my name and

any other personal data to be deleted.

Furthermore, I understand that pursuant to § 16 (1) in connection with § 22 (2) of the

federal law on universities of applied sciences (FaHG) all rights to this thesis are

assigned to the ZHAW, except for the right to be identified as its author.

Student’s name (please print)

..................................................

Student’s signature

..................................................


II

Acknowledgement

During my course of studies as a student of Banking & Finance I realized that it is very

crucial for a bank to understand the dynamic of the financial marketplace. In my short

career at a Fund of Hedge Fund I had the opportunity to learn how fund managers make

investment decisions by analysing market surveys and letters from other hedge fund

managers. It is highly interesting to see how precise some fund managers can predict

individual markets. I choose this topic as I am very interested to know how financial

institutions prepare themselves for the future and what factors guides their decisions to

adapt to the market demand. I can only benefit for the effort I gave to plan and write this

thesis.

I wish to express my humble and sincere thanks to my supervisor Dr. Bienert Horst for

providing me with all the requirements and the necessary facilities for this research, and

for bringing me this far. I cannot be able to thank you enough for this.

Winterthur, June 2015

Babu Islam


III

Management Summary

This research seeks to find out the reasons for disparities in the predictions and the

reality of the banking sector, with a particular focus on the Swiss banking sector. The

study will be geared towards finding out how far the sector has gone since the year

2008, through reviewing the available literature on the previous research activities.

There is a need to find the link between the growth of the bank sector and the overall

growth of the economy for there to be a coherent conclusion about the deviations in

reporting. Using the data that has been published by various research institutions, it is

easy to find out that the projected growth has not been achieved on the ground, and this

forms the basis for the problem statement. The article also seeks to understand the

motivation for changing the prediction figures by stakeholders without having to

achieve the previous ones. The aim is to find out what decisions makers can learn from

various surveys and how can it help their strategy. The data used is more of a qualitative

than quantitative since the outcome of the activity is meant to bring an understanding

rather than a numeric answer to the study question.


IV

Keywords: Swiss Banking Banking sector in Switzerland

SBA Switzerland Bankers Association

SNB Switzerland National Bank (Central Bank of Switzerland)

EY Ernst & Young

GDP Gross Domestic Product

IMF International Monetary Fund

EU European Union

EP Economic Profit

IMF International Monetary Fund

RoE Return on Equity

RoE-CoE-Spread Difference between the return on equity and the cost of equity of a

bank.


V

Table of Contents

Declaration of authorship ................................................................................................... I

Acknowledgement ........................................................................................................... II

Management Summary ................................................................................................... III

Keywords: ....................................................................................................................... IV

Table of Contents ............................................................................................................. V

1 Introduction ............................................................................................................... 1 1.1 Background Information .................................................................................... 1

1.2 Motivation .......................................................................................................... 2

1.3 Justification/ Problem Statement ........................................................................ 3

1.4 Research Questions ............................................................................................ 3

1.5 Methodology ...................................................................................................... 4

2 Theoretical Framework .............................................................................................. 4 2.1 Literature Review ............................................................................................... 4

2.2 Methodology ...................................................................................................... 7

3 Results ..................................................................................................................... 25 3.1 Findings ............................................................................................................ 25

3.2 Discussions ....................................................................................................... 26

4 Conclusion ............................................................................................................... 28

5 Bibliography ............................................................................................................ 31


1

1 Introduction

This paper focuses on the Swiss financial sector which has a paramount importance to

the economic growth of Switzerland. Specifically, the purpose of this paper is to find

out the usefulness of banking surveys for decision makers. Although most research

concentrates on the economic profit of value creation, banking regulations and about the

recent trends of the financial markets in Switzerland. When it comes to banking surveys

it is very difficult to comprise every aspects of this complex sector. Yet, it seems

possible to predict the answer of specific questions by narrowing down the focus in

details. The purpose of the study is to determine whether the banking surveys can

provide appropriate guidance and instruments to justify the outcome of decision makers

actions in the future. This paper will analyse the current market research on the banking

sector and the instruments used to justify their conclusion. The result may offer the

importance of banking surveys and how these can help decision makers to have a better

outlook in the financial sector.

1.1 Background Information

At the end of 2013 financial sector had 283 independent banking institutions. The Swiss

banking industry is currently dominated by two major firms namely; UBS and Credit

Suisse, these two big banks also renowned as TBTF (Too Big to Fail) make up a market

share of over 46% of the aggregated balance sheet total of all banks in Switzerland as of

2013. The other firms share the remaining 54 percent (Swiss Bankers Association,

2014). This is a situation close to an oligopoly kind of market where only a few firms

dominate the activities while others share the least share of the market. There are 24

Cantonal banking institutions that holds almost 35% of the local mortgage credit market

share. Unlimited state guarantee has been given to 21 of these cantonal banks. The third

largest banking group in Switzerland is also known as Raiffeisen group, which

comprised of 316 independent Raiffeisen banks (Swiss Bankers Association, 2014).

Following the 2008 financial crisis that crippled the global banking institutions, the

financial sector in Switzerland was significantly affected the two major firms sunk into

a debt crisis and UBS was forced to witness considerable net outflows of monies

(Körber, Müller, Schriber & Stocker, 2009). In 2011 the main features of the economic


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environment of the banks in Switzerland were the uncertainty on the financial markets,

cautious investors and the tightening of regulations (Swiss Bankers Association, 2012).

In August 2011, the SNB adopted measures to counter the strong Swiss franc. As a

result, money market liquidity was massively increased from CHF 30 billion to 200

billion in three stages. In addition, currency swaps, which were last used in autumn

2008, were re-introduced. The aim of these measures was to further ease the already

expansive monetary policy and counter the overvaluation of the Swiss franc. The Swiss

Federal Council also announced, on 17 August 2011, that it intended to inject CHF 2

billion into the Swiss economy. The funds are to come from the government’s

forecasted surplus in 2011 (Swiss Bankers Association, 2011). In this research, the

principle focus in on the lessons that a decision maker within the Swiss financial sector

can learn from the numerous surveys and reports already published.

1.2 Motivation

The Swiss banking sector has been the face of the global financial industry due to its

attractiveness to international investors. The American subprime crisis has triggered the

biggest recession in the global economy which the world has never seen in the last 60

years (Körber, Müller, Schriber & Stocker, 2009). Therefore, there is a need for an in-

depth analysis of the situation without comparing it with other sectors within the

country to avoid unnecessary influences from spill-over effects of the market. The

several predictions done by researchers have been of significant importance to the

sector. This is because the central bank has embarked on the reduction of interest rates

to improve credit creation for the sake of promoting the benefits earned by the banks

and cover up the predicted values of growth (Körber, Müller, Schriber & Stocker,

2009).

I feel motivated to find out what more information would mean to the key stakeholders

within the industry. There has not been a conclusive overview of the industry which can

make people understand what needs to be done for the sector to be stable and able to

withstand economic shakes. However Switzerland coped with the consequences of the

financial crisis better than most of the other industrialised nations and the Swiss

economy found its way out of the recession comparatively quickly. One of the main

supports of the Swiss economy has been private consumption, which grew by 1.6% in


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2009. Moreover, the various government stimulus packages in Switzerland and other

countries had positive effects for the growth of the open Swiss economy (Swiss Bankers

Association, 2010). I would like to review various surveys and the factors which helps

managers in understanding market dynamics for there to be sustainable financial

activities. The Swiss banking sector has been a supporting platform for many countries

since it forms an open field for international investors (Swiss Bankers Association,

2010). This is an interesting topic for the market analysts and the senior banking

managers as well as the central banks executives since it gives them an extra mileage in

the understanding of the sector. It brings out the past experiences, the predictions that

were met and those that did not live to see the day, thus raising the questions of what

could have gone wrong.

