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
This 2003 Article IV Consultation highlights that following a solid expansion in 1997–2000, economic growth in Switzerland is currently stalled as exports have been hurt by the global slowdown and domestic investment has undergone a sharp downward correction from earlier high levels. The important financial sector has been hit particularly hard, in part because of the steep declines in equity prices both in Switzerland and abroad. Unemployment has doubled, although it remains low by international standards. Inflation is negligible, and the external current account is running a large surplus.
This paper discusses key findings of the Third Review Under the Stand-By Arrangement for Seychelles. The program is on track, and macroeconomic stabilization has advanced rapidly. The authorities continue to implement the program with a high degree of ownership and success. All quantitative performance criteria (PC) and structural benchmarks at end-September 2009 were met. The structural reform effort is progressing well. Key progress has been made on public financial management, notably through the treasury single account. The 2010 budget features a much improved and complete presentation of government finance.
This paper discusses Poland’s performance under the Flexible Credit Line Arrangement. In recent years, Poland’s macroeconomic policies have focused on further strengthening fundamentals and institutional frameworks. Fiscal consolidation has led to an exit from the Excessive Deficit Procedure. Monetary policy has been eased to help lift inflation. Financial sector supervision has been strengthened with a new macroprudential framework. Reserves are broadly adequate against standard metrics. The new government has pledged to maintain prudent policies, including gradual fiscal consolidation over the medium term, and to ensure the continued stability of the banking system. In the period ahead, it will be important to identify specific growth-friendly measures to underpin the fiscal adjustment and reduce implementation risk.
This Selected Issues paper analyzes euro area policies and discusses the implications of the 2007–08 financial sector turbulence for real economic activity. It examines the linkages between the financial and real sectors in the euro area. The paper discusses the European Central Bank’s (ECB) monetary analysis and the role of monetary aggregates in central banking, surveying the ongoing theoretical and empirical debate. The paper also describes the introduction of a “European Mandate” for financial sector authorities in the European Union (EU), a proposal that is under consideration by EU member states.
The 2006 Article IV Consultation found that the financial system in Ireland continues to perform well but rapid credit growth is a vulnerability. Central Bank officials noted that recent stress tests indicate that the major lenders have adequate buffers to cover a range of shocks. The Financial Regulator observed that the risk weighting on high loan-to-value mortgages was increased, consistent with the advice of the Financial Sector Assessment Program (FSAP) Update mission. The general government fiscal position has been either close to balance or in surplus for the past decade.
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
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.