This publication recently interviewed one of the top men at the Swiss Bankers Association in Zurich to find out how it is rising to a broad regulatory challenge and pressure on the country to adapt.

In trying to persuade policymakers about the folly of over-regulation – a constant challenge – the best way to get the message across is to state that jobs, and wider economic wellbeing, are on the line, argues the Swiss Bankers Association.

The organisation, which represents over 300 banks (a number that has fallen from 375 banks around 14 years ago), believes that only by showing the tangible harm that can be done to Swiss people by certain changes will it prevail in making the case for clear but not destructive rules in the wake of the 2008 financial crisis.

That is certainly one of the key points made to this publication by its chief economist, and senior management member, Dr Martin Hess. The SBA and this publication recently met at the SBA’s offices in Zurich. The association also has offices in Berne, the Swiss national capital, and Basel.

“If you want to win a battle in parliament it is about showing that we are about creating jobs and promoting competition. Maybe policymakers and regulators think too much about the intended benefits of regulation and not about the long-term costs,” Dr Hess said.

The SBA hasn’t been afraid to be blunt in its warnings of overzealous regulation. Recently, it said the updated European Union rules known as MiFID, which require non-EU banks to have an onshore presence in the EU bloc, will hurt Swiss banks, particularly the smaller ones. The SBA is worried this is hitting free trade rather than about protecting Joe Public.

“The objective [of MiFID] was consumer and investor protection…We were afraid that under the label of consumer protection there would be protectionist tendencies. If you are a country small like Switzerland, your financial services have to grow abroad,” Dr Hess said.

There is a lot at risk from the regulatory juggernaut. The Swiss banking sector employs more than 105,000 people in the Alpine state. This figure doesn’t include areas such as insurance, brokerage and asset management, in which case the headcount is much bigger. Banking accounts for between five and six per cent of Swiss GDP; in total, financial services make up around 12 per cent. Banking, in other words, matters a great deal, although as Dr Hess noted, some people are surprised that banking does not account for a much larger share of GDP, if they get their impressions from news headlines. There is a lot more to this country than banking. (For a recent SBA report on Swiss bank data, see here.)

Busy times
The SBA has seldom been busier or had to deal with such sensitive issues. The Swiss and US governments last year signed a sweeping accord to draw a line under a long-running tax wrangle between the countries over wealthy Americans’ use of offshore Swiss accounts. Over a third of Swiss banks have reportedly signed up to that accord. Separately, a number of Swiss banks face legal investigation by US authorities for allegedly aiding tax evaders; the past few years have seen firms such as UBS pay large sums to settle charges of helping tax dodgers. Wegelin, Switzerland’s oldest bank (1741), ceased to operate in the US and its non-US business now operates under a different name. Switzerland has inked a number of accords with other countries and there is an increasing sense that its bank secrecy law, which in current form dates back to the early 1930s, is cracking.

But on the positive side, the country remains one of the world’s most competitive economies with low inflation and unemployment; a steady growth rate and a currency that suffers from the “problem” of being too popular with investors (so much so that the central bank has capped it against the euro). And Swiss banking has a centuries-old pedigree and the legal and political stability of this nation gives it plenty of selling points for international clients.

Warming to this point, Dr Hess also stressed that the sheer variety of banking models in Switzerland, ranging from big, universal models (such as UBS and Credit Suisse) to smaller, stand-alone institutions, was a strength, particularly as there is no such thing, in his mind, as a “perfect” type of bank. “Looking back at the crisis, I haven’t seen one banking model that is more fragile or stronger than any others…the more restrictive the regulations, the more similar banks will be,” he said.

And Swiss financial services need to move forward. One initiative Dr Hess was keen to focus on was the work it is doing to help promote the country as an asset management hub. It is working with the Swiss Funds and Asset Management Association, as well as other trade service bodies. “This is something of a new direction on asset management,” Dr Hess said.

Another issue in promoting Switzerland’s financial services is in its status as a place to handle RMB transactions. The country is in close dialogue with China about this. One objective is to attract Chinese banks to Switzerland, he said. To date, Chinese banks haven’t beaten the kind of path to the West that was taken by Japanese firms three decades ago; with the RMB becoming an international currency and China achieving status as the world’s second-biggest economy, Switzerland can’t afford not to get a piece of the action.

One question put to Dr Hess was on the regular prediction made that the wealth management industry in Switzerland was ripe for heavy consolidation via mergers and acquisitions, and some recent moves (Julius Baer-Merrill Lynch; Credit Suisse-Morgan Stanley’s wealth arm; Safra-Sarasin) have fuelled such talk. Dr Hess is cautious; he said that the decline in the total number of Swiss banks long pre-dated the 2008 financial crisis, adding that broad consolidation had not yet come to pass.

What is worth noting, he concluded, is that while Switzerland has had to deal with a lot of issues, it has done so in some ways earlier than in other countries. “I think banks have seen that there are new times ahead. Banks here have taken action earlier than a lot of their competitors abroad,” he said in reference to meeting higher capital requirements.

“If you adapt and take corrective action early enough, you are able to be very competitive in the future,” he said.