1.3 Justification/ Problem Statement

Over the years, there has been numerous bank surveys and research activities conducted

by different individuals and organization, all geared towards understanding the stability

of Swiss banking sector. The financial crisis triggered the revolution in the banking

sector and since then the market participants became more risk averse and they are

aware of the competition, changes in clients needs and the regulations (IFBC, 2014).

Each Swiss bank needs to differentiate their position in the marketplace. Now it is a

game of survival of the fittest. Everyone is following the same direction and through

banking surveys it is possible to navigate in the right direction, not only in retail but

also in private banking (IFBC, 2014).

1.4 Research Questions

For there to be a coherent understanding of the current situation, there is need to answer

one critical question that brings the reality of the past and current conditions:

• Is it possible for decision makers to understand strength and weaknesses of a

bank through banking surveys?

• Can banking surveys provide enough benchmark information to drive growth

and operational efficiency?


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1.5 Methodology

In this research, I have opted to use secondary sources of data and compare results from

different researchers for the sake of finding comparability. For a detailed data as the

research requires, it would not have been easy to collect it through primary sources and

field survey. There is a lot of documented information about the pre and post-crisis

phases in the Swiss banking sector. I opted to concentrate on the period after 2007 till

2014 and that is the period where the effects and causes of the crisis occurred. On the

other hand, I had to go through a lot of literature about Swiss banking and the influences

that the sector as well as the challenges that compromise the stability.

The other period after 2013 is now classified as the recovery phase where the world is

working to clean up the effects of the crisis while at the same time putting in place

measures to ensure that another crisis does not happen. This approach has enabled me

to use time difference in analysing the dynamics and outcomes of the banking sector

over the years.

2 Theoretical Framework

2.1 Literature Review

Its banking sector ranks among the world most significant and influential banking

centres, holding an enviable reputation for discreetness and prudence. Besides the US,

Switzerland has only two big cities which are Geneva and Zurich. These two cities

achieve a top 10 ranking among the other world cities, according to a survey conducted

by “The Global Financial Centres Index” (Swiss Bankers Association, 2014). The Swiss

Banking Association reported in the year 2014 that the assets managed by the banking

sector in Switzerland managed a total of CHF 6,136 billion in assets in 2013. Compared

with the previous year, this represents an increase of 340 billion was 10 times higher

than the GDP (Swiss Bankers Association, 2014). This shows that this country has a

larger investment in the banking industry than any other sector of the economy. This

was a massive breakthrough because the industry is still in the recovery from the effects

of the 2008 crisis that crippled the giant firms. In terms of revenue, the banks had


5

managed to hit most of their goals of growth, although the margins of profit, the sector

was still struggling with squeezed margins. The aggregate operating net income of the

banks in Switzerland rose by 3.1 percent in 2013 from CHF 59 bn to CHF 60.8 bn. This

rise in interest net income (+5.9%) as well as the income from the commission and

services business (+4.7%) more than compensated for the decreases in the banks’

smaller net income items – net income from the trading business (-2.7%) and other net

income (-5%). Net income from commission and services accounted for over 40 percent

of the aggregate operating net income and therefore remained the most important

component in net income generation for the banks in Switzerland. This was followed

closely by the interest-earning business with a share of 37 percent. Net profit rose

significantly compared with 2012, to CHF 10.5 billion, as both banks reported a profit

again for 2013. The taxes on earnings paid by the banks in Switzerland amounted to

CHF 1.93 billion, which corresponds to an increase of 25 percent compared with the

previous year. Despite the bull market in the first half of the year, no significant rise in

bank net incomes is expected for 2014 due to the continued very low interest margins

(Swiss Bankers Association, 2014).

The financial value creation measured by Economic Profit II decreased overall in

comparison to previous year. Around 20% of the acquired retail banks achieved to

increase substantial financial value creation compared to last year, and also 20% of the

banks succeeded to increase a positive Economic Profit II, which means a return on

book value equity higher than the risk-adjusted cost of capital. There is no direct

relation ship between the amount of surplus capital (to be above the regulatory

requirement of own funds required) and financial value creation can be seen in 2013

(IFBC, 2014).

The value driver analysis based on Economic Profit II clearly shows for the entire

period from 2007 to 2013 that retail banks with increased financial value creation could

not exclusively achieve a revenue growth, but have mostly generated a better cost cost-

efficiency (IFBC, 2014).

Both in the current 2013 as well as a total over the period under consideration there is a

relationship between institution size and financial value creation in comparison to the

total bank (based Economic Profit II), but also with regard to the operational


6

performance (based on Economic Profit I). It can be seen currently and retrospectively

that larger institutions in relation to book value equity (EP II) and to the regulatory

capital requirements (EP I) made tendentious higher RoE-CoE-Spreads taking into

account risk-adjusted cost of capital (IFBC, 2014).

The operational efficiency of the Swiss retail banks lies in 2013 in terms of gross

income per employee in the previous year and amounts to an average of 184,000 CHF.

Compared to the beginning of the period 2007, this corresponds to a decrease of

approximately 23%. The cost-income ratio shows in 2013 with an average value of

around 60.5%, an increase over the previous year by 0.4 percentage points. Also for the

operational Key Performance Indicators Gross profit per employee and cost-income

ratio can discerned relatively better values for larger institutions (IFBC, 2014).

The main source of income of Retail Banking, net interest income was, in 2013

increased slightly compared to last year and is on per employee basis at an average of

285'000 CHF. The value driver analysis of net interest income shows in 2013 a renewed

decline of the active interest margin to around 1.87%. Even for the passive interest

margin a lower value (0.78%) can be established from the previous year. Similarly,

there was a decline in terms of the growth of customer loans and customer funds. The

slightly higher net interest income per employee stands in 2013 compared to an average

of CHF unchanged staff and operating expenses on a per employee basis of 142'000

CHF or 82,000 CHF (IFBC, 2014).

Key questions and structure of the study. The following on the presentation of empirical

foundations main part is divided into two thematic areas: The internal company specific

banking value creation of the Swiss retail banks will be determined based on the

Economic profit approach. Economic profit is thereby analysed based on the key value

drivers revenue growth, cost efficiency and capital efficiency in detail. This study also

expands the value creation in addition to analysis with respect to the required regulatory

capital. The operational efficiency of the retail banks is investigated through Key

Performance Indicators KPI’s based on profit, revenue and cost figures are on a per-

employee basis analysed (IFBC, 2014).


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From the total number of 49 institutions, 15 are listed on the SIX Swiss Exchange. Just

under half of the registered banks has a total assets of more than 10 billion CHF. The

somewhat heterogeneous group of retail banks thus includes all cantonal banks and the

larger regional banks (including the Clientis Group) 2 and other supra-regional

institutions, including the Migros Bank, the cooperative Raiffeisen Group, PostFinance

and Bank Coop (IFBC, 2014).

