After the financial crisis

Swiss Financial Market

Policy

Published by
Federal Department of Finance FDF
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3003 Bern
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www.finance.admin.ch
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Art.-No 600.004.eng
FDF Communications
08.10
2300
860247986
Bern, July
2010
/ 860247986
Cette publication existe galement en franais.
La presente pubblicazione disponibile anche in lingua italiana.
Diese Broschre ist auch in Deutsch erhltlich.

Contents
5

Introduction

Swiss financial centre: Strengths and weaknesses

10

Strategic guideline 1: Strengthen competitiveness

11

Strategic guideline 2: Secure market access

12

Strategic guideline 3: Improve crisis resistance

13

Strategic guideline 4: Secure integrity and reputation

14

In focus: Protecting privacy in the financial sector

16

In focus: International collaboration

17
In focus: Final withholding tax and EU taxation of

savings income
18

In focus: Engagement in international bodies

19

Outlook: What are the next steps?

Introduction
The financial and economic crisis has shaken the international financial system. Major upheavals occurred
worldwide. New problems surfaced, and existing problems got worse. Responses to these challenges are
needed. Switzerlands new financial market strategy
provides them.

In recent months, the crisis has uncovered serious

weaknesses in the international financial system and
we must draw the right conclusions from this. Certain
parts of the banking system are indispensable for the
systemic stability of the national economy. Regulation
must gain more traction where it used to be ineffective so that the financial system as a whole is more robust and able to withstand crises.
Against this background, the Federal Department of
Finance has joined together with the Swiss Financial
Market Supervisory Authority (FINMA) and the Swiss
National Bank to set out goals of financial market
policy. In December 2009, the Federal Council
adopted the report entitled Strategic Guidelines for
Switzerlands Financial Market Policy. This report can
be found at www.efd.admin.ch/financialmarket.
The new financial market policy of the federal government is deliberately not a sectoral policy. It measures
itself by the national interest and the overall economy.
It points out paths allowing the Swiss financial centre
to secure and expand its already strong position. This
requires that all players are willing to face the changes
and continue to stand for the basic values that have
made the Swiss financial centre strong. Both internally
and externally, the goal must be to identify the scope
of action, to act prudently, and to negotiate.

4
5

Swiss financial centre:

Strengths and weaknesses
The financial sector is a cornerstone of the Swiss national
economy. Its share in added value has risen steadily
since 1990. Growth has primarily been in the banking
sector, which generates disproportionately high added
value. Switzerlands internationally strong position in
asset management continues to distinguish the Swiss
financial centre.

Strengths
The Swiss financial centre has numerous advantages.
These include the high political stability of Switzerland, legal certainty, the protection of property, and
the reliability of government bodies. Other important
factors are the strength of the Swiss franc, its unrestricted convertibility, the high savings rate of private
households, low interest rates, the high quality of
Swiss educational institutions, the high education level
of the population, the flexible labour market, competitive taxation of legal and natural persons, and the
generally high quality of life in Switzerland, which
makes the country an attractive place to live and
work.
The low risk of losing ones assets to expropriation in
Switzerland continues to play a major role in crossborder asset management in conjunction with the
high protection of privacy making our country a safe
haven for cross-border assets.
Not least of all due to the major importance of the
Swiss financial centre, the Swiss Financial Market Supervisory Authority and the Swiss National Bank have
long had modern structures and specialists at their
disposal to fulfil their responsibilities. The Swiss financial centre continues to offer the best prerequisites for
maintaining its status as one of the leading locations.

