Financial Centers Post-Brexit
Brexit affects the Swiss financial center, but only to a limited extent. The current situation calls for strengthened location marketing.
A scenario where London could lose its EU passporting right might also affect the internationally active Swiss banks domiciled there, by possibly causing them to lose their passports for conducting fund and investment banking business in the EU. In contrast to financial centers such as Dublin or Frankfurt, Switzerland cannot offer the benefits of a European passport – it lacks a financial services agreement with the EU, and thus has no direct access to EU markets.
After Brexit, the UK may be tempted to secure competitive advantages vis-a-vis Switzerland through targeted deregulation in private banking (e.g. trust business on the Channel Islands). However, these advantages remain limited due to the automatic exchange of information.
In contrast to Europe, the Swiss financial center is not in the headlines, and can play up its traditional strengths.
Low interest rates are straining banks. In light of the anticipated contraction of economic growth in the UK and the euro zone, interest rates may remain low or even negative for an extended period of time, even in Switzerland. This means that the pressure on banks' interest margins will remain just as significant as the pressure on revenue.
Overall, it appears that the additional influence of the Brexit decision and the associated passport loss on the Swiss financial center will be limited. This would change, however, if the dissolution of the EU should advance. In such an event, Switzerland may be viewed as a safe haven, resulting in increased inflows – primarily for the asset management business. In such a case, of course, the upward pressure on the Swiss franc would persist.
The Swiss financial center has absolutely no need to shy away from international comparison. Switzerland's traditional framework conditions are good; Switzerland and its banks are attractive for professionals in the financial sector. In contrast to Europe, the Swiss financial center is not in the headlines, and can play up its traditional strengths.
Furthermore, the extremely strict international too-big-to-fail regulation of major Swiss banks should be emphasized. This requires significantly more equity capital from the banks, resulting in higher costs; however, the stricter rules are more attractive to private clients in the asset management business.
While this regulation is not a result of Brexit, it provides a significant advantage in times of persistently under-capitalized banks in southern Europe with too much distressed debt on their balance sheets. In Switzerland, non-performing loans only make up about 0.5 percent of all outstanding credit. This is by far the lowest level in Europe.
The revenue base also benefits from strong international diversification, as well as from the revenue growth of Swiss financial institutions outside the EU, particularly in Asia. Good positioning in business with sustainable investments is also likely to provide additional support for the Swiss financial center. And last but not least, it is essential that the banks maintain a pragmatic approach to negative interest rates, and that the exemption with the central bank is maintained or even expanded.
Further information on the Swiss financial center and the impact of negative interest rates, as well as a detailed overview of the regulations, can be found in the recently published study Swiss Financial Center 2016.