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Swiss economy relies on healthy banking sector

Basel, 2012/08/20 00:00:00 GMT+2 A new study by the Swiss Bankers Association shows the key role Swiss banks continue to play in the overall economy. However, more stringent regulatory requirements and falling margins are putting the banking sector under pressure. Since the banking sector is inextricably linked to other sectors, any measures to reduce costs also have repercussions on other economic areas.

Based on calculations performed by economic research institute BAKBASEL, in the study published today the Swiss Bankers Association (SBA) analyses the importance of banks for the Swiss economy. According to the study, the average annual growth rate of the banking sector was 50% higher than the growth rate of the overall economy over the last 20 years. The banking sector has thus made the largest contribution to Swiss economic growth. However, the share of the banking sector in Swiss gross domestic product (GDP) has declined since the outbreak of the financial crisis, and in the coming years, it will slow down to the pace of overall economic growth. Higher growth is dependent on improved framework conditions. The share of the entire financial sector (banks, insurance and other financial service providers) will likely amount to 11.5% of gross value added by 2020. Claude-Alain Margelisch, CEO of the SBA, explains: "We need to understand that the financial centre is of crucial importance to the Swiss economy. Should framework conditions evolve unfavourably, everyone will feel the impact of this in the form of fewer jobs, lower tax revenue and more expensive banking services, as the study impressively proves."

Overall economic influences of the banking sector

A well-functioning financial system is the basis for every booming economy as it provides the population and companies with financial services. Banks in Switzerland are efficient in providing these services: the cost-income ratio fell from 82.4% to 68.3% within the space of three years to end-2011. This efficiency, combined with traditionally low interest rates, means that companies in Switzerland are able to obtain cost-effective financing. At 1.5%, banks' modified net interest margin, which relates net interest income to credit volume, was in most cases significantly lower than that in comparable countries in 2010. The banking sector remains an important taxpayer, with banks contributing CHF 11.2 billion to the state in direct and indirect taxes in 2011. In addition, the banking sector generated value added of CHF 32.4 billion in 2011 and also supports the Swiss economy indirectly through demand for input in the form of goods and services. Furthermore, bank employees constitute an important consumer group, generating indirect effects amounting to CHF 17 billion which - together with direct value added effects - equate to a share of gross value added of 9.3%.

Employment effects

In spite of all the turbulence of the last decade, the banking sector's share of employment in the overall economy has remained stable. Around 146,000 people were employed in the banking sector at end-2011. Alongside this, indirect effects lead to an additional 168,000 jobs in other sectors. The total employment effect of the Swiss banking sector thus amounts to 313,000 people, which is equivalent to around 6.6% of the total Swiss workforce. As the study shows, the strong interconnectivity between banks and other economic sectors creates 115 jobs in other areas for every 100 bank employees. By the same token, should framework conditions deteriorate, for each banking sector job that is cut more than one is lost in other sectors.

Framework conditions play crucial role

Falling margins and declining revenue, combined with costly capital adequacy regulations and increasingly complex legal requirements at home and abroad, have to be offset by developping new business areas. Claude-Alain Margelisch says: "The call for increasingly stringent bank regulation misinterprets the difficult situation currently facing banks. Banks need sensible and appropriate regulations to foster an internationally competitive financial centre. It is in Switzerland's best interests to maintain its powerful financial centre. However, this can only be achieved with the support of politics and authorities. Banks can only continue to offer their services at favourable rates and in the accustomed level of quality and thus make the necessary contribution to economic output if conditions remain conducive to business."