Individual Assignment Switzerland

8/6/2019 Individual Assignment Switzerland

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International Trade, Commerce, Finance and Banking in Switzerland Page 1

International Trade, Commerce,

Finance and Banking in

Switzerland

Prepared by:

Ricardo Kevin C. Domingo

4CFM




I. Introduction

Switzerland a place well known for chocolates creamy, bitter, sweet or

fruity you name it, they have it. And together with such diverse taste it could

offer, is a economy which could offer so much more. Switzerland has an

economy which can deliver more than what is expected from it.

This was the reason I chose this country for a research, it has this certain

beauty when you think of its economy. It will be like a celebrity, well known

but never boring. It still has it shares of ups and downs but not the plain

ones; they tend to be the dynamic ones.

This country has been quite interesting for me. It is maybe because of

hearing about its status of having banks with deposits from the elites. When

you say the phrase ³Swiss Bank Account´, it would always come to mind that

it is big money. It will be big money with sometimes a celebrity status

altogether with the controversies arising from it.

Switzerland had its own share of criticisms especially their banking sectors

mostly due to their secrecy laws. This special thing is what attracted me to

researching about the Swiss economy and banking. I want to know how do

Swiss banks deal with their clients. Most of all, i want to know how the Swiss

government regulate the secrecy of bank clients.




II. Brief History of the Country

Switzerland officially the Swiss Confederation, is a federal

republic consisting of 26 cantons, with Bern as the seat of the federal

authorities. The country is situated in Western Europe where it is bordered

by Germany to the north, France to the west, Italy to the south,

and Austria and Liechtenstein to the east.

Switzerland is a landlocked country geographically divided between

the Alps, the Central Plateau and the Jura. Its area is 41,285 km2 (15,940

sq mi). The Swiss population of approximately 7.8 million people concentrates

mostly on the Plateau, where the largest cities are to be found. Among them

are the two global cities and economic centers of Zurich and Geneva.

Switzerland is one of the richest countries in the world by per capita gross

domestic product, with a nominal per capita GDP of $67,384. Switzerland

also has one of the world's largest account balances as a percentage of GDP,

only placing behind a few oil producing countries. Zurich and Geneva have

respectively been ranked as the cities with the second and third highest

quality of life in the world. In 2010, World Economic Forum deemed

Switzerland the world's most competitive country.

Swiss citizens are subject to three legal jurisdictions: the commune,

canton and federal levels. The 1848 federal constitution defines a system

of direct democracy (sometimes called half-direct or representative direct

democracy since it is aided by the more commonplace institutions of

a parliamentary democracy). The instruments of Swiss direct democracy at




the federal level, known as civic rights (V olksrec hte, droits civiques), include

the right to submit a constitutional initiative and a referendum, both of which

may overturn parliamentary decisions.

By calling a federal referendum a group of citizens may challenge a law

that has been passed by Parliament, if they can gather 50,000 signatures

against the law within 100 days. If so, a national vote is scheduled where

voters decide by a simple majority whether to accept or reject the law. Eight

cantons together can also call a referendum on a federal law.

Similarly, the federal constitutional initiative allows citizens to put

a constitutional amendment to a national vote, if they can get 100,000 voters

to sign the proposed amendment within 18 months. Parliament can

supplement the proposed amendment with a counter-proposal, with voters

having to indicate a preference on the ballot in case both proposals are

accepted. Constitutional amendments, whether introduced by initiative or in

Parliament, must be accepted by a double majority of both the national

popular vote and a majority of the cantonal popular votes.




III. Nature and Operation of Domestic and International Trade and

Commerce

a. Domestic Trade and Commerce

y Zurich which is the largest city in Switzerland is the economic centre of

Switzerland. The city is then followed by; Basel, Geneva, and Lausanne.

The trend in retail trade is moving from independent establishments into

larger firms. Many small retailers have merged to form purchasing

cooperatives.

y The Swiss economy follows the typical First World model with respect to

the economic sectors. Only a small minority of the workers are involved in

the Primary or Agricultural sector (3.8% of the population, in 2006) while a

larger minority is involved in the Secondary or Manufacturing sector (23%

in 2006). The majority of the working population are involved in the

Tertiary or Services sector of the economy (73.2% in 2006). While most of

the Swiss economic practices have been brought largely into conformity

with the European Union's policies, some trade protectionism remains,

particularly for the small agricultural sector.

y Switzerland has an extensive industrial sector, not very known in the world

but present worldwide, with companies in different industrial sectors like

food processing like Nestlé, chemical for industrial and construction use

like Sika AG, pharmaceutical like Novartis, roof coating Sarnafil, among

many others.




y The foreign relations of Switzerland in respect of trade in services are

based on three pillars

o the multilateral level,

o the European level, and

oThe multilateral or bilateral level with third countries.

