Philipp M Hildebrand: Switzerland - the challenges of being and remaining a
leading financial centre
Speech by Dr Philipp M Hildebrand, Member of the Governing Board of the Swiss National Bank, at
the Financial Management Association (FMA), European Conference Zurich, University of Zurich,
Zurich, 3 June 2004.
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I am pleased to be here this evening to reflect on Switzerland: the challenges of being and remaining
a leading financial center. Moreover, I am honored to share this platform with Peter Wuffli, Walter
Kielholz and Bruno Gehrig. The Financial Management Association should be commended; you have
assembled three outstanding leaders and representatives of the Swiss financial industry. I very much
look forward to their comments.
When I think about the Swiss financial industry, two closely linked thoughts come to mind: first,
Switzerland's status as one of the world's leading financial centers and second, the important
contribution of the financial sector to the overall vigor and resilience of the Swiss economy. Going
forward, the key challenge for the Swiss financial industry will be to maintain its leading global status in
a world of fierce competition. Because of the financial sector's critical contribution to the overall
economic well-being of the Swiss people, meeting this challenge is important not only to the financial
sector but to all Swiss citizens who are concerned about the long-term vitality of their economy.
Many of you are familiar with the relevant figures: roughly 10 percent of Switzerland's real GDP
derives from the financial sector. If one adds the insurance sector, that number is closer to 14 percent.
That percentage has increased significantly since 1990 from a total of 10% of GDP or less than 7% for
the banking sector only. Importantly, this does not take into account the many economic activities
which are directly linked and in many cases dependent on a vibrant financial sector. In terms of
employment, the financial and insurance sectors together employ approximately 185'000 people or 6%
of total Swiss employment. The total federal and local tax contribution of the Swiss banking sector
amounts to an estimated CHF 13 billion or 13% of total tax revenues. A mere perfunctory
consideration of these figures should suffice to underline the importance of defending and maintaining
Switzerland's status as a leading global financial center.
In a 1974 study, Charles Kindleberger traced the history of financial centers in Western countries.
What is striking about Professor Kindleberger's historical findings is that nothing should ever be taken
for granted. Not unlike tides, cities and countries as international financial centers rise and fall. For the
most part, this rise and fall seems to reflect dynamic criteria such as transportation infrastructure,
political stability and regulatory patterns.1 Since the 1970s, the competition amongst international
financial centers has of course become genuinely global with diverse places such as Luxembourg,
Singapore, Hong Kong, Dubai and, most recently, Shanghai joining the race.
Switzerland has good reasons to be confident about its ability to defend its status. Most importantly, it
sets out from a position of strength. Particularly in the area of wealth management which comprises
over half of the total added value of the banks, Switzerland is clearly one of the world's leading
provider of services. The value of total assets managed in customer accounts in domestic banks as of
the end of the year 2003 amounts to CHF 3'300 billion, of which nearly 60% is held by foreigners.
According to various estimates, this corresponds to approximately one third of the world's total private
wealth managed abroad.
Much has been said and written about the various strengths of the Swiss financial center which
account for the dominant global position in wealth management. Political, economic and monetary
stability, know-how, traditional high quality of services provided, guaranteed protection of privacy and
strict conditions ensuring the prevention of abuse are all key ingredients to Switzerland's past and
future success. In the current global market place, some of these strengths represent structural
competitive advantages. The Swiss authorities and the Swiss financial sector representatives rightly
make great efforts to defend these structural competitive advantages as much as other sovereign
countries defend theirs.
Nonetheless, in a fierce global competitive environment, defense is a necessary but not a sufficient
condition for sustained success. The offensive component of a comprehensive Swiss strategy must be
an unequivocal commitment from politicians, regulators and financial sector representatives to
competition and free markets. Such a commitment will foster innovation which will ensure the
long-term viability of Switzerland as a leading global financial center. A commitment to competition
includes a firm commitment to an effective regulatory system based on transparency, proportionality,
predictability and an uncompromising fight against abuse. Such a regulatory framework does not stand
in opposition to a commitment to free markets. To the contrary, it strengthens free markets by
upholding the integrity of markets. Regulatory authorities must not loose sight of the primary aim of
regulation: to uphold the integrity of markets and not to impede the functioning of markets.
Let me conclude my brief formal comments with a specific example of how innovation in the face of
global competitive pressures can foster the viability of the Swiss financial center.
In recent years, hedge funds have become an important segment of the global asset management
industry. Recent figures indicate that total assets invested in hedge funds are approaching the
USD 1'000 billion mark. In comparison, the total size of the open-end mutual funds industry in the
United States is USD 7'500 billion. According to industry figures, the annual growth rate of the hedge
fund industry appears to have accelerated to a level in excess of 15% in recent years. These figures
suggest that investors increasingly look for largely unconstrained investment activities with a focus on
absolute return. In addition, there has been an important shift from the traditional high net worth clients
investing in individual hedge funds to funds being invested in hedge funds via diversified pools and
formal fund of funds structures. These pooled assets, coupled with liberalizing regulatory
developments have opened up hedge funds to a more diverse universe of investors, including a wide
range of institutional and retail investors.
Currently, the total size of funds invested in hedge funds via pooled structures is estimated to be
approximately USD 300 billion or nearly a third of the underlying hedge fund industry. Remarkably,
annual growth rate estimates of the pooled funds suggest that their expansion has proceeded at a
more rapid pace than the underlying hedge fund industry. This implies that a significant portion of new
assets flowing into hedge funds does so via collective asset management pools.
In a competitive environment, the Swiss financial sector has succeeded in leveraging its position as
one of the world's leading asset manager to secure an dominant position amongst collective asset
management pool operators in the hedge fund industry. Though many of the early formal funds of
funds were registered under Luxembourg, Cayman Island or Bermuda law, Swiss financial firms today
manage a significant part of the world's alternative asset management pools. With the growing
importance of this industry in recent years, Swiss regulators are easing regulatory restrictions to
facilitate not only investment control of these asset pools by Swiss financial institutions but also the
legal registrations of formal fund of funds vehicles under Swiss law. Moreover, Swiss financial firms
have become leaders in financial engineering to structure underlying hedge fund asset pools
according to differing client demands.
The example of managed asset pools in the hedge fund industry illustrates that Swiss financial firms
are competitive and capable to respond to market demands, particularly in the area of asset
management. In the future, Swiss financial firms will have to rise to new challenges to secure the
position of Switzerland as a leading global financial center. One such opportunity might be to provide a
wide range of trust-related services to its global wealth management clients.
Regulators have an important and difficult role to play. Their primary responsibility is to safeguard the
integrity of Switzerland as a financial center, thus bolstering its global standing. At the same time, they
must not become an obstacle to innovation by impeding competitive Swiss financial firms to respond
to rapidly evolving market developments in a vibrant global financial industry.