This Selected Issues paper attempts to quantify the impact of the demographic shift on growth and public finances in Switzerland. It examines the intertemporal consistency between current policy plans and unfunded liabilities, focusing primarily on social security, and explores policy options. It finds that so far, the impact of aging on the economy has been moderate. The number of pensioners has risen in recent years, but this is mainly owing to early retirees taking advantage of the generous disability and pension systems. The paper also examines the need for health care reforms in Switzerland.

Abstract

This Selected Issues paper attempts to quantify the impact of the demographic shift on growth and public finances in Switzerland. It examines the intertemporal consistency between current policy plans and unfunded liabilities, focusing primarily on social security, and explores policy options. It finds that so far, the impact of aging on the economy has been moderate. The number of pensioners has risen in recent years, but this is mainly owing to early retirees taking advantage of the generous disability and pension systems. The paper also examines the need for health care reforms in Switzerland.

IV. Characteristics of the Swiss Financial System in International Comparison29

105. The Swiss financial system is large, well developed, and internationally oriented. Assets of banks and investment funds, and assets under management and custody in banks total around 15 times the Swiss GDP (Table IV-1). Value added in the financial services sector (banking and insurance) amounts to 13.6 percent of GDP, more than any other sector in the economy, and the sector employs more than 190,000 people (4.5 percent of total employment in the economy).

Table IV-1.

Switzerland: Structure and Size of the Financial System

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Sources: Swiss National Bank; and Swiss Federal Banking Commission.

Share of total sector assets (in percent) of three largest institutions.

Herfindahl’s index--6 companies control 90% of the market.

Herfindahl’s index--11 companies control 90% of the market.

uA04fig01

The banking system is highly concentrated.

Citation: IMF Staff Country Reports 2005, 188; 10.5089/9781451807271.002.A004

Source: Bankscope, World Bank.
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Number of branches per population is about average.

Citation: IMF Staff Country Reports 2005, 188; 10.5089/9781451807271.002.A004

Source: ECB; and OECD Bank Profitability.

106. The financial sector is well diversified. It consists of two large, internationally active banks (Credit Suisse Group and Union Bank of Switzerland), private banks offering extensive services in wealth and asset management, regional and savings banks, cantonal banks, a large number of foreign or foreign-controlled banks, and various insurance and reinsurance companies. Structures, activities, and balance sheets of most institutions are divided across sectors, regions or countries, and asset types, bringing benefits to the system through diversification and the spreading of risk. Nevertheless, because the two international banks are large compared to those more focused on the domestic market or specialized in niche activities, the Swiss banking sector is highly concentrated by international comparison. The insurance sector is less concentrated, even though the two largest players—SwissRe and Swiss Life—are also large international companies (Table IV-2).

Table IV-2.

Switzerland: Financial Development in Major Financial Institutions, 2002-04

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Sources: Company reports; and IMF staff calculations.

Data for Swiss Life is for the first half of the year.

Profit before taxes and minority interests.

107. In response to domestic and external developments, in recent years the Swiss financial sector has undergone consolidation and reorganization, and has expanded further its activities abroad. Reflecting similar trends in other countries with an active period of mergers and takeovers, the number of banks shrunk by 17 percent between 1990 and 2004.30 In response to increased international competition and with a need to expand beyond the small and relatively slow-growing domestic market, the larger banks, insurance, and reinsurance companies have stepped up their activity outside Switzerland. In private banking, banks expanded by offering financial services to their customers in their home countries (rather than from Switzerland as a base). Moreover, UBS and Credit Suisse have become global players in investment banking. In both banking and insurance, these developments have resulted in a division between a small number of global financial service providers on the one hand, and a large number of specialized niche players on the other.

uA04fig03

Staff costs are close to average.

Citation: IMF Staff Country Reports 2005, 188; 10.5089/9781451807271.002.A004

Source: ECB; and OECD Bank Profitability.

108. Swiss firms hold a large market share in international wealth management. Swiss banks manage around one third of all private assets invested across borders31, more than any other international financial center. Some 83 percent of the assets under management and 56 percent of assets held in custody belong to foreign investors. Switzerland’s strength in wealth management reflect the strong reputation that Swiss banks enjoy with their high quality of service, attention to individual customer needs, and the benefits of tax management. Virtually all assets under management are invested outside Switzerland, reflecting the relatively small size of the domestic capital market.

109. Due to its activities in international asset management, the banking system obtains an large share of its income from fees and commissions. This makes the performance of the system less dependent on interest margins, but more dependent on asset prices (especially equity), since fees and commissions are typically linked to asset values. As a result, international financial market developments, such as the sharp valuation drop in many stock markets in 2001, tend to have a large impact on the profitability of the Swiss system. Indeed, global imbalances as a risk factor are keenly monitored by Swiss regulators and bankers.

uA04fig04

The share of interest income is relatively low.

Citation: IMF Staff Country Reports 2005, 188; 10.5089/9781451807271.002.A004

Source: ECB; and OECD Bank Profitability.
uA04fig05

Income from fees and commissions is high.

Citation: IMF Staff Country Reports 2005, 188; 10.5089/9781451807271.002.A004

Source: ECB; and OECD Bank Profitability.

110. Regulatory capital ratios of Swiss banks remain high in European comparison and the overall risk profile of the sector is low. The sector is prudently managed and has high quality assets (Table IV-3). At the same time, Swiss banks, because of their specific services profile, are vulnerable to operational and reputation risk. To protect the strong confidence in the operational and reputational integrity of the system, Swiss banks are subject to stricter prudential requirements than those proposed as international standards under the Basle II accords.

Table IV-3.

Switzerland: Core Set of Financial Soundness Indicators

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Sources: Swiss National Bank; and IMF staff calculations.

111. The Swiss insurance sector is large and active in international markets, and includes some of the global players. At SwF 530 billion, assets of insurance companies were equal to 122 percent of GDP in 2003 (Table IV-1). Premiums collected in 2003 totaled SwF 51.6 billion, of which life insurers collected 62 percent. With annual premium volume of SwF 7,000 per capita (private direct insurance only), Switzerland has the highest insurance density in the world. The domestic market is very contested and attractive to Swiss and foreign companies alike. International insurance business is important as 70 percent of group premiums are generated abroad, and 95 percent of the turnover of reinsurance companies is abroad. In contrast, health and social insurance companies tend to focus on domestic clients.

112. The insurance sector is generally well managed, but has still not fully recovered from the financial asset price collapse in 2001, and it continues to be affected by the long-lasting low interest rate environment. Low interest yields also continue to put strain on the Swiss second pillar pension funds, which are taking steps to reduce under-funding (Table IV-4). In addition, slow or insufficient adjustment in regulated parameters affecting life insurers and pension funds, such as minimum returns on policies, discount rates (for actuarial assessments), and annuity conversion rate (determining annuity benefits paid from accumulated capital), have complicated the management of these companies’ balance sheets. With the return to growth in the economy, insurance companies and pension funds have recovered some ground lost in 2004, but their stock market valuations remain well below previous peaks.

Table IV-4.

Switzerland: Encouraged Set of Financial Soundness Indicators

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Sources: Swiss National Bank; and IMF staff calculations.

Simple ratio of capital to total assets, without risk weighting.

29

Prepared by Magdalena Polan.

30

The Swiss insurance industry has not experienced such a consolidation. The number of insurance companies remained unchanged and employment was fairly stable during the same period.

31

Source: Economist Intelligence Unit.

Switzerland: Selected Issues
Author: International Monetary Fund