This reflects the general structure of international economic

relations. At the multilateral level, international trade is ruled mainly by the

agreements concluded under the Geneva-based World Trade

Organization (WTO). One such agreement is the General Agreement on

Trade in Services (GATS), whose basic obligations are market access and

national treatment. Other international organisations, though, are also

active in this field, for instance in relation to specific service sectors.

The trade links between Switzerland and the European Union (EU) on

trade in services is very narrow and concerns, with a

few exceptions, all service sectors. Switzerland is the EU after the U.S.

and ahead of Japan's second largest services trading partner. For

Switzerland, the EU is the largest trading partner in services. The

Convention of the European Free Trade Association (EFTA) establishes a

preferential relationship for services among Switzerland and its three

EFTA partners (Iceland, Liechtenstein, and Norway).

y Advertising, mostly entrusted to firms of specialists, uses as media

billboards, movie theaters, television, local transportation facilities,

railroads, newspapers, and magazines.




y Usual business hours are from 8 AM to noon and, except on Saturdays,

from 2 to 6 PM. Shops are normally open from 8 AM to 12:15 PM and

from 1:30 to 6:30 PM on weekdays but only to 4 PM on Saturdays; some

shops stay open at lunchtime but close on Monday mornings. Banks are

open to the public from 8:30 AM to 4:30 PM Monday±Friday. The five-day

workweek is becoming popular; the extent to which weekday working

hours are lengthened depends on whether offices are closed every

Saturday or only on alternate Saturdays.

b. Leading/ Top Business of Industries

y With accordance to Forbes¶ listing of top companies in Switzerland, it

showed that Swiss corporations are dominated by ³Union Bank of

Switzerland´ and ³Credit Suisse Group´. The two leading corporations are

both engaged in diversified financial services. The two corporations are

then followed by Nestle a corporation inclined mostly in production of

edible goods. They are then followed by Zurich Financial Services an

insurance company. Ranking at the fifth is Novartis Group which is a

drugs and biotechnology company. This comes to show that Switzerland

is a country heavily dependent on finance.

y The complete list of the top corporations is below:

Name of the company Industry Type

UBS Diversified financials

Credit Suisse Group Diversified financials




Nestlé Food, drink & tobacco

Zurich Financial Services Insurance

Novartis Group Drugs & biotechnology

Roche Group Drugs & biotechnology

Swiss Re Group Insurance

ABB Group Capital goods

Holcim Construction

Swiss Life Holding Insurance

Swisscom Telecommunications services

Xstrata Materials

Richemont Household & personal products

Syngenta Chemicals

Adecco Business services & supplies

STMicroelectronics Semiconductors

Bâloise Group Insurance

Swatch Group Household & personal products

Schindler Holding Capital goods

Kühne & Nagel Intl Transportation

Julius Baer Holding Diversified financials

Helvetia Patria Insurance

Synthes Health care equipment & services






oMedicinal, dental and pharmaceutical preparations

oJewellery (watches, rings)

oOther scientific, medical and hospital equipment

oOther household goods including clocks

oOther industrial machinery

o Industrial organic chemicals

oElectric apparatus and parts

oMachine tools, metal working, molding and rolling

o

Measuring, testing and control instruments

oCollectibles like antiques, artwork and stamps

y Fastest growing exports of Switzerland:

oCement, lime, sand and stone

oRailway transportation equipment

oSulfur and non-metallic minerals

o Industrial inorganic chemicals

oUnmanufactured steelmaking and ferroalloying materials

y Top imports of Switzerland

o Gold (non-monetary)

o Pharmaceutical preparations

o

Collectibles like antiques, artwork and stamps

o Jewellery

o Diamonds

o Other household goods




o Other precious metals

o Medicinal equipment

o Organic chemicals

o Civilian aircraft parts

y Fastest growing imports

o Military equipment including ammunition, artillery, guns, missiles and

tanks

o Other petroleum products

o Numismatic coins

o Steelmaking equipment

o Chemical fertilizers

d. Fiscal Trade and Economic Polices

y Switzerland has liberal trade and investment policies and a conservative

fiscal policy. The Swiss legal system is highly developed, commercial law

is well defined, and solid laws and policies protect investments. The

country is known for its high standard of banking and financial services.

