Jean-Pierre Roth: The challenges of an international financial centre: the Swiss
case
Speech by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank, to the
British-Swiss Chamber of Commerce, London, 26 February 2002.
* * *
It gives me great pleasure to have the opportunity to address your distinguished assembly today. Like
all the Swiss I know, I always enjoy coming to London. Even though there are considerable differences
between our two countries, we have many things in common. We are both proud of our history and of
our colourful traditions, we cherish our freedom and our independence. What's more, in both our
countries, the financial industry has been a pillar of our economic strength in recent times.
But these days, the most striking parallelism between the United Kingdom and Switzerland can be
seen in monetary affairs. Both countries are "outs": they do not belong to the Euro-zone. In Britain, the
currency is still the pound sterling and, in Switzerland, we still have a preference for our franc. We thus
both face the same challenge: living next to a large currency area which absorbs most of our foreign
trade. This situation is new for both of us. It is of course not up to the Swiss central bank governor to
speculate how long this situation will last in the United Kingdom. But as far as I can tell, there is a good
chance that Switzerland will remain an island in the middle of the Euro-ocean for years to come!
Experience shows, however, that the monetary regime itself is not a central issue for the existence
and the development of a financial centre. Neither in the UK, nor in Switzerland is European monetary
integration considered to be a necessary or a sufficient condition for a successful financial centre. In
today's global and very competitive markets, success relies more than ever on fundamental strengths
and skills.
Switzerland as a financial centre
Since the early 1990s, international financial markets, along with the entire banking sector, have been
undergoing profound changes. The driving force behind this world-wide trend is threefold: first, the
advances made in the processing and the transmission of information; second, the trend towards the
liberalisation of financial markets; and, third, the growing and increasingly diversified demand for
financial services. These developments have led to a widening of horizons, to a proliferation of
financial products, and to increasing international competition. Switzerland - thanks to its long tradition
of openness to the world - was well prepared to face the challenges of global markets.
But globalisation and world-wide competition did not leave our financial centre untouched.
Consolidation has significantly altered the structure of the Swiss banking industry. During the 90s,
domestic mergers and acquisitions have reduced the number of banks by about 40 percent.
Nevertheless, despite a clear tendency towards financial market concentration, Switzerland remains a
country with a wide network of small banks. Beside the two big banks, Credit Suisse Group and UBS
AG, Switzerland counts over 100 regional and savings banks, 24 cantonal banks, 17 private banks
and over 140 subsidiaries and branches of foreign banks. Our banking sector is extremely dense with
a strong presence in all parts of the country.
The insurance sector is the second traditional leg of our financial centre. Our insurance companies
have strongly expanded abroad. Here also, open markets and intense competition have led to
consolidation and large units.
More than 10 years of global de-regulation have left deep and lasting marks not only on the structure
of the financial sector, but also on the range of its activities. Reacting to the changing market
environment and stiffer international competition, many banks have placed more emphasis on their
international business and shifted their activity from balance-sheet to off-balance-sheet transactions.
This is true in Switzerland as well. Investment banking and asset management have gained in
importance, whereas less lucrative areas, such as domestically-oriented retail banking, have lost part
of their attractiveness.
In our case, the expansion of the investment banking activities has taken the form of a number of
acquisitions in foreign countries, tightening the ties between Switzerland and other financial centres.
The expansion of asset management has been much more domestically generated. Asset
management is an area in which Switzerland has been traditionally strong. According to unofficial
statistics, Swiss banks are entrusted with about one third of the totality of the world's assets managed
by banks in other countries than those where their clients are domiciled (so-called offshore wealth
management), which places them well ahead of their competitors. Indeed, asset management and
private banking are the strongest segments of Swiss banking, not only in terms of market shares, but
also measured by revenues.
For many observers, the success of our banks in asset management and private banking can only be
explained by the existence of Switzerland's banking secrecy. I think they misunderstand the meaning
of this feature. In any case, it would be short-sighted to believe that a financial centre could insure its
long-term development on a single factor. A successful strategy requires strong fundamentals: a
competent and dedicated workforce, reliable services and products, and efficient infrastructures. I
have no doubt that you share this view with me.
