Introduction

The years 2007 to 2009 were marked by extraordinary economic developments. The subprime crisis in the US prompted a financial crisis in 2007 in which financial institutions suffered losses and went bankrupt. The situation came to a head in September 2008 with the collapse of the US investment bank Lehman Brothers. The ensuing crisis of confidence in the financial sector further accelerated the downward spin. This development had a strong impact on the real economy and by the end of 2008 the global economy at large was affected by the crisis. The worldwide financial and economic crisis also left its mark on the Swiss economy.

The State Secretariat for Economic Affairs (SECO) reported a moderate GDP growth of 1.8% for 2008, but the development in certain industries turned negative especially from the third quarter on. In 2009 the overall economy caved in and the GDP contracted by 1.5%, marking the severest annual decline since 1975. Notably the export trade, which is of great importance for the Swiss national economy, was hard hit and exports fell by 12.6% in 2009.

In view of the banks’ difficulties, many countries took measures to support their banking sectors and avert a systemic crisis. For instance, the US government drew up a bailout package of around 700 billion US dollars in October 2008 in order to purchase defaulted loans from the banks and thus help the banks de-risk their balance sheets. In some countries, including the UK, the US, Germany and Island, certain banks were even partly nationalized. Moreover, many industrialized countries put substantial programmes in place to stimulate their economies and thus absorb the effects of the financial crisis on the real economy. In Switzerland, UBS had a significant exposure in US mortgage-backed securities and was therefore impacted most severely by the global financial market disruptions. In the autumn of 2008 it transpired that even with the countermeasures, the bank still held substantial positions in illiquid (i.e. non-transferable) securities and other troubled assets. Since an exacerbated crisis of confidence could not be ruled out, it was decided to take measures to strengthen the overall system.

The Swiss Federal Government and the Swiss National Bank (SNB) jointly worked out a set of measures, which included the urgent bail out for UBS, which was too big to fail. In December 2008, an urgency bill was passed to increase investor protection. Two key measures were taken to support UBS: the bank’s capital base was strengthened with CHF 6 billion, and illiquid assets of USD 38.7 billion were transferred to a special-purpose entity of the SNB (SNB StabFund). With the dramatic weakening of the economy, the parliament decided at the end of 2008 to launch an economic stimulus plan of CHF 432 million to support the real economy. Two additional plans were launched in 2009, adding the total of stabilization measures up to CHF 2 billion.

Central banks around the globe reacted to the deteriorating economic outlook by adopting clearly reflationary monetary policies. Interest rates were lowered to historically lowest nigh-zero levels. The Swiss National Bank also responded with an unprecedented easing of monetary policy, which helped absorb the economic downturn in Switzerland. Although it would be premature to herald the end of the crisis, toward the end of 2009 the world economy began to rally from the recession. The Swiss national economy has also experienced a moderate growth since the third quarter of 2009. It has weathered the crisis well compared to other industrialized countries, partly because it did not need to struggle with the effects of excessive real estate speculation. Swiss banks had learnt their lessons from the real estate crisis in the 1990-ies and introduced rating schemes and risk-adjusted pricing early on, thus anticipating the key principles of capital requirements under Basel II. The solid financial condition of private households and the comparatively robust labor market were also a relief. However, in 2009 employment was declining for the first time in six years.

The Swiss capital market experienced a slump toward the end of 2008, but recovered well in March 2009, also owing to SNB interventions, and many bonds were issued successfully. Even though terms of lending had tightened somewhat under the market conditions, Switzerland unlike other countries had never experienced an actual credit squeeze. The market for syndicated loans – another important source of finance for large companies – also continued to function well with a large number of successful transactions. In August 2009, the Swiss government was able to sell its stake in UBS equity successfully with net proceeds of CHF 1.2 billion. The banking industry’s overall earnings are still below the pre-crisis peak levels, but most Swiss banks were able to hold their ground during the crisis. In contrast to the US where 165 banks had to close down in 2008 and 2009, none of the Swiss institutions needed to file for bankruptcy.

Notwithstanding all these recovery trends, the financial and economic crisis left lasting marks and the growth outlook for the world’s and the Swiss economy remains unstable. Economies may experience another slowdown effect once the global publicly sponsored economic stimulus plans expire. The financial crisis has affected two fundamental approaches at the political level: the call for stricter financial business regulation became louder, and various countries stepped up their pressure on banking confidentiality.

International regulation efforts

Banking is among the tightest regulated industries in any country’s economy, and yet the financial crisis could not be averted. Moreover, the crisis revealed a number of flaws in international regulation. In simple terms, prior to the crisis it was assumed that the safety of the whole banking system is given if each individual bank is safe and has an adequate capital base to absorb any potential losses. The consequent theory was that it would suffice to supervise each bank at the micro level, which would automatically preclude a crisis in the entire system (at the macro level). However, in retrospect this theory has proved delusive. The concept failed to accommodate the possibility that in a crisis situation banks could be forced to act in a way, which would adversely impact the refinancing of other financial institutions.

This could be the case, for instance, when a bank’s capital base is impaired by losses and the bank is then forced to reduce its lending to other banks, in order to restore its own capital base to statutory levels. A shortage in interbank lending on a large scale can trigger a liquidity crisis in the entire financial system. Institutions work at a national and international level to propose regulatory measures that would help strengthen the financial system and protect it from systemic risk. Such proposals relate to the micro level (e.g. increasing capital requirements for banks) as well as to the macro level (e.g. greater system stability).

At the international level, the G20, the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS) proved particularly diligent, having elaborated a whole range of new proposals. In addition to capital and liquidity requirements, these proposals also deal with topics such as remuneration and the “too big to fail” issue. The Basel Committee is responsible for defining the capital requirements for banks (Basel II) and intends to raise the total equity requirements in the medium term from the levels currently required under Basel II. With regard to remuneration systems, the consensus lies primarily on aligning compensation with the banks’ sustainable results. This approach aims to discourage from assuming excessive risk as a result of a short-term focus. The FSB has issued according guidelines on behalf of the G20. In November 2009, the Swiss Financial Market Supervisory Authority (FINMA) released its guidelines on remuneration schemes, which are binding for certain Swiss financial institutions.

To reduce the systemic risk, emanating notably from institutions that are too big to fail or too interconnected to fail, there is a clear need to ensure that insolvent banks can be wound up in a regulated manner. Banks with a potential to harm the system if they failed, should therefore be required to set up a type of last will. This means they would have to elaborate the strategic procedures that would come to bear, should they need to file for bankruptcy. With most systemically relevant banks being active on a global scale, the respective regulation would have to be aligned internationally. As this publication went to press, most of the above proposals were still subject to discussion and reviews.

Tax debate and pressure on the bank client confidentiality

Public debt has soared in many countries as a result of substantial public spending on rescue plans and to stimulate the economy. Many governments therefore need to find ways to cut their expenses or generate new revenues. Given the necessity to raise new funds, governments are intensifying their efforts to repatriate cross border assets, which are currently managed by competitive financial centers in smaller countries. Due to its international significance as an asset management hub, the Swiss financial centre has become a specific target.

The Swiss financial centre is also committed to gaining market access in Europe in order to provide financial services from Switzerland. International openness and an exemplary set of regulations are key features of the Swiss financial centre. Against this background, and in view of the acceptance of international OECD standards with regard to administrative assistance, unilateral discrimination among closely related trading partners is inacceptable and should be eliminated.