The serious repercussions of the SNB decisions for Swiss banks
March 02, 2015

The serious repercussions of the SNB decisions for Swiss banks

The dust has settled since the surprising SNB decision in January. Martin Hess takes stock of the situation and finds that the repercussions are not exactly edifying for the banking centre.

Almost two months ago, the Governing Board of the Swiss National Bank decided to take back its independence by abolishing the euro floor. Instead of weakening the Swiss franc through the purchase of foreign currency, this is now to be achieved by means of negative interest rates for the commercial banks.

Banks carry the burden

The SNB’s decision may be understandable in light of the international monetary conditions. But once again, the burden has been placed on business. With the combination of negative interest rates and a strong Swiss franc, the burden weighs twice as heavily on the banking sector. Now of all times, in a period of regulation-driven cost increases, the SNB has decided to further put the brakes on profitability. Now, at a time when financial stability appears to crown all other objectives for the bureaucracy, the holding of secure liquidity is under strain.

Declining margins due to negative interest rates

According to definition, banks that exceed the SNB’s exemption threshold are those that are directly affected. Their interest margins decrease due to a competitive environment that does not allow them to pass the negative rates on to individual clients. As a result of negative interest rates, the banks are also subject to high costs for cash collateral on the SIX or cash holdings in the interbank sector.

The SNB’s decision goes beyond the direct negative interest rates and results in a significantly more negative interest rate environment across the full range of maturities. As a result of this decision, the costs of interest rate hedging in particular have increased. This to such an extent, that interest rates for fixed rate mortgages had to be left at the same levels as before the minimum euro exchange rate was lifted. In terms of investment, high-grade bonds are only generating positive yields for longer maturities.

Repercussions of the overvalued franc

Due to the symbiosis between the financial sector and the real economy, a slowing down in business is felt directly by the banks. The hospitality industry, the engineering, electrical and metal industry (MEM), as well as the retail business are likely to be most affected by the overvalued franc. Some downsizing in investments have already been announced and will have a direct effect on the corporate clients business.

Similar to the MEM sector, a number of banks also have a significantly higher Swiss franc ratio on the cost side rather than the revenue side. It is often mistakenly forgotten that such banks are part of the traditional export sector. For private banking in particular, which is internationally-oriented by nature, lower foreign currency valuations result in noticeably lower assets under management and therefore lower revenues. This can only be offset to a limited extent by amendments to the fees and conditions.

So what now?

The additional pressure on costs and margins is taking place during a period in which:

- banks with international operations are already creating far more jobs abroad than in Switzerland,
- the costs of regulation have risen to unprecedented heights,
- the rise in cross-border assets managed by foreign competitors is several times greater than the rise in the Swiss banking centre.

Action must be taken quickly. Following the decisive measures taken to ensure financial stability, the time has finally come to also introduce drastic measures to ensure Switzerland’s continued ability to compete on an international level. These measures include a lean administrative, cost-effective implementation of current proposed legislation, a favourable tax framework and the possibility to service clients without restrictions, both in neighbouring countries and in global markets.

Implementing Brunetti

The Brunetti Group of Experts fired the starting shot. Now it is up to the political decision-makers to take over responsibility for ensuring jobs. The sometimes absurd political demands made in recent times demonstrate that to the detriment of our country, a number of politicians refuse to assume this responsibility.