y Fraudulent transfer rule has become a tool for creditor protection as

opposed to asset protection in Switzerland. Such rule has allowed

collectors to gain ownership of assets simply because there is proof that a

debtor transferred his assets in the hope of getting away from paying his

debts. In such instances, courts can allow reversal of transfer of assets

since they have set the terms and conditions in determining such

occurrences.




y Swiss privacy laws are not just limited to protection of a person¶s bank

accounts and asset protection, but it also applies to their private life

including their home, mails and telecommunications such as in cases of

wire tapping for purposes of gathering information about a person¶s

activities which could be used for possibly filing a criminal or civil case

against their person.

y Switzerland maintains close trade relations with the European Union (EU),

which has resulted in the creation of several trade agreements over the

last four decades, including:

y The Free Trade Agreement, 1972: It was primarily intended to create a

free trade zone to dismantle quotas and customs for industrial products.

y The Insurance Agreement, 1989: The act guaranteed insurance

companies from Switzerland the right to establish operations anywhere in

the EU without much legal restrictions.

y Additionally, Switzerland entered a bilateral agreement with the EU in

1999 to:

oFacilitate public procurement

oRemove technical trade barrier

oSupport agriculture

oEncourage free movement of labour

y The agreement was further modified in 2004 to cover greater economic

interests as well as extend cooperation in the fields of environment, culture

and internal security, asylum, the environment and culture. Countering




fraud in trade transactions within the respective territories is another focus

area of the Bilateral Agreement II between Switzerland and the EU.

y The reform of the Cartel Act strengthened the Swiss competition regime.

Nevertheless, competition remains somewhat limited in areas such as

agriculture, health care, and public transport, contributing to higher prices.

Further reforms, including the planned elimination of subsidies for basic

agricultural products, and increased competition through, inter alia,

reduction or elimination of tariffs, mainly for agricultural products, would

benefit consumers and improve resource allocation.

y Terrorism

o Through the United States-Swiss Joint Economic Commission (JEC),

Switzerland has passed strict legislation covering anti-terrorism financing

and the prevention of terrorist acts, marked by the implementation of

several anti-money laundering procedures and the seizure of al-

Qaeda accounts. Continued relationship with the United States through

the JEC has brought the Swiss economy into closer proximity with that of

the Western world, with mutualistic goals in terrorism prevention

providing the impetus.

y European Union

o Apart from agriculture, there are minimal economic and trade barriers

between the European Union and Switzerland. In the wake of the Swiss

voters' rejection of the European Economic Area Agreement in 1992, the

Swiss Government set its sights on negotiating bilateral economic




agreements with the EU. Four years of negotiations culminated

in Bilaterals, a cross-platform agreement covering seven sectors:

research, public procurement, technical barriers to trade, agriculture, civil

aviation, land transport, and the free movement of persons. Parliament

officially endorsed the Bilaterals in 1999 and it was approved by general

referendum in May 2000. The agreements, which were then ratified by

the European Parliament and the legislatures of its member states,

entered into force on June 1, 2002. The Swiss government has since

embarked on a second round of negotiations, called the Bilaterals II ,

which will further strengthen the two organisations' economic ties.

o Switzerland has since brought most of their practices into conformity with

European Union policies and norms in order to maximise the country's

international competitiveness. While most of the EU policies are not

contentious, police and judicial cooperation to international law

enforcement and the taxation of savings are controversial, mainly

because of possible side effects on bank secrecy.

o Swiss and EU finance ministers agreed in June 2003 that Swiss banks

would levy a withholding tax on EU citizens' savings income. The tax

would increase gradually to 35% by 2011, with 75% of the funds being

transferred to the EU. Recent estimates value EU capital inflows to

Switzerland to $8.3 billion.

y Institutional membership








by only 0.1%. The Swiss Economic Ministry had said that both the lack

of an upturn in the global economy -- particularly in the Euro zone -- and

the still rather firm Swiss franc would continue to hold back the Swiss

economy in 2003. Germany, which absorbs 20% of Swiss exports, was

expected to grow by no more than 0.1%-0.2% in 2003.

