2009 Article IV Consultation: Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Switzerland

Switzerland is affected by the global crisis through the stock effect, the flow effect, and the trade effect. Along with a sharp contraction in exports, investments are now being postponed. Consumption has held up well so far, but as unemployment rises, household spending will lose momentum. The Swiss National Bank has appropriately loosened monetary policy, bringing the policy rates almost to zero. Maintaining financial stability will be essential for ensuring macroeconomic stability and growth in Switzerland.


Switzerland is affected by the global crisis through the stock effect, the flow effect, and the trade effect. Along with a sharp contraction in exports, investments are now being postponed. Consumption has held up well so far, but as unemployment rises, household spending will lose momentum. The Swiss National Bank has appropriately loosened monetary policy, bringing the policy rates almost to zero. Maintaining financial stability will be essential for ensuring macroeconomic stability and growth in Switzerland.

I. The Context 1

1. Switzerland is affected by the global crisis through three important channels. First, the decline in asset prices impacts the large Swiss banks and insurance companies directly through their balance sheets—the stock effect. Second, the turmoil will have longer-lasting implications for financial industry earnings—the flow effect. Third, the open Swiss economy will be affected by the crisis through the sharp downturn in growth prospects in key trading partners—the trade effect. As a result, after years of strong economic performance, the Swiss economy is now expected to shrink by 3 percent in 2009, before picking up again in the second half of 2010.

2. The authorities’ response to the financial turmoil in 2008 was comprehensive; the key issue looking forward will be whether more might be needed. The authorities pushed for an early recapitalization of UBS, extended deposit insurance, negotiated new capital requirements and liquidity buffers for the large banks, and stepped up supervision. The SNB has been an active supplier of liquidity to the market, while the monetary policy stance has been relaxed aggressively. In addition, there has been a fiscal expansion. However, more may yet be needed if the turmoil continues; determining the optimal policy mix to address both possible further economic weakening and continuing financial sector vulnerabilities will be the key challenge for the authorities looking ahead.

3. Strong macro-financial linkages will drive policy choices. Maintaining financial stability will be essential for ensuring macroeconomic stability and a return to growth in Switzerland—while also having positive spillovers to international financial stability. However, despite sound fundamentals, the limited size of the Swiss economy places a constraint on what the government can responsibly do to support the large financial sector. This puts a premium on tight regulation and effective supervision, and on coordination and cooperation between home and host country authorities. Potential problems will need to be addressed at an early stage, before large-scale rescue packages with major fiscal implications become unavoidable.

II. Recent Developments and Near-Term Outlook

4. Switzerland’s economic performance in recent years has been strong. Real GDP growth averaged 3 percent from 2004 to 2007—significantly above potential (about 2 percent) and the euro-area average (2.3 percent)—while inflation remained muted (1 percent). Exports and financial service flows rose rapidly in line with a favorable external environment, allowing the 2006 current account surplus to peak at 14.5 percent of GDP. Investment was supported by strong corporate profitability and capacity utilization—at 87 percent—was well above its long-term average. Unemployment fell under 2½ percent, even as cross border working and immigration flows increased labor supply. A fiscal rule resulted in budgetary surpluses in 2006–07 of some 2 percent of GDP.


Switzerland’s economic performance during the expansion has been impressive.

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001


External demand and consumption drove growth.

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

5. The financial sector crisis, however, has hit Switzerland hard. While UBS has been affected the most, both large banks have reported write-downs and losses, and underwent multiple capital injections, mostly via preference shares and convertible bonds. Job cuts have so far been mostly outside of Switzerland but are now also affecting domestic operations. In 2008, total revenues at the two big banks fell by 81 percent, while net new money flows into assets under management (AUM) dropped. Some institutions have suffered rating downgrades. Reflecting these losses, and the turmoil in global markets, the Swiss equity index fell by about 40 percent over last year. Investment and bank financial service income in the balance of payments—a key source of external income—declined by over 80 percent in 2008.

6. The economy entered a recession in the second half of 2008. Although the economy expanded by 1.6 percent in 2008, real GDP contracted by 0.2 percent in the second half of the year. Growth in exports slowed, falling from 9½ percent in 2007 to under 2½ percent in 2008, with a marked fall in the fourth quarter, as world trade collapsed. From the supply side, financial intermediation value added declined by about 7½ percent. Investment spending contracted since the second quarter, as firms scaled back plans given the deteriorating outlook. However, with labor markets robust, private consumption grew by a still healthy 1.7 percent, a rate not much lower than in 2007.

Switzerland: Financial Crisis - Write-downs, Capital Injections, and Job Losses 1/

(Billions of U.S. dollars unless noted otherwise, as of March 31, 2009)

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Sources: Bloomberg; Bankscope; Moody’s; The Banker; and IMF staff estimates.