Necessary characteristics of a successful financial centre
How can we explain the long-lasting development of the finance industry in Switzerland? It is not the
result of some public strategy or industrial policy. Instead it is the combined outcome of a number of
factors which all point in the same direction.
a) An open-minded economy
Firstly, Switzerland, as a traditionally very open economy, was well placed to benefit from trade
liberalisation and financial deregulation. We are used to see our economic performance being
constantly challenged and directly dependent on our ability to adjust to a changing world environment.
What has been true for Nestlé, Novartis or Swatch - to name just a few - is also valid for the banks: in
today's competitive marketplace, only the fittest will survive, some of them even becoming global
players in the process.
b) Professional skills
Secondly, our finance industry has access to a pool of well-educated, highly-skilled, multilingual, and
service-oriented workers who are very familiar with international financial markets. Private banking has
a long tradition in Switzerland, and financial advisory services to foreign clients have been a part of the
Swiss banking business for generations, literally.
c) Efficient financial infrastructure
Thirdly, besides the availability of a highly professional staff, there is the outstanding efficiency of
Switzerland's financial infrastructure. I am referring here to the so-called "Swiss value chain" which
comprises a full set of settlement and payment systems, with their individual parts harmonised in an
optimum way. The entire facility consists of a trading platform, a payment-against-delivery system, and
a central payment system. A fourth component, a central counterparty, is currently being developed.
It might be due to their long tradition of watchmaking that the Swiss have developed a skill to build and
interconnect sophisticated settlements systems. In 1987, the Swiss National Bank launched the Swiss
Interbank Clearing (SIC), the first RTGS system and precursor of many payment systems around the
globe. Shortly after, the Swiss Exchange moved from a traditional "à la criée" procedure to an
electronic platform including the automatic transfer of securities. With virt-x, here in London, it has now
gone one ambitious step further, creating the first international fully integrated electronic exchange.
d) Stable domestic environment
Fourthly, Switzerland, with a stable political environment, also offers the legal protection that, together
with trust, is so crucial in the banking business. Furthermore, the healthy social climate and peaceful
labour relations also contribute to a successful banking system.
Among the elements which contribute to a favourable environment - and indeed very high on the list - I
obviously also include financial stability and the strength of our currency. Switzerland enjoys
traditionally a very strong current account position. Contrary to a popular belief, it is not a net capital
importer, but a massive exporter of funds. With an excess of savings over investment, we transfer
capital to the rest of the world. Our external surplus gives to our banks an important role in channelling
funds and it strengthens their international position.
For the long-term oriented investor, moreover, knowing that the Swiss franc will keep its purchasing
power and maintain its external value is, of course, of great importance, and it reflects positively onto
the entire Swiss financial industry. In situations of crises, security-conscious investors too, even those
with shorter time horizons, demonstrate through their actions that the Swiss franc has special merits.
The fact that the Swiss franc is a safe haven currency certainly does not make the work of the Swiss
National Bank any easier. We nevertheless view the continued existence of our own independent
currency, which can be freely traded on world markets, as an important asset for Switzerland in
general, and for its financial sector in particular.
e) Efficient supervision
To be sure, no financial centre can survive without credible guarantees as to its soundness and
robustness. As we know, financial institutions are different from other firms. Due to the complex ties
that exist between them, and given that the very institution of money is built on trust, fragile elements
can destabilise the entire industry. They can have devastating effects on the other players, including
on fundamentally healthy institutions. A prerequisite for a successful financial centre is therefore a
strong banking supervisory authority.
f) Integrity
All the ingredients mentioned so far are important building blocks of a flourishing financial centre. One
should not forget, however, that the most significant factor for a successful banking system is the
assurance that the public, and the bank customers in particular, be honestly and fairly treated. In short,
without trust there can be no lasting successful financial centre.
This is more than wishful thinking on the part of a central banker. It is obvious that it is in the
selfinterest of any financial centre, of its lawmakers, its supervisory authorities and of its private agents
and their associations to set and implement rules and codes of conduct that match the highest
standards. With market globalisation and the free flow of capital, there is a real risk that a financial
centre will become involved in illegal transactions against its will. I consider reputational risk as the
major challenge facing financial centres at the beginning of this century. In Switzerland this has long
become conventional wisdom. Know your customer rules have effectively been implemented and
constantly adapted to the evolving requirements of the market realities for many years. Swiss anti
money laundering rules and regulations are widely recognised as expressions of the state of the art. I
shall come back to this thorny topic in a moment.