b. Critical Factors affecting its Foreign Business Relations and

International Finance

y Switzerland has been a very attractive country for investors. Mostly it is

because of their lax rules, but it is more than that. There are far more

important factors why Switzerland attract foreign business and here are

some of these reasons;

oLow average tariff rate

oFlexible labour market

oLow government intervention

oStable inflationary pressures

oEasy access to sources of credit

oRelatively corruption-free judicial system

c. Domestic Banking and its Operation

y Domestic Banking Industry and Names of Raking Major Players

o

Currently an estimated one-third of all funds held outside the country of

origin are kept in Switzerland. In 2001 Swiss banks

managed US$2.6 trillion. The following year they handled US$400

billion less which has been attributed to both a bear market and stricter




regulations on Swiss banking. By 2007 this figure has risen to roughly

6.7 trillion Swiss francs (US$6.4 trillion).

oThe Union Bank of Switzerland and Credit Suisse are the largest banks

in Switzerland. They are known as the ³Two Big Banks´ and they hold

up to 50% of the deposits in Switzerland.

y Central Banking

oThe ³Swiss National Bank´ is the central bank of Switzerland. It

functions are; issuing Swiss Franc banknotes and implementation of

monetary policy.

oThe Swiss National Bank is a corporation that is limited by shares, i.e.

owned by shareholders, and may be traded on a stock market. Under

special regulations. About 55% of its shares are owned by public

institutions like cantons and cantonal banks. The remaining shares are

traded on the stock market. They are mostly owned by private

individuals.

oThe SNB conducts its monetary policy by steering the interest rate

level in the Swiss franc money market. Four times a year ± in March,

June, September and December ± the SNB publishes a monetary

policy assessment in which it describes the current monetary situation,

presents the latest inflation forecast and announces its monetary policy

intentions for the coming quarter. At the same time, it publishes

a monetary policy reporting the Quarterly Bulletin.

oThe SNB manages the official gold reserves of Switzerland




y Universal/ Commercial Banking

oBanks in Switzerland is controlled and supervised by the agency

named; Swiss Financial Market Supervisory Authority which is

commonly known as FINMA. FINMA is endowed with supreme authority

over banks, insurance companies, stock exchanges, securities dealers

and collective investment schemes. It is responsible for combating

money laundering and, where necessary, conducts financial

restructuring and bankruptcy proceedings. In addition, it has

supervisory powers with respect to the disclosure of participations and

is the complaints body for decisions of the Takeover Board in the area

of public takeover bids for listed companies.

FINMA grants operating licences for companies and organisations

subject to its supervision, monitors the supervised institutions with

respect to their compliance with the requisite laws, ordinances,

directives and regulations, as well as with the conditions for the granting

of licences that must be complied with at all times. Where necessary

and to the extent permissible by law, FINMA imposes sanctions,

provides administrative assistance and regulates. In other words, it

participates in the amendment of laws and corresponding ordinances,

issues circulars and, where it is authorised to do so, its own ordinances.

FINMA is also responsible for ensuring that self-regulation is

acknowledged appropriately.

o According to studies conducted by the team of J. Maurice Zuffere




Observers of banking in Switzerland agree that the market is

presently going through an extremely positive phase, characterized

by sustainable growth, historically high revenues and an extremely

attractive profit/risk ratio.

The banking industry in Switzerland has been doing extremely well

since 2003. All banks, without exception, are currently in a

sometimes frantic growth phase and are vigorously recruiting. In

general, it can be said that the private banking market is now

showing signs of overheating that are typical of a bullish cycle or of

the peak of a long growth phase. The constantly increasing

recruitment campaigns, high remuneration levels and audacious

risk taking are evidence of this.

o And through the study conducted jointly by Accenture and the Swiss

Institute of Banking and Finance at the University of St.Gallen

The ongoing closure of loopholes in legislation on economic crime,

money laundering and the financing of terrorism incurs a growing

risk of overregulation with negative economic impacts.

The competitive advantages of the Swiss financial centre are

diminishing and banking secrecy will become less important: even if

banking secrecy is formally maintained, it will tend to be

undermined by the national legislation of third countries and the

image of Switzerland as a safe haven will consequently be

weakened.




y Domestic Banking Products and Services

oSome banks specialize in only a few banking services, whereas others

provide a wide range. As in most of continental Europe, individuals

usually buy and sell stocks and bonds through their banks. The Swiss

banks collectively have a long reputation for managing investment

portfolios for their clients, and providing other services such as estate

planning, wealth management, trust companies, etc., for individual

customers.

o

Some examples of services offered by banks in Switzerland is enlisted

below;