Since start of the crisis in June 2007 until March 2009.

Writedowns and charges related to sub-prime and other assets.

7. There was agreement that the slowdown will deepen (Figure 1). At the time of the mission, staff expected Swiss GDP to contract by 2.3 percent in 2009, and hover around zero in 2010. Given a further deterioration in the indicators, the growth forecast has declined to -3.0 percent in 2009 and -0.3 percent in 2010 (Table 1). The government (SECO) forecast was somewhat more positive; the SNB estimated a contraction of between -2.5 and -3.0 percent in 2009. The slowdown will work its way mainly through reduced exports and investment. The authorities stressed that consumption is expected to still be relatively strong in the first half of 2009, and recede thereafter. Disposable income is the main determinant for consumption, and with relatively solid wage growth2, it will take a while until the sentiment is affected. However, weaker export growth and lower job prospects should impact employment with a lag and dent consumption growth afterwards.

Figure 1.
Figure 1.

Switzerland: Developments and Outlook, 1998-2010

(Year-on-year growth rates in percent, unless otherwise indicated)

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

Table 1.

Switzerland: Basic Data

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Sources: IMF, World Economic Outlook database; Swiss National Bank; and Swiss Institute for Business Cycle Research.

Fund staff estimates and projections unless otherwise noted.

Change as percent of previous year’s GDP.

Including railway loans as expenditure.

Excludes cyclical items only.

Excludes cyclical and one-off items (about 2.1 percent of GDP in 2008).

2009 values as of April 14, 2009.

Based on relative consumer prices.

2009 Growth Forecasts


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Sources: SECO, KoF, Consensus forecasts, and IMF WEO.

April Consensus forecast.

Machinery and equipment investment for SECO and KoF.

8. Headline inflation is set to decline rapidly and deflationary risks have increased (Figure 2).3 Inflation (y-o-y) peaked in July 2008 at 3.1 percent (the highest level in 15 years) on the back of higher fuel and clothing prices. As energy and food prices eased, headline inflation dropped to -0.4 percent in March. At the time of the mission, deflationary tendencies were not expected to persist, as core inflation remained above 1¼ percent. However, the rapid deterioration in the outlook has increased risks of deflationary expectations setting in. Inflation is now projected to reach -0.6 percent in 2009. The authorities have a similar (negative) inflation forecast for this year and noted the presence of deflationary risks.

Figure 2.
Figure 2.

Switzerland: Inflation Developments, 2005-11

(Year-on-year growth rates, unless otherwise indicated)

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001


Growing slack in the economy should place downward pressure on inflation.

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

9. The precise impact of the financial crisis on potential output growth remains uncertain. The authorities noted that potential output growth would be constrained over the next few years, but it was too early to quantify this. Given the financial sector’s weight in value added and the importance of financial intermediation to growth, estimates of potential growth should decline. However, the permanence of recent labor migration and productivity gains—which could bolster the economy’s resilience—were unknown. The authorities noted that under purely statistical methodologies potential growth would fall below 1.5 percent and that uncertainty surrounding potential output spilled over into uncertainty regarding output-gap/inflation dynamics.

III. Macro-Financial Linkages and Risks

10. Risks to the outlook are sizeable, on the downside, and depend on developments in global demand and financial markets.

  • The baseline outlook incorporates a contraction in Switzerland similar to the one experienced by the euro zone. Swiss real sector activity is correlated with euro area growth. The euro area is facing the prospect of a sizable and extended downturn which will spill over into Swiss export activity (63 percent of Swiss exports are to the European countries). However, as an open economy with a large financial sector, the probabilities of a larger contraction are non-trivial. Possible mitigating factors include the diversification of the Swiss economy, aggressive monetary policy relaxation, and the absence of a housing boom.

  • Swiss fortunes are aligned with the health of the global financial system (Box 1). A fall in equity prices is associated with declines in financial service exports, and real growth. Returns on equity for the two large banks have been good predictors of the future direction of the economy. There is a risk to the outlook in case the problems at the two large banks continue—which will show up in a further reduction in investment income and financial service flows, and a deeper, more protracted recession. The financial crisis is affecting other parts of the Swiss financial system (e.g., insurance companies and pension funds) as well.


Lower market capitalization tends to be reflected in lower Swiss growth.

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001


The large banks’ RoE outcomes also suggest a decline in growth.

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

Macro-Financial Linkages and Spillovers

The financial sector accounts for a large share of economic activity. In 2008, financial intermediation accounted for about 9 percent of GDP (12 percent including insurance and pensions) and 5½ percent of employment. In terms of growth rates, financial intermediation directly contributed about 1 percentage point (pp) to Swiss real GDP growth (annually) between 2004 and 2007.