6
7

Weaknesses
The Swiss financial centre also has its weaknesses. The
small home market entails that Swiss banks practically
can only grow in foreign markets and in cross-border
asset management. The latter in particular exposes
the financial centre and makes it vulnerable. Another
risk is that access to foreign markets could be made
more difficult for Swiss financial institutions. Without
market access abroad, however, added value in the
banking sector cannot be maintained at current levels.
Switzerland has two major banks of global importance. De facto, this leads to a national economic concentration risk. Also for the financial system itself,
this constellation can become dangerous at any time.
The too big to fail problem therefore demands a
high level of sensitivity to the associated risks in
Switzerland, forcing it to adopt effective measures to
limit risk.
Switzerland will in future adopt more international
standards relating to regulation and supervision. Only
in that way can it achieve international recognition of
the equivalence of its regulation and supervision. This,
however, reduces the leeway for competitive advantages, which constitutes a risk for the financial sector.
The traditional strengths of the Swiss financial centre
will in future play a smaller role than they do today.
All the more important will be a good fiscal framework, innovation, and the qualifications of employees.
For the Swiss financial centre to maintain its international importance, targeted improvements of market
access abroad and new competitive factors are necessary. Self-imposed competitive disadvantages that only
affect the Swiss financial centre must be eliminated.

Swiss financial centre:

A stable Switzerland with a robust financial centre

Added value and state intervention: there is virtually no country in
which the financial sector accounts for such a high share of the gross
domestic product (GDP) as Switzerland does. In spite of this exposure
to risk, during the financial crisis the Swiss financial centre was able to
manage with considerably less government assistance than the financial
centres of comparable countries.

Added value
financial sector
in % GDP

14
12
10
8
6
4
2

Belgium

Spain

Japan

Germany

France

Switzerland

Strengths and weaknesses

8
9

Added value financial sector

Amount of government assistance allocated (June 2009)

Government assistance allocated

in % GDP
283 %
100
90
80
70
60
50
40
30
20
10

Ireland

USA

UK

Sweden

Netherlands

Austria

Sources: IMF, OECD

Strategic guideline 1

Strengthen
competitiveness
The financial centre makes a disproportionate contribution to Switzerlands prosperity. For this reason, it
is important for the financial centre to remain competitive in the international environment. Strengthening competitiveness is therefore the first strategic
guideline for Swiss financial market policy.
To strengthen competitiveness, financial service providers offer high-quality, innovative services. This is
primarily their own challenge. They must adjust flexibly to ongoing changes and help shape them.
Secondarily, however, the State must also act. It must
create the necessary framework and stand up for
Swiss interests within international institutions. For
the financial sector to thrive, the federal government
must be guided by internationally recognised standards while at the same time creating competitive advantages. A solid financial policy creates scope for
government action. The federal government must
also keep the labour markets open and ensure an
education system of the highest quality. Not least of
all, the financial market infrastructure must sustain
its high performance and remain independent. Businesses have a wide range of financing options at
their disposal. The protection of financial privacy continues to apply, and the tax environment for the entire
national economy remains attractive as well.

Implementation
Strengthening competitiveness is a horizontal responsibility
that fundamentally affects all areas of policy and that is
important far beyond financial market policy.

Strategic guideline 2

Secure market
access
Internationality and openness will continue to distinguish the financial centre. The second strategic guideline of financial market policy has an internal and an
external component: foreign financial service providers
continue to receive full access to the Swiss financial
market as before. In return, Switzerland expects its
financial service providers to be granted equally free
access to foreign markets. This is currently not the
case everywhere. Good market access conditions
abroad are highly relevant to Switzerland, since Swiss
banks will henceforth engage in more businesson-site.
As a consequence of the financial market and economic crisis, various countries have restricted crossborder movements in capital and services. This has
made the situation more difficult for Swiss banks, insurers, asset managers, and fund providers in individual business areas. It is therefore important for Swiss
foreign economic policy to secure and expand market
access for domestic financial service providers.

Implementation
Barriers to market access can be eliminated in a targeted
manner with liberalisation agreements. Additionally, already
existing market access can be secured under international law.