Challenges ahead
What are the challenges ahead?
a) Market globalisation
As I mentioned at the outset, the banking sector has gone through a period of heavy restructuring
during the past decade or so. Banking no longer amounts to simply accepting savings and granting
loans. Business has become increasingly complex and is dominated by a dwindling number of
everlarger financial conglomerates. The trend toward concentration and the tendency toward onshore
international banking can be observed in your country as in mine. The internationalisation of the
banking business has led the large banks to establish major business units outside their home
country. Our banks create now more jobs outside the country than in Switzerland.
Obviously, global business is the first challenge to be faced by the financial centres as well as by the
authorities. A close co-operation between supervisors is essential.
The trend toward financial conglomeration poses an additional challenge for the banking industry: the
tendency towards "all-finance". More and more providers not only offer banking services, but all types
of other financial services as well, notably insurance products. A single supplier offers specific
advantages to the customer while providers in turn expect synergies, customer loyalty, and lower
costs. It is not yet clear whether this strategy will be a commercial success, and the question is heavily
debated among specialists.
What is clear, however, is that financial conglomerates are a challenge for the supervisors as well.
Today, banks and insurance companies are often governed by different laws and supervised by
different authorities. The absence of consolidated supervision makes it more difficult to assess the
combined risk of conglomerates. With the creation of the Financial Services Authority (FSA), the
United Kingdom has taken the lead in this respect. The creation of an integrated financial supervisory
authority is now also being envisaged in Switzerland and in other major financial centres. A single
authority could supervise all banks, securities dealers, investment funds, insurance companies,
financial conglomerates and portfolio managers. This integrated supervisory authority would also play
a key role in the fight against money laundering.
b) Fight against money laundering and financial crime
I come naturally to the issue which is of major importance for all financial centres today: the fight
against money laundering and criminal money.
Any financial system - and the Swiss system is no exception - can be misused in order to transfer or
recycle money issued from, or linked to illegal activities, including terrorism, drug trafficking, illicit
trades in weapons, modern slavery, and corruption, just to name a few. To be sure, a money
laundering risk already existed in the past. As a result of globalisation, however, and of the growing
significance of organised crime, the risk has increased considerably in recent years, not just in my
country, but in every major financial centre. For this reason, a dense network of legal regulations,
controls and self-regulatory mechanisms is necessary in order to make a financial centre as
unattractive as possible for criminal funds.
Switzerland has been one of the first countries to introduce strict anti-money laundering laws. They
cover the activities not only of banks, but also of any other financial intermediary such as insurance
companies, funds managers, lawyers and even fiduciaries.
Our experience so far has shown that an efficient fight against financial crime requires two specific
rules: first, the application of strict due diligence procedures that includes careful identification of the
customers, i.e. of the beneficial owners of the assets involved; second, the obligation, imposed to the
market intermediaries to inform the authorities in case of any founded suspicion of money laundering. I
am fully convinced that an effective fight against money laundering can only be successful if an active
co-operation between financial institutions and authorities is promoted. In our view, the responsibility
of the banker should prevail over an automatic reporting of transactions exceeding a certain amount.
Tracking down criminal money is even more difficult than identifying money laundering operations. The
financing of criminal activities does not require large amounts and the ex ante identity of a criminal is
not a source of pertinent information. Furthermore, funds used in the financing of terrorism, unlike
cases of money laundering, very often are legally acquired. It is therefore crucial that financial
intermediaries in both the banking and the non-banking sectors thoroughly verify their client
relationships in order to identify suspicious circumstances. In this connection, strict observation of the
"know-your-customer" principle is again of key importance.
Switzerland does not hesitate to offer international co-operation in judicial matters and to block
incriminated assets. Following the decision of the United Nations to apply sanctions against the
Taliban regime in 1999 and 2000, we blocked a certain number of Afghan bank accounts and froze
the assets belonging to persons listed by the Sanction Committee of the United Nations. To date,
76 accounts are frozen with a total of 42 million Swiss francs.
In the United Kingdom and in Switzerland, the authorities and the banks themselves are fully aware of
the utmost importance of successfully warding off criminal funds. We all realise that money laundering
is not only morally unacceptable, but that it also clearly undermines the public's confidence in our
financial centre.