Accounts

Home financing

Retirement and insurance

Retirement and financial planning

Wealth Management Research

Asset Management

y Deposit and Investments

oThe most attractive factor for deposits in Switzerland is their secrecy

law. Switzerland has been known to protect their clients¶ identity even

offering numbered accounts. This statement can be proved by the

following excerpts from Article 47 (Art. 47) of the Swiss Banking Act,

Paragraph 1; ³Whoever divulges a secret entrusted to him or of which

he has become aware in his capacity as officer, employee, mandatory,




liquidator or commissioner of a bank, as representative of the Banking

Commission, officer or employee of a recognized auditing company and

whoever tries to induce others to violate professional secrecy, shall be

punished by imprisonment for not more than six months or by a fine of

not more than SFr. 50,000´ (nearly $40,000 USD).

oSwiss Banks even offer numbered bank accounts for increased privacy.

A numbered bank account is a type of bank account where the name of

the account holder is kept secret, and he identifies himself to the bank

by means of a code word known only by the account holder and a

restricted number of bank employees, thus providing the holder with a

degree of bank privacy in their financial transactions. Nowadays,

numbered bank accounts are not fully "anonymous", but they do serve

to provide the account holder with a greater degree of protection from

scrutiny while minimizing the exposure of the account holder's name in

public settings.

oThis caught the eye of people who wanted to evade taxes. And

eventually it was known as a safe haven for illegal moneys as well.

This dilemma was addressed by the Swiss government, which they

arrived to the solution of giving exemptions to concealing client

identities. The Swiss Government has given exemptions regarding

secrecy of identity. They shall not apply such law if a client or an

account is lawfully requested for investigation due to suspicious

circumstances. Especially in the case of numbered bank accounts,




where the identity of the client is fully anonymous. So In order to restrict

the use of numbered accounts for money laundering and other forms of

financial fraud, the Council of Europe mandated in 1980 that numbered

bank accounts be subject to international and domestic regulations

pertaining to the verification of the identities of account holders and their

activities. Under these regulations, banks which operate numbered

accounts may be required by a court order to reveal the owner's name

and financial details, and the identity of the holder or beneficial owner

must be examined for obvious fraudulent intentions at the start of the

banking relationship. Since July 1, 2005, Switzerland (as the largest

holder of European numbered bank accounts) has also charged a

withholding tax on all interest earned in the personal Swiss accounts

of European Union residents, a measure designed to satisfy EU tax

requirements while still preserving account holder anonymity.

y Loans and Credit

oAlthough renowned for its elite international banking clientele,

Switzerland is less well known for its large and powerful domestic

mortgage industry, which is the cornerstone of its superb banking

system.

oThis system has a number of striking features:

the highest per capita mortgage indebtedness in the world,

interest rates which almost never fluctuate more than two or three

percent, and




The highest withholding tax rate in any country.

o Mortgages in Switzerland are collateralized with the land upon which

the housing is located--the owner has the possibility of obtaining credit

because of the value of the land. As such, there is a sharing of

property rights pursuant to the mortgage agreement. The lender

acquires the right to use the land if the borrower is unable to meet

his/her mortgage payments.

y Other Products

o

Portfolio Management - The aim of Portfolio Management is to achieve

the maximum return from a portfolio which has been delegated to be

managed by a private banker. The manager has to balance the

parameters which define a good investment ie security, liquidity and

return.

o Investment Banking

Corporate Finance and advisory work.

Banking, for governments, institutions and companies.

Treasury dealing for corporate clients in currencies, with financial

engineering services to protect them from interest and exchange rate

fluctuations;

Investment management, either for corporate pension funds,

charities, private clients, either via direct investment for the more

wealthy or via unit and investment trusts. In the larger firms, the value

of funds under management runs into many billions of pounds;




Securities trading, in equities, bonds or derivatives and offering

broking and distribution facilities

y Fiscal Banking Policies

oThe Swiss National Bank controls the fiscal policy of Switzerland and it

conducts its monetary policy by steering the interest rate level in the

Swiss franc money market. To this end, it uses the three-month Libor.