The Swiss retail banks are mainly active in the interest margin and except for a few

institutions only limited active in other business segments. The regional or local

presence simplifies reputation care and recovery of the main banking relationship with

individuals and corporate clients, mainly SME’s (IFBC, 2014).

In the current environment, the various challenges of the changing regulatory

environment, narrowed interest margins, new demands from customers and a limited

market growth accentuate. This partly strategically relevant problem areas and the

increasing intensity of competition are likely to accelerate structural change in the Bank

Group (IFBC, 2014).

2.2 Methodology

The evaluation will focus on current and historical economic profit performance

(Economic Profit II). Prerequisite for financial value creation is a positive excess return

as the difference of the achieved return on equity (RoE) and Institute-specific cost of

equity (CoE), which corresponds to the RoE-CoE-Spread on the equity employed

(IFBC, 2014).

According to Swiss National Bank (SNB), lack of strict rules in the management of

foreign institutions, as they came to the sector, was the main reason they applied wrong

competitive mechanisms. Swiss banking is largely foreign and does not discriminate

investors by countries or objectives (Swiss Bankers Association, 2013). For that reason,

there is a high possibility of finding irregularities in the activities since not all people

are genuine in their undertakings. This information is very critical to management and

senior stakeholders in the sector since it can enable them understand the trend. On the


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other hand, the cross-border business activities were backed with a constant rise in

assets being managed in the year 2010, since foreign investors regained their confidence

in the banking sector and came back to make more investments (Swiss Bankers

Association, 2013).

In fact, in the year 2010, according to Swiss Banking Association, almost half of the

total assets of the financial sector were attributed to the foreign businesses (Swiss

Bankers Association, 2011). Most cross-border investments in Swiss banking come

from Western Europe and some parts of the North America. The trend in growth of

foreign assets continued consistently and by the year 2013, the amount was slightly

above 55 percent. What became a concern in this period is that half of the cross-border

businesses came from new investors from the emerging countries. Currently, the rate of

investment from the developed countries is standing at 45 percent (Swiss Bankers

Association, 2013). This trend is attributed to the fact that assets from the emerging

economies have constantly been growing and at a regular rate during the developed

economies only move with small margins. The question that many would ask is why the

developed countries have been stagnant while little efforts from emerging economies

are gaining grounds in a developed country. This is a point of concern for many

researchers since the trends seem to be going contrary to the reality of the industry.

A concerned researcher will attempt to analyse the sector in terms of the number of

firms coming in from other countries and those leaving both locally and internationally.

This would help in understanding the motivation of international investors and

depositors coming to do their business in Switzerland. The reasons for the discrepancy

in the predictions and the reality in developments may be blamed on the independence

in the analysis and the consideration of different components during the actual

prediction (EY 2008, p.6). Currently, reports show that the growth is assets is now at

8.1 percent per annum. The new entrants into the Swiss banking business include

countries from the Middle East, the Latin America and South Asia. These are the

countries contribution the highest number of foreign private investment firms and the

largest contributors of assets.

On the other hand, assets emanating from Western Europe and USA declined due to the

implementation of new tax policies by the Swiss National Bank (SNB) on the cross-


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border portfolios. It was also caused partly by the adjustments that have been going on

and the political influence on the management of the sector. Due to the high regulatory

costs in the banking business and the declining gross profit margins, most private

banking firms have revised their policies reducing their attention on the growth of assets

and work on increasing revenues. The strong growth in revenue over the last few

months only resulted in a slight improvement in the cost-income ratio to 77 percent in

2010 from 72 percent in 2013 (Swiss Bankers Association, 2013). Due to this upward

movement, the cost-income ratio for the Switzerland private banking remained

significantly higher in the post-crisis period that the pre-crisis phase.

In light of the adjustments in the customer framework conditions and portfolios in the

private banking in Switzerland, numerous sector participants have lately reviewed their

current strategies and economic models. The sector is promising to the local investors

since the international banks have lately reduced their presence in the country owing the

adjustments in the volume of activities. The number of international banks has reduced

since some of them have entirely closed their branches and sold their assets (EY 2008,

p.7). What makes researchers suspicious about this trend is that there is no reciprocation

by local banks increasing their branches to cover the closed ones. Thus, this topic

becomes an area of strict consideration since it would be unfortunate if the international

banks retreated and the local firms failed to cover the gap. If such happens, the industry

will suffer a severe decline in the financial sector investment, and customers would

begin to take their deposits and investments to the neighbouring countries.

Swiss banking is a centre of huge deposits from international countries, and this trend

has a major challenge posed by money laundering. International criminals have been

found to deposit their illegally gained money into Swiss banks due to the hospitality of

the sector and mild nature of the stakeholders (EY 2008, p.6). Money laundering is the

practice of cleaning money that has been gained through dirty means like drugs,

kidnapping ransom, piracy at sea, corruption and robbery among others. There have

been cases whereby governments have complained to the international community due

to the issue of Swiss banks being used to keep stolen money.

In 2014, so many bank accounts were closed down by the Swiss government after

being identified as having been owned by African leaders who steal money from the


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public through corruption. This shows that the hospitality in the banking sector has been

misused by some people as they struggle to make their lives better. This information is

very crucial for the key stakeholders since they can be able to point out suspicious

businesses being transacted by foreigners and have a background idea of what it could

be.

For instance, Swiss National Bank (SNB) should be aware of the money laundering

activities and identify the specific banks that could be doing it. This would help in

ensuring that the sector does not suffer because of a few greedy banks and also protect

the future of the country’s international relations. In all the surveys that have been

conducted, there has never been a clear explanation of how much illegal money Swiss

banks have been holding from foreigners. No researcher has made it point out any

specific bank that attracts launderers to save money with them, simply because it has

not been an area of concern for researchers. This is what has been hindering the truth

from being known, and the sector has been condemned by the international community

for not taking measures to stop these activities. Despite the strong economic situation in

Switzerland, the financial crisis which began in the USA did not miss to leave its mark

on the earnings made by the Swiss banks. The poor and uncoordinated conditions on the

cross-border financial markets weighed heavily on the trading profits in the last phase of

year 2007 (Swiss Bankers Association, 2008).

Consequently Swiss banks’ overall earnings in the year 2007 fell by close to 3.1

percent, although the trend in the commission businesses continued to be satisfying

(Swiss Bankers Association, 2008). Despite the immense turbulence in the financial

sector, Swiss banks continued to add staff and by the end of financial year 2007, an

additional of 4.4 percent employed had been done. According to Swiss Bankers

Association (SBA), the worst scenario in banking was experienced in the mid-2008

since both revenue and assets had significantly gone down (EY 2008, p.6). The rate of

employment growth did not also withstand the shock since the banks begun

Employment to slow down their recruitments (Swiss Bankers Association, 2008).

According to a survey that was conducted by Swiss Bankers Association (SBA),

employees’ levels increased by 1.2 percent in the first half of year 2008 before it started

going down in the mid-year. This was a decline from the last figure of year 2007 which


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closed at 4.4 percent recruitment level. It was predicted that workers levels would grow

by about 1 percent in 2008, but it did not match up (Swiss Bankers Association, 2008).