As the financial sector deleverages and shrinks, the amount of assets available to generate value added (VA) will decline. Growth in banking sector assets and financial sector VA is highly correlated (0.75). In 2008, the banking systems’ total assets fell by 10.4 percent, while financial sector VA fell by 7.2 percent. Given the financial sector’s overall weight in VA, the drop in banking assets placed direct downward pressure on growth of about 1.4 pp. At the same time, negative shocks to financial intermediation will also spill over onto the rest of the economy placing added indirect downward pressure on growth. A VAR regression using quarterly data for 1980-2008 suggests that a 1 percent contraction in the value added of financial intermediation reduces real GDP over the next 4-6 quarters by about ½ pp. Thus a 7.2 percent decline in financial intermediation could result in a 3.5 pp decline in real GDP growth (which encompasses both effects) within a year. This reduction in growth is in line with the staff’s projected swing in Swiss growth rates (from +1.6 to -3.0 percent). Other real sector shocks (e.g., trade), which are not included here, are also expected to hit the economy.


Growth in financial sector assets underpins growth in financial sector value added.

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001


Contribution to Real GDP Growth, 1990-2008


Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

In addition to growth effects, financial sector balance sheet shocks also imply sizable contingent fiscal liabilities. The April 2009 GFSR indicated that Switzerland’s financial system is systemically vulnerable to shocks emanating from other international financial centers.

11. Increased equity market volatility has resulted in safe haven flows and upward pressure on the Swiss franc. The Swiss franc plays a traditional role as a safe haven—appreciating in times of heightened uncertainty. With the decline in equity prices and return of risk aversion, real and nominal exchange rates became quite volatile. The franc appreciated by 8 percent against the euro in the span of a few months, reaching less than SFr 1.45 per euro at the end of October 2008, due in part to the unwinding of carry-trades. A marked reduction of interest rates pushed the rate above SFr 1.57 per euro by mid-December—which was reversed by early March as the rate declined to 1.47 leading up to the SNB policy meeting. There has been a clear link between exchange rate appreciation and economic growth in recent years.


Volatility of currencies jumped in late 2008…

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

Source: Bloomberg; and Swiss National Bank.

…meanwhile, the Swiss franc REER appreciated sharply.

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

12. There is little evidence of a domestic credit crunch. Private sector financing costs are rising and lending conditions are becoming stricter in trading partner economies (Figure 3). However, the SNB’s survey of 20 major Swiss banks indicated that the vast majority had not tightened lending conditions. Given that the majority of Swiss private sector credit is in mortgages, the absence of a housing bubble, and a resurgent Pfandbrief (covered mortgage bond) market which has supported credit supply, Switzerland is expected to avoid a sharp contraction in domestic credit. The decline in domestic private sector credit growth (down 6 percentage points from its 2007 peak to 3.8 percent year-on-year in February) has stabilized. However, private household demand for credit, both mortgage and non-mortgage related, has slowed.

Figure 3.
Figure 3.

Switzerland: Developments in Credit

Risk premiums have increased…

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

Sources: SNB Monthly Statistical Bulletin; SNB Bulletin of Banking Statistics; and IMF staff estimates.1/ Reported as an indicator of broader European lending conditions in main export markets. An SNB survey started in early 2008 and only a few observations are available.2/ Reported at bank office level (113 banks; at least SFr 280 million in lending); domestic credit by residence of borrower. Coverage does not include lending by Swiss banks outside of Switzerland.

IV. Assessment of External Stability

13. Switzerland remains a competitive economy but export market shares have declined. Switzerland’s exports have expanded rapidly along with the cyclical up-tick in world trade. In many capital-intensive and luxury good areas, Swiss exporters were well placed to increase gross volumes as the world economy boomed. However, Switzerland’s goods exports have lost market share in their major markets in recent years. Exports declined by 8 percent in real terms in 2008Q4 and by 14 percent in the first two months of 2009. While pharmaceuticals and chemicals—which make up about 1/3 of total exports—have remained relatively stable, demand for raw and semi-finished materials, and luxury goods has fallen sharply. At the same time, growth in labor productivity (GDP over hours worked) averaged about one percent from 2002–07, slightly under its historical norm of about 1.3 percent. Over the same period, average euro area and U.S. labor productivity rose by 1.1 and 1.8 percent, respectively.


The Swiss franc has appreciated since the start of the crisis.

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

Sources: IMF, Direction of Trade Statistics and WEO.

Swiss goods exporters have lost market share in all major markets.