Both the regular and the other monetary policy instruments are

described in the "Guidelines of the Swiss National Bank (SNB) on

Monetary Policy Instruments".

oThe Swiss National Bank (SNB) is maintaining its expansionary

monetary policy. It is leaving the target range for the three-month Libor

unchanged at 0.00±0.75%, and intends to keep the Libor within the

lower part of the target range at around 0.25%.

oMonetary policy assessment of 16 December 2010 The global

economic recovery is continuing. While the growth dynamic in emerging

economies is vigorous, the recovery in the industrialized economies

remains modest overall. Growth in Switzerland was robust in the third

quarter of 2010, but the weakening of exports, in particular, points to a

significant reduction in growth in the quarters ahead. The SNB expects

GDP to grow by some 1.5% in 2011, following growth of about 2.5% in

the current year.

oMonetary policy operates in an environment of heightened uncertainty.

Concerns about stability in the euro area have led to renewed financial




market tensions. Against this backdrop, the Swiss franc has again

appreciated. Should these tensions be exacerbated and put a strain on

economic developments in the euro area, this would also have a

detrimental effect on the Swiss economy. If a deflation threat emerges,

the SNB would take the measures necessary to ensure price stability.

oThe SNB¶s conditional inflation forecast for 2012 and 2013 is slightly

below the September forecast. This correction is the result, in particular,

of the less favorable economic outlook for Europe compared with the

last assessment. For 2011 it is marginally higher, due mainly to a higher

price for oil. Assuming an unchanged three-month Libor of 0.25%,

average inflation for 2010 is expected to amount to 0.7%, for 2011 to

0.4% and for 2012 to 1.0%. The conditional inflation forecast shows that

there is no threat to price stability in the short term. However, the rising

path in 2012 and 2013 shows that the current expansionary monetary

policy cannot be maintained over the entire forecast horizon without

compromising long-term price stability. The inflation forecast is still

associated with a very high level of uncertainty.

y Interest rates and pricing structure of loans and deposit

oHousehold borrowing in Switzerland has traditionally been dominated

by mortgage borrowing, while consumption borrowing plays a negligible

role. This role of mortgage borrowing in the domestic financial market

has not changed over the past decade. Mortgage loans still make up

90% of total household borrowing. Swiss households can choose from




a wide range of mortgage contracts. Banks traditionally offered

contracts with either fixed or variable interest rates. Over the past 10

years, lenders have begun to introduce new contract types which mix

the features of the two traditional products. Currently, variable contracts

are available with rates pegged to Libor and/or upper and lower caps.

Moreover, some lenders have introduced contracts with a portfolio of

fixed rate obligations with staggered maturity. The graph below shows

that the share of fixed interest contracts has increased strongly over the

past decade. In 1994, less than a quarter of all mortgages were based

on fixed interest rate contracts. Today, the share of fixed rate contracts

amounts to more than two thirds of total mortgage loans. Fixed interest

contracts are available for a term of two to 10 years, and borrowers who

terminate fixed interest rate contracts in advance must pay a

prepayment penalty. Owner-occupiers seeking mortgage loans must

provide at least 20% equity participation, while minimal equity for buy-

to-let borrowers and holiday home buyers is even higher. Interest-only

loans are available for up to 65% of the property value. Borrowing in

excess of this threshold is subject to amortisation. Lenders typically

demand yearly repayments of 1% of the initial loan size, so that

borrowing in excess of the 65% threshold is amortised within 15 years.

Given lenders¶ conservative lending practices, the loan-to-value ratio

(LTV) is low in Switzerland. As the graph below shows, the




overwhelming majority of mortgages display a Loan to Value ratio of

less than 2/3.

o The Deposit interest rate (%) in Switzerland was reported at 0.16 in

2008, according to the World Bank. Deposit interest rate is the rate

paid by commercial or similar banks for demand, time, or savings

deposits. Switzerland's economy has low unemployment, a highly

skilled labor force, and a per capita GDP among the highest in the

world. Its policy of long-term monetary security and bank secrecy has

made Switzerland a safe haven for investors, creating an economy

that is increasingly dependent on a steady tide of foreign investment.

Because of the country's small size and high labor specialization,

industry and trade are the keys to Switzerland's economic livelihood.




o Current deposit interest rates offered by domestic Swiss bank ranged

from 0.25% for EUR currency and 0.125% for Swiss Franc currency

o Current loan interest rates offered by domestic banks in Switzerland

ranges from 2.5% to 2.95%

y Sound Banking practices and procedure

oSwiss banks are known for secrecy and protecting their clients.

