This paper was prepared by Benedicte Vibe Christensen in the European Department of the International Monetary Fund under the direction of Gyorgy Szapary. It describes developments in international financial transactions conducted through the Swiss banking system until December 1985.
Switzerland, through a long tradition of banking and finance, has developed into a major center for international financial transactions. In recent years, however, significant institutional changes in most large capital centers have challenged Switzerland’s traditional role as a financial center. Deregulation of domestic banking in other countries has reduced its comparative advantage of having a universal banking system. The creation of new offshore banking facilities and the repeal of the withholding tax on interest income of nonresidents in the Federal Republic of Germany, France, and the United States in 1984 have changed the competitive environment. In addition, capital controls have been relaxed in several countries, including France and Japan, while Germany and the Netherlands have taken measures to strengthen the international competitiveness of their financial markets.
Switzerland has a long tradition of capital exports. As domestic savings exceeded domestic spending, Swiss financiers and governments were already actively engaged in international finance in the eighteenth century. Net capital exports continued into the twentieth century, except during periods of the nineteenth century, when domestic credit demand increased with industrialization and the building of railroads, and for a time after World War I. The excess of domestic savings was largely a result of financially sound governments in the cantons and towns and was in marked contrast to the large financing needs of many other European governments, which resulted from continuous engagements in war. The financial performance of both the Swiss governments and the private sector was based on several factors. First, the country maintained political neutrality and thereby did not incur large war expenses. Neutrality was a consequence of the multiconfessional and multilingual character of the Confederation, the strategic location in the center of Europe, and the small size of the country.2 Second, Switzerland was able to maintain trade with the belligerent countries and also benefited, on a large scale, from income earned from Swiss military service abroad, through treaties concluded with foreign sovereigns. Finally, in the early stage of industrialization, Swiss exports of cotton and silk products prospered because of little competition from abroad.
The Swiss banking system is characterized by the coexistence of privately and publicly owned banks. The publicly owned banks include the cantonal banks, owned by the cantons, and local savings banks, run with the capital of the municipalities. These public institutions accounted for about 16 percent of the total assets of Swiss banks at the end of 1984. The private banks are organized mainly as joint-stock corporations or as cooperatives. Although Swiss banks are organized as universal banks, their historical development has led to some specialization. Cantonal banks, regional banks, and savings and loan associations have specialized in savings deposits and long-term mortgage lending, while the so-called “big banks”8 have concentrated on company finance and international finance. During the last two decades, however, there has been a tendency for banks to engage in a broader field of transactions; the big banks have engaged more actively in mortgage lending through proliferation of their domestic bank network, while the cantonal and regional banks have participated increasingly in portfolio management.9
The international money market transactions of Swiss banks serve partly as a substitute for a domestic money market and partly as a connection between the various segments of domestic and international financial transactions, including the Euro-Swiss franc market. The domestic money market is characterized by its thinness in terms of limited money market instruments and few participants. The lack of a developed money market is mainly attributable to fiscal impediments, especially the stamp duty, which amounts to 0.15 or 0.30 percent—independent of maturity—depending on whether the debtor is a resident or a nonresident.19 This is a prime reason for the lack of short-term instruments and for the fact that existing paper is often held to maturity. The existence of the stamp duty is also one of the reasons why less than 15 percent of the marketable debt of the Federal Government consists of short-term liabilities; there is no market for treasury bills as in many other countries. In addition, Swiss banks have not issued certificates of deposits to attract funds, in part because of resistance in the past from the Swiss National Bank which has feared that this instrument would compete with savings deposits with low interest, thereby raising the overall level of banks’ costs. Furthermore, Swiss industry has covered its short-term financing needs through bank credits rather than through commercial paper. Finally, export and import financing have normally not been associated with issuance of bankers’ acceptances, partly due to the stamp duty but also in order to protect customer relationships.20
Under a floating exchange rate system, the monetary authorities are faced with the dilemma of whether to target the growth in the money supply or the exchange rate. The dilemma is even more acute for an international financial center, where domestic residents have easy access to foreign currency deposits, which might render the demand for domestic money volatile. In addition, the demand for a reserve currency—such as the Swiss franc—reflects the portfolio choices of foreign asset holders and, therefore, might fluctuate with major shifts in world savings, for example, increases in OPEC funds in the first years following the second oil price rise and, more recently, large net savings in Japan. The demand for a reserve currency is also subject to erratic changes as a result of political events. In this respect, the Swiss franc is possibly more sensitive than other reserve currencies owing to the neutrality and bank secrecy of the country. It can also be argued that the small size of the Swiss economy and the money supply make the Swiss franc exchange rate more sensitive to capital flows than the exchange rate of major currencies, such as the deutsche mark.