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

14. The current account has deteriorated but is expected to remain in surplus.4 The recent turbulence in financial markets and commodity price reversals have caused substantial adjustments in certain current account components. The most significant change is the shift in net investment income, which has fallen by 83 percent as banks’ direct investment income is cut with subsidiaries reporting persistent losses. Given the size of the investment income component, the overall current account surplus has declined by 33 percent since 2006 and stood at 9.1 percent of GDP in 2008. Looking ahead, there was agreement that the surplus will remain under double digits over the next few years as financial sector activity declines, and investment banks restructure. WEO projections for the components of the current account reflect moderating commodity prices which will keep merchanting receipts low, and subdued bank commission and fee income will reduce financial service revenues. Investment income is not expected to quickly come back to 2004–07 levels given the uncertain outlook for investment banking.


The current account surplus has fallen from it’s 2006 peak.

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001


Losses by banks’ foreign subsidiaries have cut net direct investment income…

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

Source: Swiss National Bank.

…and offset increases in goods and services balances.

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

15. CGER finds the exchange rate to be broadly in equilibrium, but a stronger-than-expected deterioration in the financial sector could imply overvaluation pressures going forward. The equilibrium exchange rate approach in the current reference period suggests an overvaluation of about 1 percent, while the two current account based approaches (macrobalance and external stability) imply an undervaluation of about 1 and 9 percent, respectively (based on Fall 2008 CGER). On net, the average of the three methodologies suggests that the franc is broadly in equilibrium. Given sizable downside risks to the Swiss financial center and potential growth, a sharp decline in export market shares, as well as large contingent liabilities, a more pessimistic scenario may suggest that the exchange rate is on the strong side.

V. Financial Sector Issues

A. The Authorities’ Response to the Crisis

16. The authorities have moved proactively to reduce the impact of the crisis on the economy and to stabilize the financial system. In hindsight (and in common with other countries), the authorities did not act forcefully enough to mitigate the buildup of risks to financial stability in the run-up to the crisis. However, since the start of the turmoil they have reacted swiftly. The SNB has actively cooperated with other central banks to ensure liquidity in the international interbank market. They pushed for recapitalization of the two large banks at an early stage and, when the crisis worsened in October 2008, introduced a plan to relieve pressures on UBS from bad assets without weakening its capital adequacy. They enhanced deposit insurance arrangements. Swiss regulators have also taken a lead in developing tighter financial sector regulation to help prevent crises in the future. The various measures have been coordinated to maximize the impact on fragile market confidence.

Interbank Liquidity

17. In cooperation with other central banks, the SNB provided liquidity to calm interbank tensions. Risk premiums in unsecured markets have remained volatile since the start of the financial turbulence. The SNB extended maturities on refinancing operations, starting in December 2007, and cooperated with the ECB in auctioning off U.S. dollar liquidity obtained via newly established swap lines with the U.S. Fed to ease dollar shortages. In late 2008, it offered Swiss francs through swap arrangements with the ECB and the National Bank of Poland, and in early 2009 with the National Bank of Hungary, to avoid tensions in the offshore Swiss franc market. Moreover, it has issued SNB bills in U.S. dollars to finance the Stabilization Fund (see below), and in Swiss francs to mop op excess liquidity from the domestically oriented banks.


Interbank tensions have declined since October.

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

Source: Bloomberg; IMF staff estimates.

Financial Sector Stabilization Package

18. The stabilization initiative for UBS comprised both asset purchases and recapitalization (Appendix I). The main measures were the transfer of $39 billion (equivalent to 8½ percent of GDP) of distressed assets to an SNB-sponsored special purpose vehicle and a capital injection of SFr 6 billion from the Swiss Confederation into UBS. Funds for the capital injection came from budgetary surpluses and did not require additional borrowing. The government’s stake is in the form of mandatory convertible notes, which it hopes to sell before conversion. Credit Suisse did not participate in the asset purchasing plan but instead undertook a SFr 10 billion capital increase, placed with major global investors.

19. The government made clear its readiness for further action if needed—and if private sector solutions proved insufficient. At The the same time as it announced the arrangements for UBS, the government indicated that it (and the SNB) would take further steps, if necessary, to safeguard financial stability. In particular, it would guarantee, as needed, new medium-term bank borrowings of Swiss banks in the capital market. No guarantees have so far been given. Further losses, including on banking book risks (which have not been addressed by the stabilization measures to date) may yet create a need for new intervention, including capital injections accompanied by shareholder dilution. However, the authorities would look for private sector solutions first. In this regard, the mission welcomed efforts to channel funds from the small banks, increasingly favored by depositors, to the larger banks through the covered bond market.

Financial Safety Net

20. Switzerland has a developed bank resolution and insolvency framework. The Swiss government reformed the law applying to insolvency of banks and securities dealers in line with the April 2008 FSF recommendations. The regulatory authority has extensive intervention powers and is itself the authority for initiating and overseeing insolvency proceedings. Until recently, the only need to use these arrangements was in respect of unauthorized firms, but in 2008 they were applied successfully to the small Swiss subsidiary of a foreign bank.