However, the banking laws do not allow individuals to use the Swiss

banks for criminal acts or tax fraud. In order to operate in Switzerland a

bank must obtain a license from the Banking Commission of the Swiss

Federal Government. Individuals who are not residents of Switzerland

may open a Swiss account if they meet the conditions of the bank. Each

bank is different, but conditions may include a minimum balance. In

addition, the individual must comply with his own country's laws and

regulations about foreign banking.

oClient Confidentiality






information to the individual's home country to ensure that tax laws

are properly enforced. This means that the country does not have to

file criminal charges to obtain information. Using a Swiss bank to

commit tax fraud or evasion is punishable in both the individual's

home country and in Switzerland.

Banks in most countries are prohibited from divulging information

about their clients, and the provisions of the Swiss law follow the

same lines. Swiss law is especially strict on any breach of

confidentiality, whether in banking or in other commerce. The

banking act adds a special section (introduced in 1934, in order to

protect accounts of Germans, especially German Jews, from Nazi

confiscation) which makes it a criminal offense, with the possibility of

an individual going to jail, for the bank or its employee or agent to

improperly divulge any confidential information. These portions of the

banking law have been interpreted, both in practice and by the

courts, to make it a serious offense to divulge any information about

a bank customer to any third party, including official requests of

foreign governments, unless very specific criteria have been met.

Swiss bank secrecy is reinforced by a constant awareness of the

seriousness of the bank's obligation to maintain confidentiality,

starting with bank employees having to sign the secrecy portion of

the banking act as a condition of employment. Both individuals and

the banks are prosecuted if a lapse is discovered; this keeps




awareness of bank secrecy high and lapses rare. While this culture of

absolute discretion is integral to the Swiss banks, the branch offices

outside of Switzerland must operate according to the laws of

countries in which they are located, which may not provide so much

protection.

The perception that Swiss bank secrecy provides a means of hiding

criminal activity is, and has been for many years now, largely myth.

Banking secrecy is not a protection from criminal investigations, and

Swiss legal authorities routinely cooperate with their foreign

counterparts in such matters. The general rule is that an activity

which both the foreign government and Switzerland consider a crime

will result in cooperation, including Swiss authorities examining bank

account transactions.

The perception that Swiss bank secrecy can be used to hide criminal

activity is due to many factors. Partly it is an historical relic; prior to

the 1980s, there were a number of financial activities which

Switzerland did not consider criminal, but which many other countries

did. Today, Switzerland's financial legislation is quite similar to that of

most other OECD countries, and financial crimes in one jurisdiction

are likely to be considered criminal in Switzerland. Partly it is due to

the difficulty having enough information to make a request; "fishing

expeditions" cannot be done. This is quite similar to both internal and

international practice in most countries, but can be used as a




convenient excuse by frustrated criminal investigators. And partly it is

due to specific differences in criminal law; in particular, the legal

definition of what constitutes a tax crime varies considerably from

country to country.

y Electronic Banking

oThe common features fall broadly into several categories

Transactional (e.g., performing a financial transaction such as an

account to account transfer, paying a bill, wire transfer... and

applications... apply for a loan, new account, etc.)

Electronic bill presentment and payment ± EBPP

Funds transfer between a customer's own checking and savings

accounts, or to another customer's account

Investment purchase or sale loan applications and transactions, such

as repayments

Non-transactional (e.g., online statements, check links, co browsing,

chat)

Financial Institution Administration - features allowing the financial

institution to manage the online experience of their end users

ASP/Hosting Administration - features allowing the hosting company

to administer the solution across financial institutions

o Features commonly unique to business banking include

Support of multiple users having varying levels of authority

Transaction approval process




Wire transfer

o Features commonly unique to Internet banking include

Personal financial management support, such as importing data into

a personal finance program such as Quicken, Microsoft Money or

TurboTax. Some online banking platforms support account

aggregation to allow the customers to monitor all of their accounts in

one place whether they are with their main bank or with other

institutions

o Electronic payments - Swiss banks, as well as the post office (which

handles some financial transactions) use an electronic payments

system known as Swiss Interbank Clearing (SIC). The system is

supervised by the Swiss National Bank and is operated via a joint

venture. SIC handled over 250 million transactions in 2005, with a

turnover value of 41 trillion Swiss francs.

y Critical Factors and Issues affecting its local and foreign banking

operations

oSwiss National Bank (SNB)

The Swiss Central Bank has maximum independence in setting

monetary and exchange rate policy. Unlike most Central banks, the

SNB does not use a specific money market rate to guide monetary

conditions. Until fall 1999, the Bank used foreign exchange swaps

and repurchase agreements as the main instruments to impact

money supply and interest rates.




