Part I: The Swiss banking sector
The Swiss financial centre is one of the most competitive in the world and the leader in cross-border wealth management. It offers a first-class environment for technological innovation, while its regulatory system is recognised internationally as exemplary.
Economic environment dominated by COVID-19 – federal and cantonal governments and banks supporting Swiss economy
The Swiss economy has withstood the COVID-19 pandemic well so far. The decline in economic output during 2020 was modest by international standards. Strong growth is expected for 2021. The federal and cantonal governments are supporting the Swiss economy with a broad range of measures. During the first phase of the pandemic, banks worked with the federal government to launch COVID-19 bridging credits, offering the companies affected a quick and straightforward way to secure liquidity.
Central banks making large-scale asset and currency purchases to stabilise markets
The Swiss National Bank (SNB), US Federal Reserve (Fed) and European Central Bank (ECB) have made large-scale purchases of currency and assets to stabilise markets and support the economy during the pandemic. Despite a rise in eurozone and US consumer prices in the first half of 2021, both the ECB and the Fed are sticking to their expansionary monetary policy for the medium term. Swiss inflation forecasts range from 0.5 % to 1 %, and no end to the negative interest rate policy is in sight.
Private digital money and central bank digital currency attracting attention worldwide
Various central banks, other banks and technology firms around the world are currently working on forms of digital money. Depending on the form it takes, it can fundamentally transform banks’ business models and the work of central banks. The discussion paper published by the SBA is a contribution to an important debate on the design and use of digital money and its implications for business and society.
Global increase in government debt making exit from expansionary monetary policy harder
The pandemic has led to further growth in the already high levels of government debt. Household and corporate debt have also risen. These high debt levels are making an exit from expansionary monetary policy harder. There is a strong incentive for central banks to maintain low interest rates and give less weight to inflation risks. The danger is that monetary policy will increasingly become an instrument of fiscal policy, amid growing concerns over the independence of central banks.
No institutional framework agreement between Switzerland and EU
In May 2021, the Federal Council decided not to sign the institutional framework agreement with the EU. Cross-border wealth management for private clients based in the EU is a key export sector for Switzerland. Export-oriented banks rely on practicable and sustainable market access. It is essential to consolidate the bilateral approach and find future-proof solutions for developing it going forward.
Meanwhile, efforts to work out new arrangements governing relations between Switzerland and the United Kingdom (UK) have moved forward. Exploratory talks have gone well so far, and concrete progress on some specific issues is expected by the end of the year. The UK recognised the equivalence of Swiss stock exchange regulation in February 2021, as a result of which Switzerland deactivated the measures to protect its stock exchange infrastructure in respect of UK trading venues.
Progress made towards abolishing stamp duty and reforming withholding tax
Switzerland’s stamp duties and withholding tax are a serious competitive disadvantage for the country’s financial centre. The Federal Council adopted the dispatch on the reform of withholding tax in April 2021. It provides for withholding tax on domestic interest to be abolished with no replacement. The Council of States supports a National Council motion to abolish stamp duty on a staggered basis. Both of these reforms should lend a fresh boost to the Swiss capital market.
Part II: Consolidated trend in Switzerland’s banks
The banks in Switzerland recorded a solid business performance in 2020. Their aggregate net income in particular increased thanks to the result from trading activities. Total assets also increased. The banks were able to maintain the supply of credit even in the midst of the pandemic. The number of staff in the banking sector rose slightly for the first time since 2010.
Result from trading activities responsible for biggest share of aggregate net income
After a large fall in the prior year, the result from trading activities rose by 46.7 % in 2020. This combined with a slight decrease in the result from interest operations (due to low interest rates, as in previous years) and an increase in the result from commission business and services to lift aggregate net income by 5.8 % to CHF 69.9 bn. The increased result from trading activities was linked to higher market volatility and the attendant rise in trading among customers. This also bolstered income from commissions in securities and investment business. Since the SNB increased the threshold factor in April, the banks in Switzerland paid less negative interest to the central bank in 2020 than they had in 2019. Overall, the SNB earned around CHF 1.4 bn from negative interest. Most of this came from banks, and this continues to be reflected in their results.
The banks’ gross operating profit rose by 18.3 % in 2020. They paid taxes amounting to CHF 1.9 bn.