The only prediction by SBA that attempted to match with the outcome was the

reduction in assets under management and the decline in banks earning since, by the end

of year 2008, the situation was horrible. This was the genesis of the problems in Swiss

banking since no prediction could reflect the reality and the international investors

begun to lose hope in the business.

It also affected the customer loyalty, since some banks closed down after they ran out

of credit, and many debtors defaulted. In international business comparison, Switzerland

remained the top and most preferred global financial centre for the cross-border assets

in the year 2013. This was after it closed with assets under management worth CHF

2.110 billion that financial year. The biggest competitors and challengers in terms assets

under management has been the Panama, Caribbean and the Channel Islands and

Dublin, UK, followed by Singapore, USA, Luxembourg and Hong Kong.

The world economy lost momentum since the start of year 2008. The commodity prices

increased massively reducing the purchasing power of the importers from the emerging

economies. The situation was compounded by tensions that gripped the global financial

and credit markets as well as the painful price corrections which were experienced by

many of western real-estate markets. The Swiss economy would not have been able to

escape the weak global economic status. However, the domestic economic situation was

expected to help in containing the negative effects of the declining situation. However,

the trends in the local income for the privately managed banks did not deliver the

expectation since most investors have already begun to lose trust in the future of Swiss

banking.

For the management of these banks to understand what changed the dynamics of the

domestic business when the foreign investors began to retreat, there is need to first

know what relationship there was between the cross-border and local banks. There is

also need to know the influence of the local banks on the growth of international assets

under management. These are critical areas of interest for the central bank since this is

the body that makes rules for the banking sector, and it is also the custodian of all the

activities being undertaken. By the end of year 2008, the economic growth was still


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promising but there was growing concern due to the rate at which revenue was

declining.

It is good to note that the Swiss banking sector has for long been internationally

influenced, to a point where it had more foreign banks than the locals. Thus, the shift of

focus by the cross-border private banks portrayed a defeated spirit in the banking sector,

watering down the customer trust in the sector. The aim of many researchers has been to

identify the cause of accepting defeat by some banks and closing down their businesses

while others were struggling to find a stable ground. According to the quarterly

estimates released by the State Secretariat for Economic Affairs (SECO), the economy

of Switzerland had lost momentum in mid 2008 due to the tensions that had shaken the

financial sector and particularly banking. This was a negative move in the country

which highly depends on foreigners in the management of the banking sector.

However, all was not lost since some major firms were still holding strong and could

withstand the crisis. The management of central bank did not realize in time that

something was wrong when the sector began to sink into a debt crisis since the most

affected firms were the cross-border banks and their transparency was not guaranteed. It

is believed the lack of information is one critical reason Swiss National Bank (SNB) did

not act prior to the shrinking of the banking sector. Reports indicate that some of the

banks which sunk most into debts had noticed that things were not good long before

they got into serious problems, but failed to alert the stakeholders. This lapse in the flow

of information contributed a heap to the collapsing of firms and the retreat of foreign

bank managers and investors. However, the Swiss economy and particularly banking

sector has become more resistant to further economic stress than most of the countries

in the Europe.

The real GDP expanded by 2.3 percent in the second quarter of financial year 2008.

This was even after things having been proved difficult in most countries in the world

and some European countries suffering acute effects of financial shrinking. This was an

indication that Swiss banking was a little bit stronger than most of the countries in the

world and had the central bank known in advance that things were not going on well, it

could have stopped the crisis from spreading. Switzerland is greatly supported by

foreign trade and the ever growing consumer expenditure. According to SBA, most of


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the deposits that are made in banks come from consumption activities both locally and

internationally. This country has great hospitality for international businesses, and any

investor who wishes to do business in Switzerland is always welcome. Unlike many

western industrialized nations, Switzerland private consumption continues to enjoy the

benefits of a good labour market with skilled labour at the required amounts.

The employment rose in the second half of year 2008 and the beginning of 2009 despite

the predictions that it would weaken and partially shrink. The growth in employment

was recorded at 2.3 percent in the mid-2008 compared to the similar period in 2007. In

2009, the figures rose to 2.4 percent and by the beginning of year 2010, the growth was

2.5 percent. This means that the labour market was not greatly affected by the financial

crisis, since people continued to get jobs even when things were tough. However, after

the figure of growth reached 2.5 percent in 2010, the growth stagnated and until the last

report of 2014, employment was still at that same rate. The tides that were unfavourable

for private consumption in Switzerland continued to blow more strongly although the

economy was finding balance.

The only factor which remained undisturbed was the country’s labour market, which

kept supporting the private consumption. The research activities intensified, and

researchers were predicting that even the labour market and private consumption would

lose momentum, but it did not happen entirely as predicted. This is because the

economy is wide and has great support for international markets where locally

manufactured goods are sold. Changes which happened and the challenges which have

been experienced since then continues to impact negatively on the Swiss banking. Since

2013, SNB have been intensively working on the regulatory mechanisms of the sector

to close all the potential leakage points which could result in a crisis in future. This is an

activity which has cost the country a lot of money since management of banks has been

made a national affair.

The country has come to the reality that without a stable banking sector, economic

growth would remain a prediction that will never see the light. Furthermore, strategic

plans have been made to ensure that the current growth in assets that are under

management will not go down in future since they mean a lot in the stability of the

whole sector. The face of the banking sector has been largely international, but SNB is


14

doing everything possible to promote local banks so as to get a stronger base that

transacts from within. The question that many people have been asking is what SNB

will do to ensure that the issue of money laundering does not continue to tarnish the

name and integrity of the banking sector.

Eastern part of Europe has become one of the best areas that act as the source of finance

and business for the Switzerland. This is the area that produces most investors who

establish private banks in the Swiss sector. Most of the centres in Singapore and Hong

Kong put more emphasis on their services entirely on customer properties from all over

Asia and Europe including Swiss banking sector. Many countries in Europe, especially

UK, assign their investment management to individual investors in the Middle East and

Asia. This stems mostly back from historic time’s transactions between the countries.

From the results found in the study conducted on capital market performances in

Switzerland, it is evident that the management of all investments by private bankers is

expected to grow at a rate of 2.8 percent per annum. This directly translates into a rise in

revenue collected over the year to Swiss franc 30.3 billion which is then combined with

the annual increment of 2.8 percent by 2018. According to a report by the Swiss

government, the banks based locally in Switzerland are expected to increase the assets

under their management at a higher rate than before. Currently, the assets are valued at

Swiss franc 140 billion and are predicted to grow by 1.120 billion every year from

2014.

This will highly boost the economic development of Switzerland especially in the

banking sector since the country is known to have the lowest rate of inflation. This

gives the economy the competitive advantage throughout Europe since the economic

recovery will attract more international investors than before. The competition in the

period between 2008 and 2013 was very high, and this needed a closer look for there to

be sustainability and continuity in business. Predictions by SBA revealed that there was

a possibility that the economy would recover fully and gather enough momentum to

drive business worth CHF 8.8 billion by 2018.

Apart from the banking services provided within the country, there are those provided

outside the country by local and foreign-based banks with their branches in Switzerland.

Thus, this system of banking is generally affected by the shakes from different levels of


15

economic development. However, the current status shows that across all states, there is

likeliness of asset value rising by 2.8 percent annually from 2014. This is after SNB put

in place measures to ensure that assets under management are not affected by little

financial shakes. There is a lot of backup for the financial sector according to SBA and

IMF since the government has shifted focus from growth to the sustainability of

activities to ensure stable continuity.