21. The authorities have moved to strengthen deposit insurance, while initiating a fundamental review of the arrangements (Box 2). The pre-crisis deposit insurance system factually could only protect smaller depositors at the small and medium-sized banks. Coverage was limited, overall covered payouts capped, financing ex post, and there could be delays in larger payouts. These arrangements risked being insufficient to maintain depositor confidence in case of problems. While coverage has now been extended, the mission noted that the system remains unfunded and still cannot fully cover large banks’ deposits. The Federal Council has initiated a fundamental review of the system, due for completion later this year. The mission welcomed the review, noting the importance for countries with large banking systems of containing the contingent liabilities for government that can be created by deposit insurance. In this context, the mission noted that a blanket guarantee for deposits, as given last year by governments in some major economies, would not have been credible in Switzerland, where deposits are about six times GDP.

Deposit Insurance

On December 20, 2008, protected coverage was raised to SFr 100,000 per depositor from SFr 30,000 per depositor previously. In addition, the overall cap on the system-wide liabilities of the deposit insurance system was raised to SFr 6 billion from SFr 4 billion. The move followed increases in deposit insurance in other financial centers (a blanket guarantee for household deposits in Germany and Ireland in October 2008, and increases in limits in the U.S. and the U.K. in December 2008). The coverage of the insurance system is broad, comparable to that in the U.S. and the U.K., but the limit per depositor is less than that temporarily imposed in the U.S.

Comparison of Deposit Insurance Schemes

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Sources: National authorities.

Increased on December 20, 2008 from SFr 30,000 previously.

Announced but not legally implemented.

Since October 14, 2008.

Regulation and Supervision

22. The authorities have moved swiftly to enhance financial sector oversight and strengthen regulation (Appendix II, Box 3). Supervisors intensified their oversight of major banks early in the crisis and have been extending this approach to insurance companies as they began to suffer from the economic downturn. Extensive regulatory reforms are being introduced, to take effect, where appropriate, when the crisis is over (to avoid reinforcing the downturn) but giving a clear signal now that regulation will be much more demanding in the future. The authorities noted that they will continue to balance participation in international regulatory work (e.g., FSF, Basel Committee) with a readiness to implement measures that they think appropriate to the Swiss financial sector. Similarly, they have been taking a stronger lead in international cooperation on the supervision of major groups, responding to some limitations of previous arrangements with foreign supervisors that have been highlighted during the crisis.

Key Elements of Regulatory Reform in Switzerland

Capital adequacy
  • Basel II requirements to be strengthened in line with the Basel Committee’s evolving standards;

  • Increased capital buffers (under Pillar 2) above the Basel II minimum requirements for the two major banks, including a cyclical adjustment (by 2013);

  • The introduction of a minimum leverage ratio, including a cyclical adjustment (by 2013);

  • A redefinition of eligible capital.

  • FINMA is developing a “building block approach” to supplement the existing top down stress tests conducted by the SNB. Results will inform management discussions and can be input in capital adequacy decisions.

  • New requirements are planned for the two large banks in 2009 and will be extended as appropriate to other banks.

  • FINMA will issue guidance on remuneration practices.

Note: See Appendix II for details.

23. The reform of capital requirements for the big banks is an important step with innovative elements. In addition to increased capital under Basel II, for the large banks FINMA has introduced a minimum leverage ratio (core tier 1 capital as a percentage of assets excluding domestic lending) and provisions to vary the actual minimum required of banks to reflect economic conditions. The two banks have until 2013 to comply, with a longer deadline possible. By applying Basel II and leverage ratios together, with higher requirements in “good times”, FINMA expects to address both the procyclicality of existing risk-based requirements and incentives created by leverage ratios for banks to increase risk assets and off-balance sheet business. The authorities noted that by defining “good times” by reference to profit cycles of individual banks, they have ensured that adjustments will be automatic and independent of judgmental estimates of the economic cycle.

24. FINMA is also reforming its requirements in relation to stress-testing, bank liquidity, and remuneration. In addition to the focus on capital, the reforms are addressing other weaknesses in regulation, in some cases extending work that was started before the financial crisis. For the stress test and liquidity requirements for banks, FINMA will apply the new approach initially to the major banks only, reflecting the significance of the shortcomings in these areas. But they will also be applied to other banks in due course, depending on experience with the major banks. The authorities emphasized that planned FINMA guidance on remuneration, helpful in the context of controlling investment banking risks, will apply to all regulated entities.