Sharp increase in liquid assets, mortgage loans still largest asset item
The aggregate balance sheet total of all banks in Switzerland grew by 4.5 % to CHF 3,467.3 billion in 2020. This growth was aided by a sharp increase of 26.1 % in liquid assets, which corresponds to the marked rise of 24.1 % in the banks’ sight deposits with the SNB as a result of the higher threshold factor. The raising of the threshold factor also gives the banks increased scope for lending. Mortgage loans are the largest asset item on the Swiss banks’ balance sheet, accounting for 31.7 % of total assets. Liquid assets and mortgage loans have been the driving forces behind assets over the past decade. Liquid assets showed a dramatic increase from CHF 106.1 billion in 2010 to CHF 684.6 billion in 2020. This was due to the Basel III liquidity rules, the strong franc and low interest rates, among other things. Low interest rates have made residential property more attractive, leading to a rise of around 43 % in mortgage loans over the same period.
Diverging trends in sight and time deposits
On the liabilities side, amounts due in respect of customer deposits rose by 8.7 % and made up 56.9 % of the balance sheet total at the end of 2020. This increase was triggered by a sharp rise of 29.2 % in sight deposits, a component of amounts due in respect of customer deposits. At the same time, time deposits fell by around 16 %, continuing the trend observed in the past ten years. More and more money has been moved out of time deposits and into sight deposits in view of the low level of interest rates. The strong year-on-year growth in sight deposits is also attributable to the exceptionally high savings rate caused by the slump in consumer spending during the successive lockdowns.
Slight fall in assets under management despite increase in securities holdings
Assets under management showed a slight fall of 0.2 % in 2020, primarily due to foreign customer assets. While the volume of domestic customer assets invested in securities increased despite the volatile markets, the corresponding figure for foreign-domiciled customers was unchanged. Fiduciary liabilities and amounts due to customers excluding sight deposits declined for both domestic and foreign customers. Foreign currencies make up a larger share of foreign customers’ assets than those of domestic customers, which is why an appreciating Swiss franc has a greater negative impact on foreign customer assets when they are valued in francs. The shift from time deposits into sight deposits has prevented a significant increase in assets under management.
Number of staff at banks in Switzerland rising in spite of pandemic
In 2020, the 243 Swiss banks’ recorded an increase in headcount of 414 full-time equivalents, the first since 2010. Consolidation within the industry, more stringent regulation and outsourcing had caused the number of staff in the banking sector to fall steadily in recent years. Last year’s increase does not necessarily signal a reversal of this trend. According to the State Secretariat for Economic Affairs (SECO), the unemployment rate in the financial sector was 3.3% at the end of the crisis year that was 2020, slightly lower than that of the overall economy. The sector was less affected by the pandemic than others.
The regional banks and foreign banks shed around 1000 jobs in 2020, while banks in the remaining categories added a total of 1414. The main reason for the fall among the regional banks and the increase among the big banks was statistical effects resulting from the merger of Neue Aargauer Bank with Credit Suisse (Switzerland) Ltd.
According to the SBA survey, the Swiss banks’ headcount rose by around 1 % in the first half of 2021, with the number of foreign jobs growing faster (by 1.8 %) than the number of domestic jobs (0.2 %). The SECO figures show that the unemployment rate in the financial sector fell to 2.8 % in the same period. The outlook for the remainder of the year is positive. Only 9.5 % of the banks surveyed expect their headcount to fall, whereas a quarter expect it to rise. The survey shows that the best prospects for the second half of the year in this respect are in logistics and operations (back office) and wealth management.
First half of 2021 dominated by recovery from pandemic
In the first half of 2021, the easing of measures to contain COVID-19 around the world led to an economic recovery, monetary policy remained expansionary, and the stock markets performed well. This is all reflected in the Swiss banks’ balance sheets and assets under management. Following a slight fall in 2020, the latter rebounded by 6.9 % in the first five months of 2021 The aggregate balance sheet total grew by 3.0 % in the same period, with amounts due from securities financing transactions and amounts due from banks showing the largest increases on the assets side and sight deposits and amounts due to banks on the liabilities side. Time deposits also posted a rise after falling sharply in 2020. Whether this trend can continue in the second half of the year depends to a great extent on how the pandemic situation develops going forward.