The goods market in Switzerland intensively dependent on the growth of banking

sector among different federal states and this as far as asset growth is concerned. The

increase in the asset under management across the states is expected to grow by 2.8

percent per annum. The latest prediction shows that the increase in regulations is

causing a decline in the expected revenue due to restriction by SNB. Researchers say

that if central banks continue to get strict on the lending activities of the privately

owned banks, the sector is bound to lose revenue at the rate of 2.6 percent.

Another aspect of concern in the development of the banking system by the cross-

border companies is the is the issue of international tax with foreign countries. This is

since Switzerland has become too committed to the Automatic Exchange of Information

(AEOI) which reduces the event of tax evasion among countries, and this affects by far

the performance in terms of competition. In addition to the tax issue, the future form of

access to the EU market is also of great significance. As a third-world country,

Switzerland is exposed to considerable political and economic uncertainties in this

matter.

In this forecast, it is assumed that Swiss legislation will be equivalent to the EU

regulation and that there will not be any negative impact on revenues, such as through

new limitations to EU market access. An increase must be expected on the cost side as a

result of the regulations. Additionally the political instability of the country is also a

critical point of concern since it affects the stability of the economic growth.

Additionally, this will dictate the future access to the EU market, however to counter

this effect Switzerland will pass its regulations that are similar to those of EU thereby

increasing their ability to access the market.


16

Fiscal and monetary policies of the Swiss state also create a major impact on the local

and international banking system, especially in countries of western Europe. These are

the countries which depend on the customer package that suits many of the investors in

the region especially those who get interested in the financial services of the foreign

banks. This group of investors causes a relative rise in asset managed by banks that

operate in foreign countries which further increases the overall portfolio of the whole

economy.

The competitive advantage that Switzerland enjoys is distinctive and well laid down

political and economic policies that govern its operations. These policies guarantee its

current stability in both aspects without creating suspicious occurrences. Switzerland

also enjoys having a currency with the lowest rate of influence from inflation. The

exchange rates for Swiss franc are somewhat stable and does not suffer from inflation in

the products market. This creates a distinction between the financial and goods sectors,

hence ensuring that the duo does not squeeze each other to the negative ends.

In developed countries, the general organization of investment across countries is

estimated to be -0.3 percent per year, which in monetary terms, can be projected to

grow from CHF 910 to CHF 890 billion. The more profitable economy fetches the

largest number of customers especially from the high-class segment if citizens but this

effect of outflow of income is countered by the rest of customers operating within the

country.

In the current times, the cost of living is rising, and this behaviour is transferred to the

business world, whereby the cost of doing business is increasing. This, in turn, builds up

pressure on profit maximization in the private banking system whereby firms are forced

to forego some profitable activities for them to undertake basic activities. According to

SNB, most Swiss private banks have been struggling with high costs of doing business

due to the new regulations imposed by the central bank. However, it has not been a

measure to make it hard to do business but it is a way to make the business safer and

more stable against economic shakes.

Compliance with international bodies like World Bank and IMF has also been insisted

and made a matter that does not allow any adjustments. This is a means to make the


17

international community more cautious about forthcoming crises and economic

downturns, and to ensure that financial sectors recover from the 2008 stress. Since

international trade provides a platform for countries with superior economies to attract

investment from developing countries, these further increases the assets managed in the

country. Currently, the asset under management after the crisis is valued at CHF 1.530

billion which is 4.9 percent growth per annum. This comes as a boost to the private

sector banking as well as the capital markets. The wealthy citizens of the emerging

economies are immensely attracted by the interests on investment and returns on capital

goods offered by the Swiss economy.

In general financial assets in Switzerland are projected to increase by 3 percent per year

from 2014 to 2018, after which the growth is predicted to stagnate before the economy

employs different mechanisms. Unfortunately, this shows distinctively a slower growth

than some of the Asian countries especially Singapore whose growth is predicted at 10

percent per annum. Hong Kong’s growth is estimated at11 % annually due to the

competitive advantage that the country enjoys. The two Asian countries basically

benefit from the fact that they hold strong positions in the Asian market, both in

financial and goods markets. The whole tradition of concentrating on foreign customers

may cause a slower growth rate due to the unstable outflow of funds during poor

performance periods in the economy.

The primary focus will remain inclined towards private banking in particular. This is

due to the mounting pressure and the immense growth in revenue from these banks as

well as their rate of recovery. Private banking generates almost half of the sector’s gross

revenues every year. Although they are not as big as the capital banks, private banks

hold the biggest market share in the banking sector. The international business as an

export industry is in strong cross-border competition with other regions. This paramount

business field is undergoing a vast transformation process for there to be a sustainable

sector in Switzerland.

In the future world context of the convergence of legislation, regulatory and fiscal

frameworks, cross-border financial assets from the developed nations around the globe;

especially from affluent clients, will drop back to the customers’ states of domicile. This

is explained by SBA in their 2010 report on the Swiss banking progress after the global


18

financial crisis. Switzerland will be primarily impacted by the change in global financial

activities and legislations, due to its huge volumes of client portfolios which are under

the ownership of foreign customers. These are people particularly from Western Europe

and South Asia. Additionally, there is a significant risk that the profitable businesses

which concentrate on providing services to clients from the Western European.

It is predicted by SNB that it will become difficult or even prove impossible to conduct

cross-border banking business if the internal regulations continue to be upgraded. Banks

that have access to the EU markets as part of their international businesses will find it

difficult since countries in EU are becoming stricter in their banking sectors. This

would be translated into a substantial loss of revenue that comes from the private

practices of international banking services.

Since Swiss banking is majorly international as much as it is locally based in

Switzerland, any restriction on the international business means grave consequences. In

this context, the Swiss government is supposed to ensure that the profitable services in

the cross-border business will continue to be provided by securing regional market

access. In doing so, the lost revenue through restrictions would be recovered through

increasing the assets from the regional customers. According to a report that was

prepared by BCG under the name Global Wealth 2011; Switzerland continues to

emerge the world’s largest and most attractive financial destination for offshore private

banking.

This country has a market share of 27 percent, followed by the UK and the Channel

Islands each with 24 percent of global offshore banking. Of the US Dollars 2.1 trillion

offshore private banking managed assets within the Swiss sector, over 50 percent of it

belongs to customers from Europe while the rest is shared among the other countries.

There is a lot of new influence due to the mounting competition from other financial

fields for offshore funds and the recent political approaches to tax legislations for

offshore assets. The new focus by the central bank about the Swiss banking sector is the

new developments regarding private banking in offshore markets.

It was universe’s most difficult monetary year, back in 2009 when the entire financial

environment turned into a cerebral pain and the most difficult area of money. This


19

influenced all the banks in the word to make grave decisions in an attempt to save their

situations. This is the place where most African nations encountered exceedingly

terrible monetary emergencies and the loss of certainty and trust from both the investors

and customers. According to SBA 2010, the financial tension came about because of the

numerous budgetary emergencies. This drove a huge issue in the first home value credit,

home value advance, and OTC business. This included a stock trade where securities

exchanges are made through phone and PC instead of on the floor of a trade. This is the

point at which the word exchange encountered its disgusting express that it even

proceeded to undermine the dependability of the Eurozone.