Liquidity management has characteristically affected the Swiss franc

due to the use of Foreign Exchange Swaps. If the Bank wishes to

inject liquidity, it buys foreign currency (primarily dollars) against

Swiss francs, thereby pressuring the currency.

As of December 1999, the Bank shifted from a monetarist approach

(targeting money supply) to an inflation-based approach namely; a

2.00% annual inflation rate. The Bank will use a range in the 3-month

London Interbank Offer Rate (LIBOR) to stir monetary policy in order

to achieve the 2.00% inflation target. SNB officials can affect the

Swiss Franc by making occasional remarks on liquidity, money

supply or the currency itself.

o Interest Rates

The SNB uses the discount rate to announce changes in monetary

policy. These changes have a significant impact on the currency. The

discount rate, however, is rarely used at the Bank¶s discount facility.

o 3-month Euro ± Swiss franc Deposits

Eurodollar deposits are bank accounts deposited in a country other

than the country of the currency. Ex: Japanese Yen accounts

deposited outside Japan are called "Euro yen". Similarly, euro-

denominated accounts deposited outside the Euro zone are called

"Euro Euros". The interest rate on 3-month Swiss-denominated

deposits held in banks outside Switzerland. It serves as a valuable

benchmark for determining interest rate differentials to help estimate




exchange rates. Using a theoretical example on USD/CHF, the

greater the interest rate differential in favor of the Eurodollar against

the euro - swiss deposit, the more likely USD/CHF is to rise.

Sometimes, this relation does not hold due to the confluence of other

factors.

o Swiss franc¶s Changing Role as a Safe-Haven Status

The Swiss franc has historically enjoyed an advantageous role as a

"safe" asset due to: SNB independence in preserving monetary

stability; secrecy of the nation¶s banking system; and the neutrality of

Switzerland¶s political position. Moreover, the SNB¶s relatively hefty

gold reserves had largely contributed to the franc¶s solidity. Even as

the currency¶s international role starts to wane in the mid-1990s

(partly due to the emergence of the dollar and fall in gold), the Swiss

franc remains a valuable alternative in Forex markets.

o Economic Data

The most important economic data items released in Switzerland are:

M3 (broadest measure of money supply), CPI, unemployment,

balance of payments, GDP and industrial production.

o Cross Rate Effect

USD/CHF is sometimes impacted by movements in cross exchange

rates (non-dollar exchange rates), such as EUR/CHF or GBP/CHF.

To illustrate: A rise in GBP/CHF that is triggered by an interest rate




hike in the UK could extend franc¶s weakness against other

currencies, including the dollar.

o 3-month Euro - swiss Futures Contract

The contract reflects markets expectations on 3-month euro Swiss

deposits into the future. The difference between futures contracts on

the 3-month Eurodollar and euro - swiss deposits is an essential

variable in determining USD/CHF expectations.

o Other factors

Due to the proximity of the Swiss economy to the Euro zone

(specifically Germany); the Swiss franc has exhibited a considerably

positive correlation with the euro. The relationship is most prominent

in the highly negative correlation between USD/CHF and EUR/USD.

To illustrate, a sudden move in EUR/USD (triggered by a major

fundamental factor) is most likely to cause an equally sharp move in

USD/CHF in the opposite direction. The relationship between these

two currency pairs is one the strongest in currency markets.

y Others

oCantonal Banks - are Swiss governmental-owned commercial banks,

that use the canton that they are based in as guarantee for the assets

held there. However, currently they are in process of being partially

privatised. The cantonal banks are organised and regulated by

the Association of Swiss Cantonal Banks, with its office in Basel.




There are 24 cantonal banks, one in each canton of the country, except

in the cantons of Appenzell Ausserrhoden, who sold its bank to banking

rival UBS, and Solothurn, who privatised its bank in 1995 after a

scandal. Each bank uses a distinctive motif as the logo with a cantonal

colour on white used as the colours of the bank, e.g. light blue

for Zurcher Kantonalbank (Zurich Cantonal Bank). Despite what they

seem to appear, cantonal banks are not little private banks, as two of

them; Zurcher Kantonalbank and Banque Cantonale Vaudoise are the

third and fourth biggest banks in Switzerland (after UBS AG and Credit

Suisse).

As a group, le Grouped des Banques Cantonales amounts for about

30% of the banking sector in Switzerland.




V. Synthesis (Executive Summary of the Report)




VI. Personal Insights and Reaction on the Study



VIII. Appendices

Documents

Individual Assignment Switzerland