The Swiss financial system is undergoing major changes, which will require an adaptable system to keep up with the changing world. The banking sector must be ready to face existing and future challenges in order to remain at the top of the competitiveness ladder. There are a number of important aspects to consider to ensure Swiss financial systems are resilient and successful.
In order to operate in Switzerland, banks must obtain a licence from FINMA. FINMA is the regulatory body for banks, both in Switzerland and abroad. Switzerland’s universal banking model allows banks to engage in a variety of financial industry business, such as asset management and insurance. In order to conduct these activities, banks must have appropriate organisation and management systems and meet fit and proper conduct of business standards. Some of these activities require additional licences. For example, a bank cannot operate an insurance or fund management company, or financial market infrastructure without a separate license.
FINMA’s mandate is to promote an efficient and stable financial system in Switzerland. In order to achieve this, the agency has extensive powers of supervision. These powers are drawn from FINMA’s mandate, and FINMA’s role as the regulator is to ensure that the Swiss financial system is free of fraud and financial system risks.
FINMA has implemented a variety of regulatory measures. One of these measures is to streamline the regulatory framework for banks. For example, the new FINMA Circular 2017/1 on corporate governance has made the process of regulating banks more transparent and easier. This circular also introduces requirements for the independence of board members.
In addition, the Swiss financial system is largely governed by international standards. The Federal Financial Market Infrastructure Act aligns Swiss financial system regulation with the European Union’s standards. The act also introduces pre and post-trade transparency and market conduct standards. FINMA has also prioritized regulatory reform of the securities markets to bring them up to international standards. This reform will improve the focus on conduct of business supervision for banks and securities dealers.
The Swiss Financial Market Supervisory Authority, FINMA, is a government agency with a board of directors and an executive board. It is tasked with overseeing banks, securities dealers, and collective investment schemes. Its primary responsibilities are to protect creditors and ensure the proper functioning of financial markets. It performs these tasks by licensing, regulating, and enforcing its regulations. It is also responsible for ensuring the financial stability of the country.
The Swiss financial system has long been a premier banking destination, attracting a variety of high-net-worth individuals to invest in the country. In 2018, Swiss banks held US$6.5 trillion in assets, and the nation has a thriving financial community. The country is one of the leading global banking hubs, with major hubs in Zurich, Lugano, and Geneva. Switzerland has consistently ranked among the top three states on the Financial Secrecy Index, and has been ranked first on several occasions. Its banking sector has remained a dominant part of the Swiss economy, and it remains one of the most regulated.
Despite the strong international reputation of Swiss banks, some question the Swiss approach to banking secrecy. The Swiss financial system has a long history of accepting tax evasion money, which has prompted other world financial capitals to label Switzerland an unfair competitor. In an effort to curb tax evasion, Switzerland has taken steps to crack down on tax evasion by offering a more transparent financial system.
In 1934, a raid on a Swiss bank prompted the Swiss Federal Banking Act, which prohibits Swiss banks from disclosing the names of clients to third parties. The law imposes steep fines and even prison sentences for violating confidentiality. Nevertheless, the Swiss banking system has remained one of the most secure offshore financial centers.
Some critics claim that banking secrecy in the Swiss financial system is deteriorating. But Rossi says that the secretive environment has prompted a new generation of bankers to become more ethical. Furthermore, financial institutions are under pressure to earn bonuses, which push bankers to take risks. At the same time, the Swiss banking center is afraid of losing its competitive advantage.
Regulatory reforms in Switzerland have resulted in improved capital and liquidity requirements for banks and other financial institutions. In addition, Switzerland’s ‘too-big-to-fail’ regime has been strengthened. FINMA has also launched a pilot regime for small banks. Under this scheme, well-capitalised banks will no longer be required to calculate risk-weighted assets (RWA), a process that became more complicated under Basel III.
Since 1 January 2018, Swiss financial institutions have been collecting account information for 38 partner states. In September 2019, the National Council endorsed the AEOI with 19 further partner states, which requires them to adopt the CRS of the OECD by 2019. As of 1 January 2021, new provisions of the AEOI-Act will become effective. These provisions implement the recommendations of the Global Forum in Switzerland.
While Swiss banking supervision has traditionally been compliance-based, recent economic and financial conditions have prompted a transition toward risk-based supervision. FINMA was established to facilitate this shift. Its mandate is to ensure the safety, soundness, and efficiency of the financial system and to preserve the reputation of Switzerland as a global financial center.
The Swiss regulatory framework is particularly influenced by developments in the European Union. The EU has harmonised capital market regulation through MiFID II and MiFIR. The Swiss legislator is following suit by introducing measures to ensure that Swiss financial institutions can access the European financial markets. This is an important step toward strengthening the reputation of Swiss banks.
As a result of these reforms, Swiss banks are now required to manage the liquidity risks in their business and ensure they have sufficient liquid assets to meet their financial obligations. A transitional regime is in place, giving banks two years to adapt to the new requirements.
Deposit insurance is an important element of the Swiss financial system, as it safeguards deposits against loss or bankruptcy. The scheme protects up to CHF 100 000 per client. It also provides fast payment of protected deposits. In addition to this, all banks are required to hold collateral of at least 125% of the protected deposits. Furthermore, deposits that are protected receive priority treatment in bankruptcy proceedings, with the liquidator appointed by FINMA using the bank’s liquidation resources to pay out the deposits. The Swiss deposit insurance scheme is made up of all the elements that help strengthen the country’s status as a financial hub.
Despite the benefits of deposit insurance, it is not without its limitations. Insufficient funding of the DIS may mean that taxpayers would bear the burden of the insurance in the event of a systemic bank failure. This is especially true in the case of “too-big-to-fail” banks, where deposits of more than CHF 6 billion are insured.
As a result, Swiss banks will need to make extensive changes to their processes in order to implement the scheme. In the meantime, the Federal Council is keen to improve the scheme and identifies key areas for improvement. It has adopted the Banking Act revision, which will further strengthen the credibility of the deposit insurance scheme. The amendments will improve customer protection and ensure the stability of the Swiss financial system.
Switzerland’s deposit protection system is much higher than the EU’s minimum requirement of 20,000 euros. It requires banks to hold enough assets in the country to cover the deposits they guarantee. Most banks meet this requirement. In addition to this, the government is planning to increase the amount of deposits that can be guaranteed immediately.