This is the place most financial specialists surrogated an instrument which prompted

low volume of exchanges. Accordingly, minimized securities exchanges were low,

lessened stock stamped traded off the ordinary work execution of the bank. It may

sound a smidgen testing however then again it prompted expanded benefit to the

enormous banks. The analysts say that the huge banks had the capacity astonish

moderate their trade line of business misfortunes in 2009 as compressed to the earlier

years. Securities property got to be uncommonly again in 2009 on account of a strong

recovery of the budgetary markets over the compass of the year. In view of low-interest

rates, credit interest inclined emphatically despite the subsidence and home advance

receivables particularly got to be space.

The effects of the money related hang were felt in work, and there were job cuts of 2.4

percent in the banks in Switzerland. The survey of the Swiss Financiers Affiliation

(SBA) exhibits a slight addition in occupation for 2010. In the initial 50 percent of the

year staff levels extended by 0.5 percent and most dealing with a record establishments

also envision that business will stay stable for the second a vast part of the year. In the

present year 2010, the economy is from every angle continuing recouping, and the

enthusiasm for credit is growing, so arising in bank advantages can be ordinary. The

budgetary perspective is joined with a considerable measure of precariousness

regardless, including the effects of the euro crisis.

The Swiss keeping cash range stands up to negative perils however there are

furthermore open entryways - the "spot of asylum effect" for occurrence. The impacts

of the money related emergency kept on being reflected in the benefits figures of the


20

banks in 2009. Despite the fact that working benefit rose contrasted with 2008 by 10.8

percent with CHF 54.3 billion, it is still well underneath the figures for 2005-2007. The

recuperation is owing to the exchanging business, where the huge banks had the

capacity lessen misfortunes impressively. There was a further decrease in salary from

the enthusiasm acquiring business by 9.2 percent and in the commission and

administrations business the decrease was 13.9 percent. Toward the start of the year, the

inclination of speculators enhanced, and securities exchange costs rose up to the end of

the first quarter. In the second quarter, in the wake of the euro emergency, there was

recharged turbulence and instability on the businesses, and the pattern got to be negative

and exceptionally unpredictable.

Poor macroeconomic information and worries about the American economy are

antagonistically influence in the worldwide money related markets at present.

Numerous financial specialists are still restless, and stock market turnovers stay low,

which is affecting the exchanging and commission business. It is hard to figure future

improvements with any sureness. As it was at that point the case a year ago, the

accounting report aggregates of the banks in Switzerland additionally declined notably

in 2009, diminishing by 13.4 percent. The decline happened primarily in the enormous

banks, which greatly decreased their outside positions specifically.

Regardless of an economy in subsidence, the credit volume take-up in Switzerland

developed in 2009 by about 4.2 percent to CHF 880 billion. The development is

inferable from home loan receivables, which ascended by 5.6 percent, due in addition to

other things to generally low intrigue rates. Other loaning fell somewhat by 1.1 percent

due to economic situations, yet no credit crunch created anytime. Amid the present year,

credit interest is liable to pattern absolutely as a result of the monetary recuperation.

After a sharp decrease in 2008, the advantages oversaw by Swiss banks recuperated

impressively. A significant given to this was the recuperation on the monetary markets

specifically. For instance, the securities portfolios in client care records expanded to

CHF 4,508 billion toward the end of 2009. Some interest-related movements were seen

in the trustee store business and monetary record positions. Because of the low premium

rates, the guardian stores oversaw by the banks tumbled to CHF 248.2 billion. In the

first a large portion of 2010, securities possessions fell marginally by 2.0 percent. On


21

the asset report positions side, the 2009 pattern proceeded with and further moves

because of the low intrigue rates were watched. Furthermore, a few banks in

Switzerland profited from new cash inflows from neighbouring outside nations. Foreign

clients are searching for safe enhancement alternatives, which are profit capable in

Switzerland, from one viewpoint on account of the solid Swiss franc and then again due

to the political and financial steadiness.

Despite the fact that staff levels in the banks in Switzerland ascended in 2008

notwithstanding the poor business conditions, the impacts of the monetary emergency-

affected job designs in 2009. 2,576 employments equal to 2.4 percent were cut, such

that the Swiss banks were all the while utilizing 107,500 individuals (full-time

counterparts) toward the end of 2009. The greatest staff diminishing happened in the

huge banks with jobs equal to 5.9 percent was lost. The Cantonal banks employed 2.1

percent while the Raiffeisen banks managed to add 4.4 percent of the existing

workforce.

As indicated by the review of the Swiss Investors Affiliation (SBA), a slight upswing in

the example of occupation was detectable in the banks in Switzerland. Aggregate staff

levels ascended by 0.5 percent in the first half of 2010 compared with the end of 2009.

Also, the SBA overview draws out the way that the slight development in employments

is a pattern that will be maintained in the second a large portion of 2010. Generally, it

was expected that staff levels will be marginally higher toward the end of 2010, but it

did not happen due to the mounting tension of another crisis. Banks all over the globe

decided to take defensive measures to protect themselves from sinking further in the

post-crisis period. Thus, an increase in the workforce was the least of their plans since

some of them were already laying off workforce.

The effect of the budgetary emergency kept on influencing the banks' benefits through

reducing the revenue. In 2009, the working profit of the banks in Switzerland expanded

by slightly over 10.8 percent to CHF 54.3 billion. However, they stayed beneath the

highs recorded before the budgetary emergency. The exchanging business returned into

the dark, yet benefits in the enthusiasm winning business and in the commission and

administrations business declined. For the present year, enhanced benefits are normal in

the exchanging business and in the commission and administrations business, because


22

of somewhat higher stock market turnovers. The customary interest margin business

ought to advantage as the credit volume keeps on rising, in spite of the fact that margins

are underweighted.

In spite of the fact that Swiss banking sector continues to be in the spotlight for money

laundering, international and corporate clients continue to make the best use of Swiss

banks. The influence of the international legislation in the global banking continues to

shape the new developments in Switzerland way of doing things. The new lending

conditions issued by World Bank after the crisis crippled the global financial firms have

maintained a considerable amount of caution. This had reduced the rates of unsecured

lending that Swiss banks and other banks in the world were doing before the crisis

struck.

After a favourable first quarter in 2010, the temperament on the value markets appraised

again in the second quarter, and the costs in the main records were much lower toward

the end of the first half. The volume of stock market exchanges on the SIX Swiss Trade

may have been higher than in 2009, however, contrasted and the incomes accomplished

before the monetary emergency they were still low. This will likewise affect the

commission pay of the banks, which is liable to stay low. Speculators keep on showing

moderately chance unwilling conduct, giving inclination to more clear or standard

budgetary items over made-to-quantify arrangements.

Because of low intrigue rates, the credit volume in Switzerland continued developing in

the first a large portion of 2010, which ought to have a constructive outcome on the

routine interest edge business. However, rivalry in the home loan business has ended up

harder, and interest edges are underweight. By and large, the assumption is that benefit

in the credit business will stay level in 2010.