10
11

Strategic guideline 3

Improve crisis
resistance
Only a financial sector that has long-term stability can
create prosperity and permanently contribute to added value and employment. Large financial institutions
contribute substantially to the international importance
of the financial sector. The third strategic guideline of
Swiss financial market policy therefore aims at stability
and crisis resistance and at defusing the problem of the
size of individual institutions (too big to fail).
The two major banks are of systemic importance to
the Swiss national economy. Trusting that the State will
support them in the event of crisis, they may be tempted to assume exaggerated risks. The too big to fail
problem is especially salient in Switzerland: the balance
sheet total of the two major banks is six times as high
as the entire GDP, and their debt is four times the entire GDP. For Switzerland, the risks due to the size of
the major banks are especially high. A default of one
or both financial institutions would have disastrous
consequences for the Swiss national economy. n
For systemically important institutions, special requirements will henceforth apply. Should a case of insolvency occur despite higher crisis resistance, the
affected bank should be allowed to fail perhaps
while separating out and saving the parts relevant
to the system. This requires adjustments to insolvency law.

Implementation
Crisis resistance of the banks is improved in three ways:
more equity capital
more liquidity (potentially with a progressive structure)
better risk diversification

Strategic guideline 4

Secure integrity and

reputation
The Swiss financial centre must continue to distinguish itself with its stability, predictability and integrity. This strengthens the trust of clients and market participants and enhances acceptance abroad. This is the
goal of the fourth strategic guideline of Swiss financial
market policy.
Every significant financial centre faces the threat of
misuse for criminal purposes. Financial market crime
can be combated even more effectively if regulators
and central banks engage in intensive exchange at the
international level and work together with authorities
in other countries. Switzerland has long been actively
engaged on behalf of cross-border suppression of
money laundering, corruption and terrorist financing.
Also in tax matters, Switzerland is open to an exchange of opinions and international dialogue. The
federal government endeavours to harmonise the
long-term interests of the Swiss financial centre to the
extent possible with the justified fiscal interests of
foreign countries; in return, Switzerland expects its
financial service providers to be given unimpeded market access in the country in question. Switzerland also
offers its help in ensuring improved taxation of capital and the income it generates (see final withholding
tax p.17).

Implementation
Switzerland continues to participate intensively in numerous
peer review processes of the Financial Stability Board, the
Global Forum, the Financial Action Task Force on Money Laundering, and other international bodies.

12
13

In focus

Protecting privacy in the

financial sector
Banking secrecy does not protect banks, but rather
citizens. This basic understanding continues to apply.
It is a fixed component of the democratic tradition of
Switzerland and an expression of trust between citizen
and State. The low share of the underground economy in Switzerland compared with other countries
shows that this basic understanding works and is in
any event more successful than a system that treats
citizens with distrust from the outset.
Banking secrecy does not protect criminal acts. In the
event of qualified indications of an offence, banking
secrecy can be lifted with regard to both Swiss citizens and foreign citizens. The OECD standard on administrative assistance in tax matters, which now applies practically all over the world, has led to changes
in Swiss practice. The less restrictive administrative
assistance policy will henceforth permit information
exchange with foreign States in cases of tax evasion
not automatically, however, but rather only upon request and in specific individual cases. Switzerland rejects automatic information exchange, because it violates financial privacy.

14
15

Underground economy in % of GDP

USA

7.0

Switzerland

7.9

Japan

8.8

Netherlands

9.6

United Kingdom

10.1

France

11.1

Canada

12.0

Ireland

12.2

Finland

13.8

Denmark

13.9

Germany

14.2

Norway

14.7

Sweden

14.9

Spain

18.7

Portugal

18.7

Italy

21.4

Greece

24.3
Source: Schneider, Torgler, Schaltegger, 2008

In focus

International
collaboration
In economically difficult times, many countries have a
strongly increased need to bolster the national budget
with additional funds. Numerous bailout and economic stimulus programmes in the wake of the financial
crisis have further increased sovereign debt to unprecedented levels. Many States are therefore looking for
opportunities to tax their citizens income as comprehensively and with as few gaps as possible.
As long as the protection of privacy of citizens and clients is guaranteed, Switzerland supports international cooperation in tax matters. However, legal certainty and predictability must continue to be ensured. For
Switzerland, this means:
Information exchange is granted to foreign tax
authorities only upon request and in specific indi vidual cases
Fishing expeditions are ruled out
The prohibition of retroactivity applies to new rules
In administrative assistance, the principles of sub sidiarity and reciprocity apply
Legal protection of the person concerned must be

guaranteed

Implementation
Since Switzerlands adoption of the OECD standard on administrative assistance in cases of tax evasion in March 2009,
Switzerland has negotiated double taxation agreements with
25 States in which the new standard has been incorporated
on a bilateral basis. Agreements with other States will follow
constantly.