25. Overall, the reforms address key issues for the large Swiss banks but should be kept under review. In particular, the reforms tackle pressing needs for improved liquidity standards and higher capital for investment banking. They respond well to the international reform agenda. The program needs to be kept under review in the light of further international work, for example on developing a macroprudential focus to regulation. While welcoming the new capital framework, the mission suggested that the exclusion of domestic lending from the leverage ratio calculation, while necessary in current economic circumstances, should be reconsidered in the future. The authorities noted they would do so, particularly if a minimum leverage ratio were introduced by the Basel Committee.

26. Insurance regulation is also now being tested by the crisis. While overall insurance sector exposure to US subprime and related risks is limited, regulators are having to respond to strains imposed by wider market falls, on life companies in particular. Major reforms since the sector’s problems in 2001–03 have strengthened balance sheets and helped equip FINMA to manage the crisis. But the full benefits of the reforms, including those of the Swiss Solvency Test and the Swiss Quality Assessment, will be felt over coming years. In the meantime, the authorities have resorted to intensive monitoring of existing solvency standards and “tied assets” (those backing reserves). They are responding to solvency and liquidity pressures and have stepped up cooperation with foreign supervisors of major groups.

27. The new integrated regulator FINMA is well-placed to strengthen supervision. The Federal Office of Private Insurance (FOPI), the Swiss Federal Banking Commission (SFBC) and the Anti-Money Laundering Control Authority were merged on January 1, 2009 under a long-planned reform. The creation of FINMA has enhanced the capacity of regulators to implement changes resulting from the crisis and strengthened their hands in the supervision of the major banking and insurance groups. FINMA had a somewhat challenging start and a debate about its governance and staffing model was reopened. The authorities emphasized their commitment to strengthening governance as necessary.

28. Additional resources will help to ensure the effectiveness of the new organization. FINMA is a public law body, accountable to the Federal government but enjoying institutional and financial independence. In particular, it has appropriate flexibility to recruit staff with required skills. FINMA has 315 full-time staff at present (April 2009) and a budget in 2009 equivalent to $88 million. The authorities noted that FINMA will increase total resources to 355 full-time staff, while emphasizing the need for the appropriate level of skills and experience. The mission welcomed the planned strengthening of staffing and noted that FINMA currently has somewhat light resources compared with those of other integrated regulators. 5

B. Risks to Financial Stability

Balance Sheets and Income Statements

29. The size and composition of the banks’ balance sheets creates risks for the public sector. The banking sector’s total on-balance sheet assets (at the group level) alone exceeded SFr 4.7 trillion at end-2007 or over nine times the size of Swiss annual GDP.6 Off-balance-sheet activities and emerging market exposure are also large. The rapid growth of the two big banks almost exclusively reflected the development of foreign business. For example, based on BIS data, as of the third quarter of 2008 Swiss banking exposure to emerging market countries was close to 50 percent of GDP—in Europe, second only to Austria. At end-2005, Swiss emerging market exposure had been only 28 percent of GDP.


Swiss banking system exposure to emerging markets is well diversified, but large.

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

Source: BIS banking statistics, October 2008.

30. The deleveraging process has been slow among the large banks (Figure 4). Although the Swiss banking sector remains well-capitalized on a risk-weighted basis (Tier 1 capital ratio and capital adequacy ratio), low “permanence of capital” (in the form of tangible common equity) and still high balance sheet leverage have dented confidence in the ability of large Swiss banks to absorb further valuation losses. Despite a significant amount of noncore asset sales, basic leverage ratios have even reverted back to levels last seen in early 2008. Estimates could be higher depending if securities holdings were marked-to-market and how negative deferred tax liabilities are applied in the calculation of Tier I ratios.

Figure 4.
Figure 4.

Switzerland: Banking Sector - Capital Ratios1/


Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

Source: Bloomberg.1/ The data covers only the largest banks in the system. For Switzerland and Germany, two banks each; for the U.K., four banks; and for the U.S., seven banks. U.S. averages and 2008 first quarter data exclude Goldman Sachs and Morgan Stanley in the first two panels.

31. Funding pressures for the large banks require close monitoring. The funding market for bank-issued debt instruments remains depressed as banks strive to bolster their balance sheets and shore up their capital basis in anticipation of higher leverage ratios. Given that demand for bank term debt has largely disappeared, markets may demand some form of government guarantee—a contingency the authorities would consider, as announced in the October package of stabilization measures—to secure short-term financing of the two large banks. At the same time, the shift of deposits from the large to the smaller banks within the system, has added to liquidity concerns. At the time of the mission, the large banks felt that they had sufficient sources of short-term funding.

