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Swiss Financial Center post-COVID-19: Focus remains on sustainable growth

Credit Suisse publishes fifth edition of its study on the Swiss financial center

The study on the Swiss financial center published today examines the macroeconomic consequences of the COVID-19 pandemic and the implications thereof for the financial center. It finds that the financial center will continue to depend on an internationally competitive regulatory environment. The study also focuses on the urgently needed pension reforms and the integration of sustainability factors into the banking business. Credit Suisse has been publishing this study every two years with the aim of making a constructive contribution to the debate on the future of the Swiss financial center.

The study on the Swiss financial center published today by Credit Suisse places a strong focus on the corona crisis. In contrast to the 2008 financial crisis, when the banks were the weak link in the chain and arguably the catalyst, they have played a pivotal role during the corona crisis in transferring the support measures adopted by the authorities to the real economy. A role for which, according to Credit Suisse's analysis, they were well equipped thanks to their better capitalization and much higher liquidity buffer.

The rapid and efficient liquidity support for Swiss SMEs should significantly reduce the number of corporate bankruptcies. However, it is foreseeable that not all SMEs will be able to fully service the COVID loans. Thanks to the state guarantee, however, the banks' credit losses on corporate loans should be limited.

Margins in the traditional lending business remain under pressure
Even in the proportionately much more significant mortgage business, Credit Suisse's economists do not expect a significant increase in loan defaults. This is thanks to the restrictive lending practices of recent years and the prevailing low financing costs. However, according to Credit Suisse's analysis, the outlook for the banks' lending business is not particularly promising. The mortgage business and the broader lending business are unlikely to make any major contributions to banks' profitability in the future, even when the economy has fully recovered. Interest margins have fallen considerably over the last ten years and there is no sign of a reversal of this trend in view of the low interest rates.

Asset management characterized by trend towards institutional clients
In asset management, there were hesitant signs of a stabilization of margins before the crisis. In addition, assets managed in Switzerland reached a new all-time high of CHF 6.4 trillion in November 2019. This means that while Switzerland remains the leading center for offshore asset management, Hong Kong and Singapore are rapidly catching up, according to Boston Consulting Group. Meanwhile, the structure of the client base in offshore asset management in Switzerland has changed dramatically: At the beginning of the 2000s, institutional clients accounted for around 25% of offshore assets, but Credit Suisse estimates that this figure has now risen to over 70%.

Share of Swiss GDP accounted for by financial service providers could even rise temporarily
Meanwhile, despite pressure on margins in the lending and asset management business, Credit Suisse economists do not expect the importance of the Swiss banking sector for the Swiss economy to decline. Banks could even prove to be more solid than other sectors in the current crisis, which could lead to a temporary increase in the share of Swiss gross domestic product (GDP) attributable to financial services.

However, in order to continue to make a significant contribution to value creation and employment, banks are dependent on an appropriate regulatory environment. As outlined in the study, it is particularly important to preserve and expand market access, eliminate tax-related obstacles and implement prudential regulation in a way that is internationally aligned.

This year's Financial Center Study also explores the following topics:

  • Pension funds: Clock ticking for reforms
    The coronavirus crisis is exacerbating the already dire predicament of the state pension system. The importance of personal retirement savings is increasing as a result. But even here there is a need for reform.
  • Sustainability: The role of financial institutions in meeting global sustainability targets
    The integration of sustainability factors into the core business of financial institutions is becoming an increasingly important area of focus. A key market driver here is the development of political and regulatory framework conditions.
  • Replacement of LIBOR: Goodbye LIBOR – welcome SARON
    An operation is currently under way in the financial markets that is akin to changing horses in midstream. At the end of 2021, CHF LIBOR is set to be replaced by an alternative reference interest rate, SARON. The preparations for this are in full swing.

The study "Swiss Financial Center post-COVID-19: Focus remains on sustainable growth" is available here.