In focus

Final withholding tax and EU

taxation of savings income
Switzerland has always worked closely together with
the European Union. Long before the financial crisis,
Switzerland signed a Taxation of Savings Income
Agreement with the European Union. This agreement
provides for a retention tax that is collected by Switzerland and passed on to the entitled EU countries. This
ensures that interest income of persons resident in EU
States is taxed appropriately. Currently, consultations
are underway between Switzerland and the EU on the
technical workings of the agreement. Switzerland is
ready to close gaps that remained open at the instigation of individual EU countries.
As an element of expanded bilateral cooperation,
Switzerland is willing to introduce a comprehensive
final withholding tax. This tax would apply to crossborder income on capital and, like the EU taxation
of savings income, would be based on the paying
agent principle. The privacy of foreign clients is
preserved, and the foreign State immediately receives
revenue (in contrast to the automatic information
exchange whereby just data is supplied). The final
withholding tax effect would over time lead to a legalisation of non-declared assets. Additionally, a rule
for non-declared legacy assets could be agreed at a
negotiated rate.

Implementation
Switzerland is considering abolition of the anticipatory tax in
favour of a paying agent tax with a lower rate, a broader tax
base, and a final withholding tax effect.

16
17

In focus

Engagement in
international bodies
International financial market regulation is currently undergoing fundamental reform. Switzerland is actively involved in these reforms because it acknowledges that highly complex financial crises can no
longer be tackled by one country alone. When financial markets and suppliers are globally integrated,
then regulation must also operate internationally.
Switzerland is committed to shaping the new framework for open markets. It holds the view that all providers should be subject to the same conditions in international competition. Where the stability of global
financial markets can be increased through the use
of regulatory minimum standards, Switzerland advocates corresponding measures. The risks posed by
future crises which could have a severe impact on
Switzerland can thereby be greatly reduced. However, preventive efforts only have an impact if they
are supported not just by one country but by as many
countries with global financial centres as possible.
Switzerlands representation in political steering bodies
is extremely important for the countrys interests. By
virtue of its presence in the IMF Executive Board and
in the Committee of the Whole for the Financial Stability Board, Switzerland is able to have an influence
on reforms at an early stage. In addition, it is represented in numerous technical bodies via the Swiss Financial Market Supervisory Authority (FINMA) and the
Swiss National Bank. These institutions also set international standards. It is Switzerlands aim in these international bodies to ensure that a framework which
is effective, efficient and pragmatic is established.

Outlook

What are the

next steps?
When implementing the new Swiss financial market policy, the focus is on strengthening international
competitiveness, improving market access, strengthening crisis resistance, and the integrity of the financial centre.
To achieve these goals, the State and the financial sector must continue to work together intensively. In addition, financial market authorities must regularly exchange information at an international level, so that
Swiss interests can be heard abroad. Switzerland is
strengthening its early-warning mechanisms in order
to identify and analyse the impact of international developments at an early stage.
The goal of the new financial market policy is to create a good framework for the high-added-value financial sector, to ensure a high level of systemic stability
and performance, to preserve the integrity and reputation of the Swiss financial centre, and to enable suppliers in the Swiss financial centre to continue to offer
high-quality services for the national economy.

18
19

But if we wish to remain human, then there is only

one way, the way into the open society. We must go on
into the unknown, the uncertain and insecure, using
what reason we may have to plan for both security and
freedom.
Karl R. Popper, Philosopher