32. Financial sector revenues will remain under pressure. Investment banking revenues have declined sharply. At the same time, other key business areas, such as private banking, have been weakened. Net new money (from private banking and asset management) for the two large banks fell substantially in 2008 and outflows have continued in early 2009 for one institution. On March 13, Switzerland adopted the OECD standard on administrative assistance in fiscal matters, which will permit a fuller exchange of information with foreign tax authorities.7 It is not possible, at this stage, to gauge the impact of the enhanced information exchange on Swiss banking.


Investment banking has underperformed while market risks have almost doubled … Large Swiss Banks: Net Income and Market Value-at-Risk VaR, 2004-08

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

Sources: Financial statements (UBS, Credit Suisse); and IMF staff calculations.

Insurance and Pension Funds

33. The insurance sector has suffered from the downturn in markets:

  • Most life companies reduced equity risk following the 2001–03 market falls but retained other significant market risk through corporate bonds and alternative investments that were not either matched by liabilities or fully hedged. Rising credit spreads, higher liquidity premiums, lower interest rates and increased market

  • volatility have combined to cause large, mostly unrealized losses in the second half of 2008, while increasing the cost of hedging.

  • While non-life insurance is less affected, the reinsurance sector faces particular challenges. Non-life business globally is relatively unaffected by the crisis. However, a major reinsurance group is exposed to deteriorating credit conditions through some credit default swap contracts and other structured finance exposure acquired under a strategy to diversify from core business.

34. Further market weakness could create serious stress at life insurance companies in particular, with implications also for pension funds. The authorities noted that life insurers’ liquidity is not now under pressure, giving them time to take strengthening measures, while solvency ratios still exceed the minimum at major firms. For most companies, the key pressures may arise from weaknesses in the business model exposed by the crisis (particularly the high capital drain and risk management challenges in guaranteed business). However, more severe pressures, even liquidity strains, are not impossible should there be a further market downturn. Given the high proportion of pension funds underwritten by insurers, there would be adverse impacts on the pensions sector were life insurance policyholder benefits to be put at risk.

35. Occupational pension funds also face direct financial pressures from falling asset values. A growing number of Pillar II pension funds, which had total assets of around SFr 630 billion at end-2007, have funding ratios of below 100 percent. Their average ratios are estimated to have fallen to around 95 percent from 112 percent at end-2007, comparable to the low point of 2002. Further market falls would require more measures to restore adequate funding ratios, for example through increased employee or employer contributions.

36. The authorities are monitoring the impact of the crisis on these sectors and their wider implications. The guarantees provided by the insurance and pension sectors are insulating Swiss policyholders and pension fund members from some of the direct wealth losses experienced in some other countries. But their capacity to absorb shocks is clearly limited. In this context, there is a particular need for pension fund supervisors (based in the cantons, but coordinated by a new confederation level body) to balance the needs both to restore funding ratios promptly and to avoid exacerbating the downturn through strong measures.


Switzerland has a sizable stock of pension fund assets.

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

Source: OECD.

VI. Monetary and Exchange Rate Policies

37. The SNB has used monetary policy to good effect in a difficult environment (Figure 5).

  • The SNB kept the monetary stance unchanged in the first three quarters of 2008, offsetting higher risk premiums through lower repo rates. Infusions of SFr liquidity in interbank markets, use of longer-term repos, foreign exchange swaps, and new refinancing facilities lowered risk premiums and helped to ease appreciation pressures on the currency. Monetary and financial conditions continued to tighten nonetheless.

  • With the economic slowdown worsening, inflationary expectations rapidly falling and the currency appreciating, the SNB moved forcefully, relaxing the monetary policy stance by 225 basis points over a period of about two months at the end of 2008. With 1-week repo rates at 5 bps since September, the SNB had effectively moved to a zero interest rate policy at a relatively early stage. Longer-term rates, however, remained elevated.

Figure 5.
Figure 5.

Switzerland: Monetary Developments

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

Sources: SNB Monthly Statistic Bulletin; and IMF staff estimates.

The SNB aggressively relaxed the monetary stance in October by adjusting the 1-week repo rate.

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

Source: Swiss National Bank.

The Confederation yield curve shifted down but long-term rates remain elevated.

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

38. At the time of the discussions, the SNB saw rapid Swiss franc appreciation as the main risk to the economy. Despite a widening of interest rate differentials as the SNB cut policy rates, the Swiss franc had continued to appreciate against the euro on the back of safe haven flows. Currency volatility had also significantly increased. Given that anticipated reductions in euro-area rates would only exacerbate these tendencies, there was a concern that deflationary risks could accelerate uncontrollably in the middle of a severe recession. Waiting for a reversal in market sentiment could prove risky—and some insurance was felt to be necessary. Steering expectations, either by verbal intervention or “thinking aloud” to weaken the currency against the euro, or by a public recommitment to keep rates close to zero for a longer than expected period of time had worked during the last episode of deflationary risks in 2003. However, the SNB emphasized verbal intervention alone might prove insufficient in the current environment of risk aversion.