The negative effects which researchers had predicted that will befall Swiss banking

have again risen significantly. After the unpredictability of the value showcases in the

second quarter, the disposition of speculators is liable to be one of instability, which

could interpret into a steadily low exchange volume. The Swiss economy recouped

notably in the first half of financial year 2010, and an increment in household interest

for credit can be normal in the medium term. However, the high rate of development


23

can scarcely be kept up in the second a large portion of the year. An interest rate

increment could discourage the interest for home loans. However such an increment by

the SNB appears to be somewhat unlikely in the short term.

Currently the banking sector in Switzerland has expanded enormously throughout the

years since the 2008 financial crisis. This growth has been achieved through the policies

that have been passed and others amended for example the baking law on tax evasion

that was amended in 2009 that helped in reducing the number of clients evading tax

especially non-Swiss bank customers. However the current financial market is not

precisely identified but according to a report written by KPMG in 2008 the number of

banks operating in Switzerland were 112 with a total asset value of CHF 4.7 trillion and

the banking sector at the time was characterized by a big gap between the banks that

operated whereby the top end scooping a bigger share of the market with the two bank

UBs and credit Suisse taking up the lead since they managed half of the financial

market.

There were other 11 larger sized banks holding assets of a value greater than Swiss

franc 50 billion when combined with the top leading banks they operated 77 percent of

the financial market. UBS and Credit Suisse manage half of the total assets since they

are the biggest banks in the sector, with the largest market share both for local business

and the cross-border activities (Swiss Bankers Association, 2014). The remaining share

of the market was shared among several cantonal banks and regional and savings

financial institutions that basically operated within the areas of retail banking, issuing of

mortgage and the granting of loans to small and medium sized companies. They also

funded primarily local commercial and private operations and provide loans to public

authorities.

Most of these banks had an asset value of less than CHF 50 billion and this becomes an

important area of concern in our study since this part of the market is the most

fragmented, therefore it is where we expect to see the highest growth in terms of asset

value and change in customer base. This part of the market has the most opportunities

for consolidation and mergers as we look at the future of the banking system in

Switzerland. In a research done in 2011, banks contributed up to 59.4% of the total

value of the Swiss financial sector, amounting to CHF 35.0 billion which represented


24

6.2% of the country's GDP. UBS and Credit Suisse which are the two largest banks in

Switzerland were ranked at the global level as number 19 and number 25 among other

world largest banks, with assets that amounted to approximately US$1.375 trillion and

US$1.090 trillion, respectively.

However according to the current estimate by SNB of the assets at risk especially from

clients outside country which creates a shake in its successful growth the market is

expected to grow more within the country than across border in the next three years.

The current strategy of the better part of the banks is to expand their territory in terms of

the regions of operations now according to a report about the future of the industry the

survival of Swiss private banking is mostly dependent on its access to a greater value of

international client base in areas of its operations. This strategy needs to be backed up

by an adoption and implementation of transnational regulations which are of great

importance when penetrating the cross-border business market.

Therefore transnational regulations must be incorporated in the policies governing the

banking industry in order to create a sustainable and successful Swiss private banking

market. This comes as a prospect for a good number of the larger banks while the

medium level banks consider enhancing their client relationship with the client base in

Switzerland since offshore businesses are more expensive in terms of cost of operations.

The main and important question to ask would be whether the Swiss banks are able and

ready to take part in this trend? And will they be able to compete with other banks in

foreign countries such as china and United States of America and be able to acquire a

substantial share of the foreign market?

Based on the current interviews and online survey done by SBA, 9 out of 10

respondents think that the adoption and implementation of transnational regulations

only improves the reputation of the Swiss financial industry while only 3 out of 10

respondents think it only improves clients’ confidence in the Swiss banking system.

Therefore, based on this study fifty percent of the interviewees suggested that with the

uptake of the cross-border business strategy the Swiss private banking industry will

expand to about 25 percent. 36 percent of the respondents think that the industry will

experience a decline of between zero and more than 25 percent in the next three

financial years.


25

3 Results

3.1 Findings

The long term growth assessment of the Switzerland private banking industry based on

the current trends is expected to experience both negative and positive effects

influenced by some factors. These factors include different levels of inflation and

deflation within and in other countries, change in tastes and preferences by the clients

on the baking services provided. This may lead to a negative effect on the growth of the

industry if prefer foreign banks. For example it creates the potential outflow of

European client assets that are already in Switzerland and also general development of

worldwide wealth. This creates better returns in the capital markets as well as financial

markets; this boosts the framework of competition enhancing better performance of the

industry both onshore and offshore.

According to statistics by the SNB and the Swiss Federal Department of Finance on the

assets held by the non-resident of Switzerland, a good number of these clients are

members of EU from which about 80 percent are undeclared. This poses a threat since it

represents 40 percent of the security holdings by non-residents at risk. The best move

now is for Swiss banks to lure affluent clients from emerging economies, so as to avoid

decrease is value of assets managed. This is because there is already a lot of outflow of

assets especially from foreign clients being investigated on tax evasion.

For example since Switzerland passed the bank secrecy laws in 1934, Swiss banks have

been able to create one-third of the global offshore wealth since then until the U.S.

government sued UBS on Feb. 19, 2009, to force the provision of information about

52,000 American customers who were suspected to have undeclared assets in Swiss

bank accounts. UBS has been on the spotlight for claims that it is used by rich

individuals in tax evasion. In February 2015, the bank confirmed that it was under

intensive investigation by the US financial authorities for having been a hideout for

American tycoons who have been evading paying taxes. The hospitality in the Swiss

banking seems to have been misused by a few people who find it an easier route to do


26

illegal banking businesses. In the year 2010, this bank paid the US government a total

of £512 million in settlement for a tax evasion scandal which was involving huge sums

of money deposited by Americans in 2009. This trick has been noticed severally by

SNB and reported by some members of SBA.

3.2 Discussions

Closing these undeclared accounts is the solution that Swiss is applying, however this

will lead to some level of assets outflow. For example, western Europeans may

withdraw as much as 135 billion francs from Swiss bank accounts in this year only.

This has created a lot of pressure to the domicile banks, especially the small and

medium level banks. What we will see is that one in every three banks will close down

or merge with other firms in the coming five years. This will be because there will be

having difficulty in raising fees to compensate for the recently adopted regulatory costs

and tough market conditions.

This hunt for tax evaders may lead to a reduction of the Switzerland’s share of the

global market in the short term and this time it might shake the market harder. This is

since AUM may fall ranging between zero percent and ten percent. This represents a

greater decline compared with the one that took place between 2004 and 2007 with a

growth rate of 15 percent. Therefore there are some of the strategies such as Successful

compliance to transnational regulation that ensure support by Swiss governmental

bodies, such as FINMA. Also, the banking industry groups for example SBA also work

closely with financial sector bridging the gap between the government and the firms.

These organizations support banking in ensuring an international level financial market

field upon which Swiss banks can show their competitive advantages in terms of quality

services. The faster the Swiss private banking sector address this challenge, the lesser its

effect will be in the long run in terms of sustainability and continuity of services.

On March 30 2015, BSI SA happened to be the first bank within Swiss bank sector to

seal a deal with the US Government on the issue of helping tax evasion. This bank

agreed to pay USD 211 million for as a fine for the 3,500 American accounts that had

deposits of USD 2.8 billion in the year 2008. As part of this agreement, BSI admitted to

have been using fake identities and coded language in helping customers evade paying


27

taxes to the US government. This was termed as one of the most unethical activities that

a bank can engage in, and had to pay the fine and close down all the accounts, freezing

the money and taking it back to the American authorities. It was a painful decision for

the bank, since it is the obligation of the bank to protect its customers, but had to expose

everything for the sake of the agreement.