Unfortunately identifying money laundering and criminal money, is not an easy task, for criminal
elements are not short of imagination, and continuously invent new schemes to deceive our banks and
our authorities. Although Switzerland is at the forefront in the fight against money laundering, the
Swiss financial centre has also suffered from a number of mishaps, especially involving politically
exposed figures. The same experience has been made elsewhere: the London City as well as other
centres have been misused similarly or even to a greater extent by undesirable clients. These cases
stress the need for relentless vigilance.
c) Political integration and fiscal harmonisation
Let me come now to another issue of great importance to us: the movement toward tax harmonisation
in Europe.
You can easily imagine that Switzerland, as an island within the EU, has close economic ties with the
single market. About 80% of our imports come from the EU, which absorbs more than 60% of our
exports. After the United States, Switzerland is the EU's second largest trading partner and our firms
are among the most important investors in the EU (for instance, we are the second largest in the UK).
As a non-EU member, we seek co-operation on the basis of bilateral agreements. A first round of
agreements will be implemented this spring. A second round of negotiations will begin shortly. It
covers one issue which is of major importance for our financial centre: the taxation of savings income.
Switzerland is directly affected by the EU's intention to introduce a system of automatic exchange of
information between banks and tax authorities in order to enhance tax revenues on savings income
within the European Union. One can of course fear that such a plan might trigger capital transfers to
non-EU financial centres for purely fiscal reasons.
Our position is known: we do not want the Swiss financial centre to become a privileged haven for
funds seeking to avoid EU regulations. We are thus ready to consider a reform of our withholding tax
regime along the line of the EU directive. We even consider the possibility of handing over to the EU
part of the tax on interest earnings of EU residents.
We have already 50 years of positive experiences with a withholding tax: it is a convenient and
efficient way to collect resources without income declaration. We have never considered introducing
any system of automatic exchange of fiscal information for our own citizens, and we are not ready to
consider such a scheme for foreign depositors. We feel that our current system secures an
appropriate balance between protection of the private sphere and safeguarding the interest of the
State.
There are many misunderstandings between Switzerland and the UK about this fiscal issue. Let me
recall a few points:
- First, it is wrong to say that foreigners can invest their funds tax-free in Swiss banks. We
have a 35% withholding tax imposed on all interest and dividend payments made in favour of
residents and non-residents.
- Second, to avoid any loophole basically due to an international failure to apply the debtor
principle in withholding taxation, we are ready to reshape our system in line with the EU
directive, i.e. to apply the payment agents principle in withholding taxation whenever a client
of a Swiss bank is fiscally domiciled in the EU.
- Third, and this must not be forgotten, Switzerland grants full judicial co-operation to fight tax
fraud.
Thus, our position is fair. With these measures - which are fiscally equivalent to the exchange of
information - Switzerland cannot be accused to be a fiscal paradise attracting foreign money like an
offshore centre.
With capital being extremely mobile internationally, it is evident that co-ordinated taxation policy makes
sense only if it covers all the main financial centres. The EU regulation will not have to be only
implemented in the member countries, but also in their many dependent and associated territories.
Furthermore, it is crucial for Europe that similar measures are taken on a world-wide basis. Without a
fully watertight solution, offshore centres around the globe will expand their business at the expense of
Europe and this with an increasing lack of transparency and with higher global risks.
One last point about fiscal harmonisation. I live in a country that counts nearly three thousand different
tax regimes. In Switzerland, every town, every canton and, of course, the federal government, all have
the authority to levy taxes and to set the rates. It is part of the functioning of our internal democracy
and of our decentralised political system. We firmly believe in the benefits of tax competition, which
manages to keep tax rates relatively low. We regret that at the international level, any mention of "tax
competition" is almost always preceded by the term "harmful". This clearly reveals preconceptions and
a biased judgement.
d) Financial privacy
With tax harmonisation, banking secrecy is once more at the centre of the discussion. Allow me to add
a few words on this subject. Earlier on, I did not mention banking secrecy - or perhaps should we call it
financial privacy - as one of the necessary features of a successful financial centre, because I believe
that, per se, it is not. What is important, though, as I emphasised earlier, is trust and professionalism.
Banking secrecy is the prohibition for bankers and their staff to divulge any privileged information
regarding their clients or third parties. The beneficiary of banking secrecy is the client, not the bank.