Monetary and financial conditions tightened despite interest rate cuts.

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

Source: Staff estimates, based on real exchange rates, interest rates, and equities.

39. However, options to counter an unwanted tightening of monetary and financial conditions are limited. It was acknowledged that deflation risks, while increased, are still limited, credit is still available, and that the full effect of the already considerable monetary easing has yet to be realized. The authorities agreed that quantitative easing measures may not be overly effective, and entail increased risk to the SNB balance sheet. However, they emphasized the need to employ them, both to affect expectations and avoid the worse-case scenario of a deflationary spiral. With banks hoarding liquidity, a further sharp increase in the monetary base may not generate a subsequent rise in credit. Most short-term Swiss interest rates were already near zero. Direct bond purchases could be undertaken to lower longer-term interest rates, but Swiss debt markets are quite shallow, and an intervention could prove disruptive. In this context, direct foreign exchange intervention was seen by the SNB as the most effective monetary policy option.


Domestic debt markets are relatively small…

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

Source: BIS. Domestic debt in domestic currency (issued by nationals).1/ Based on 12 euro area countries.

… and domestic bond issues have fallen with budget surpluses.1/

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

Source: SNB Monthly Statistical Bulletin.1/ Includes public and private issuers.

40. At the mid-March meeting after the Article IV mission, the SNB announced measures—including currency intervention—to force a relaxation in monetary and financial conditions.8 The SNB noted that a sharp deterioration in the economic situation since last December and heightened deflationary risks over the next three years required decisive action. With the SNB forecasting -0.5 percent inflation for 2009 and zero inflation in the period 2010–11, the Libor target range was reduced by ¼ percentage point to between zero and 75 basis points. Moreover, the SNB will target the lower part of the band, as opposed to the usual middle point, a de facto easing of 25 basis points. Given unstable risk premiums that are hampering the transmission of monetary policy, the SNB decided to directly purchase private sector Swiss franc bonds. In order to counter an inappropriate tightening of monetary conditions, the SNB also announced it would buy euros on foreign exchange markets. This was the first foreign exchange intervention since 1995.9

VII. Public Finances

A. Fiscal Developments

41. The fiscal position has improved significantly over the past four years (Figure 6). The economic upswing and the consolidation since the introduction of the federal government debt brake rule have culminated in a general government surplus of 2.2 percent of GDP in 2007 (Tables 5 and6). Despite the support for UBS in 2008, Switzerland’s stock of debt at end-2008 remained about 30–35 percentage points of GDP below that of the Euro area average and Germany, and 20 percentage points below the U.S., as also reflected in relatively low financing costs. At end-2008, the public sector had a net international asset position of 21 percent of GDP, and 25 percent of GDP in the short-term.

Figure 6.
Figure 6.

Switzerland: Fiscal Developments

(Percent of GDP)

Citation: IMF Staff Country Reports 2009, 164; 10.5089/9781451807417.002.A001

Sources: Ministry of Finance; and IMF staff estimates.1/ Projection.
Table 2.

Switzerland: Balance of Payments, 2006-141/

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Sources: IMF, World Economic Outlook database; and Swiss National Bank.

Fund staff estimates and projections unless otherwise noted.

Includes errors and omissions.

Table 3.

Switzerland: Major Financial Institutions---Key Indicators, 2003-08

(Millions of Swiss francs, unless otherwise indicated)

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Sources: Company reports; and IMF staff estimates.

Total assets divided by shareholders equity.

In millions of US$, unless otherwise indicated.

Table 4

Switzerland: SNB Balance Sheet

(Millions of Swiss francs; unless otherwise indicated)

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Sources: SNB; and IMF staff estimates.
Table 5.

General Government Finances, 2007-11

(In billions of Swiss francs, unless otherwise specified)

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Sources: Federal Ministry of Finance; and IMF staff estimates.

Confederation and extra budgetary funds. Excludes transfers of proceeds from gold sales from confederation to social security fund (SwF 7 billion, or 1.3 percent of GDP).

Computed as in OECD (2005). Excluding one-off items (1.1 percent of GDP in 2008).

Table 6.

Switzerland: Federal Government Finances, 2007-12

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Sources: Federal Ministry of Finance; and IMF staff estimates.

Includes the balance of the Confederation and extrabudgetary funds (Public Transport Fund, ETH, Infrastructure Fund, Federal Pension Fund).

Excludes VAT increase planned for 2010 since it has not yet been approved.

2008 total expenditures include extraordinary spending. Exclude transfers of proceeds from gold sales from confederation to social security fund.

Excludes cyclical and one-off items (about 1.4 percent of GDP) in 2008.