Swiss government did not take centre stage in the agreement since the issue would

compromise the relationships with the US government. There was an investigation and

transparency program that was launched in 2013 by the US government on the private

Swiss banks for suspicion of tax evasion and money laundering. The program required

that banks were to give out their lists of customers to the Swiss justice system for

scrutiny but it has been struggling to yield any results. The deal was that any bank that

would have done so by the set deadline of September 2014, there would be lower

penalties for any crime found present. However, this did not yield the expected results

since most banks chose to wait and see what would happen after the deadline. The US

government has been extremely concerned about the offshore tax evasion and money

laundering through the Swiss banking sector.

According to the office of the US attorney general, there were foreign assets worth

USD 2.3 trillion in Swiss banks by the end of 2014. This is a lot of money considering

that every country has a banking system but some few wealthy individuals chose to take

their deposits and assets to Switzerland. The question that most researchers ask

themselves is what makes Swiss banking more preferable by cross-border clients. In an

attempt to show compliance, some banks are pressing the existing American customers

to allow the banks in exposing their assets under management in Switzerland. The

Swiss banking laws provide that a customer can forego his/her rights to secrecy if their

activities raise concern. This is where the US government is waiting to see how much

the Swiss government is willing to assist in curbing the financial crimes from

international customers.

Consolidation is another aspect of concern within the Swiss financial industry. Over

time many discussions have been held to address this issue but nothing much has been

done. This is one of the current trending strategies to gain competitiveness and power,

and to be able to scoop a bigger share of the global business. Swiss banks have not done


28

much in this field, and our question today is whether it is possible for them to

consolidate assets in future. However, according to a recent research conducted by

PWC, 79 percent of the Swiss residents believe that the industry challenges will force

private banks to consolidate their assets. However, another 68 percent of residents

believe that there exist good M&A opportunities in the global market that are attractive

to consolidated firms awakening the need to consolidate. For example there has been a

positive growth in the worldwide assets at about 8.1 percent per year since 2013. In the

current global market Switzerland has mostly been the central spot of wealth

management expertise. It then continues to acquire NNM from emerging wealth

economies such as the Middle East, Asia, Russia and Central and eastern parts of

Europe.

4 Conclusion

Digitalization is one of the biggest agendas currently in all sectors globally. All

economic sectors are trying their best to incorporate the latest technology in their daily

activities as a way of making the service delivery and production process shorter. The

world has seen primary revolution in the banking sector and media services where

technology has been made a necessity. Banking is one of the important sectors to adopt

technology in the current trends to enhance efficiency of the operations and sharing of

information. This makes the business world better and creates potential for expansion.

In the banking sector in Switzerland, banks have incorporated a lot of technology after

the crisis to ensure that every activity is monitored and recorded. All these are desperate

attempts to protect themselves from any financial stress in future, of unpredicted

economic shakes.

According to SBA, Swiss banking has become one of the most attractive sectors in the

globe due to numerous ways of doing transactions through technology. Due to the huge

number of international customers, Swiss banking has got many outlets where

customers can deposit or access their accounts without going to the bank (Swiss

Bankers Association, 2010). This has made it easier to do transactions from far

distances, and ensuring that customers do not reduce the volume of their transactions.

However, there have been security concerns where some stakeholders seem to be


29

worried about cyber theft and hacking of bank accounts by technology experts. This is

the current area where most researchers are trying to study and understand what banks

are doing to ensure that they do not expose their customers to money loss.

There is an existing consensus in Europe concerning the importance of stress in banks.

This activity entails testing how prepared and stable a bank is against any forthcoming

financial stress and to prove that the said bank has already recovered from the previous

crisis (Ernst & Young, 2008). However, the activity does not involve revealing the

results of the tests, since they are meant to help the decision makers in formulating

policies and not for customers. USA made a mistake and disclosed the names of the

banks that had agreed to be tested in 2009, and this move offended the involved banks.

EU and Switzerland authorities did not agree to the call by the US agencies to release

the results of the international banks with activities in these two places.

According to the US government, releasing of those results were meant to restore

customer confidence in the banks, but the banks did not take it positive (Ernst & Young,

2008). On the other hand, EU argued that disclosing such details would compromise the

competitive advantage of the banks with weak base, as well as limit their access to

credit in future. This criticism went on and some banks began to withdraw from the

activity, pointing out that their privacy and that of their clients was at stake. According

to the report prepared by Ernst & Young Global Limited, EY-2009, Switzerland

addressed the issue of stress in relation to the activities that banks engage in, and took

the step to advise the individual banks on what to improve. This was backed up by the

EU which condemned the public disclosure of banks details as a way to kill their

competitiveness (Ernst & Young, 2008).

From a regulatory perspective, incorporating a stress testing into an on-going risk

management program was very crucial for the banking sector and would help in

protecting the stability of a country’s financial sector. This was to be backed with

setting up a provision for a loan-loss with a conservative approach. Stress test was to be

used for the purpose of measuring the rate of recovery from the 2008 crisis and the

change in strategies which would enable banks seal all openings for recurrent crisis.

Based on the financial reports prepared by EY, it is evident that there was need for


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countries in the Europe to take stiff measures than the rest of the world since this is the

zone where international banking is concentrated.

However, it seems that the same place is a little bit resistant to change and countries do

not like collaborating with each. For instance, the banks in UK do not work in good

terms with Swiss banks since the competition seems to be concentrated in these two

countries. IMF argues that there is dire need for the two countries to come together and

work out their competitive mechanisms for the sake of sustainability within Europe.

Switzerland attracts attention from the international community due to the existing

hospitality for international businesses. Thus, it creates some level of uncertainty and

insecurity in the sustainability of the European businesses since any decision made in

thus banking sector is a fundamental point of reference for the international community.

Research shows that the issue of stability in the Swiss banks does not only involve the

parties which are directly concerned; rather, it is a point of reference for the whole

continent. The comprehensive assessment of stress status is not a one-off exercise;

rather, it is a recurring supervisory tool used by several bodies and individuals for a

long term solution. This practice also influences FINMA’s agenda, given the

macroeconomic upgrading of credit risks, which has been a typical cause of financial

crisis.


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Ernst & Young. (2008) (pp. 4 - 46). Retrieved from http://www2.eycom.ch/publications/items/200812_navigating_the_crisis/200812_ey_navigating_the_crisis.pdf

IFBC. (2014). Der Schweizer Bankenmarkt 2015. (The Swiss Banking market 2015). (pp. 2 - 40). Retrieved from http://www.ifbc.ch/tl_files/content/file/publikationen/Studien/Banking/2014/Studie_Retailbanken_2014.pdf

Körber, A., Müller, U., Schriber, M., & Stocker, T. (2008). Banking Barometer 2008 (pp. 2-23). Swiss Bankers Association. Retrieved from http://shop.sba.ch/999977_e.pdf

Körber, A., Müller, U., Schriber, M., & Stocker, T. (2009). Banking Barometer 2009 (pp. 4 - 21). Swiss Bankers Association. Retrieved from http://shop.sba.ch/999973_e.pdf

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