Financial privacy is part of the Swiss legal structure. In my country, like here, individual freedom and
protection of the private sphere are highly valued and deeply respected. In Switzerland, privacy rules
are not limited to the banking sector, but they apply with equal vigour to professions such as doctors,
lawyers, solicitors and the clergy.
The respect of one's private sphere has a long tradition. Like yours, our country is based on a high
value attributed to the individual and on democracy. Our state is a bottom up - rather than a top down -
construction. We trust our citizens - who are often called to vote on important matters, including on
those relating to taxes. We trust them when they keep their army rifle, with a full round of ammunition,
at home. We trust citizens when they file their tax forms, and we trust them when they undertake
financial transactions. Sure, there are occasional abuses, and these are prosecuted with determination
to the full extent of the law. We do not believe, however, that these cases can be used to justify
switching over to a system where big brother breathes down our neck.
Swiss people would not comprehend - and indeed they would not support - any initiative aimed at
throwing out financial privacy principles simply because some dishonest people have taken advantage
of them, any more than they would accept giving up medical secrecy because of a few cases of health
insurance fraud. Nor could the Swiss understand - or accept - that the foreign clients of our banks be
treated any differently, i.e. without the same amount of due trust and respect.
But - and this is important - banking secrecy is not absolute. It is simply not true that Swiss banks
maintain secret numbered accounts whose holders are not known to anyone. Swiss banks do hold
socalled numbered accounts, but a restricted circle of persons within the bank must - by law - know the
name of the person(s), i.e. the beneficial owner(s) behind every account. In this regard, the "know your
customer rule" is once again essential. Banking secrecy is routinely lifted in the case of criminal
investigations and the Swiss judicial authorities have earned high marks for the extent of their
cooperation in international criminal affairs, including those involving politically exposed persons. These
facts do not mean that our country is especially attractive for criminal money. They rather show that
bank secrecy rules are not an obstacle to an efficient and determined action against criminal activities.
Let us be frank: the fact that some financial centres only rarely or even never register cases of
suspicious transactions is certainly not a proof of integrity but rather of a lack of it.
Conclusion
Today, we find many financial centres around the globe. They all benefit from easier communication
and high capital mobility. Some have a long history of banking activities, others have recently
expanded, often by giving foreign investors special legal or fiscal treatment.
With its customers from all over the world, Switzerland is as much an offshore centre as London or
any other significant financial centre. We do not provide special advantages to foreign investors. Our
financial centre has been built on a wide range of comparative advantages: a financially sound
country, a stable political and monetary framework, a long tradition of banking and an internationally
oriented economy. All these points are also valid for the United Kingdom. There is a major difference
in terms of specialization, however: the City is "the" market place for investment banking and a number
of other financial activities in Europe, whereas Switzerland plays a dominant role in asset
management.
Despite different realities and market positions, Switzerland and the United Kingdom share many
common values vis-à-vis their financial centre:
- both countries believe that financial activity requires professionalism, high standards and
efficient supervision;
- both countries consider money laundering and the financing of criminal activity as major
threats for the long term development of their financial system and act decisively against
them;
- both countries favour market competition in general and have a liberal attitude toward tax
competition in particular;
- both countries are reluctant to accept over-regulation and see in the mushrooming of
offshore centres a source of risk for the global financial system.
I come therefore to the conclusion that there are more converging interests than rivalries between our
financial centres. Some diverging views are due to misunderstandings. With its traditions and its
experience in asset management, Switzerland attaches great value to financial privacy. But, as I
showed you, the protection of financial privacy is not an obstacle to an efficient fight against money
laundering or the financing of terrorism, nor does it hamper fair tax competition with our neighbours if a
withholding tax is implemented along the line of the EU directive. Both the disclosure of certain
informations relating to bank clients and the protection of privacy in the financial sphere arise from
fundamental ethical convictions that are worth protecting.
I am confident that with a frank dialogue and mutual effort to understand each other's position, the
common values of the Swiss and British financial centres will again come to the forefront. In particular,
it is our predominant joint interest to see the very demanding standards that we have set for our own
financial industry become the world-wide accepted rules. The long history of our financial centres and
the large experience of our banking industry should give us a natural leadership role in this respect.