August 2012
The importance of the Swiss banking sector An economic perspective
The importance of the Swiss banking sector – SBA – August 2012 1
The importance of the Swiss banking sector
Executive Summary
5
1
The banking sector as part of the economy
7
2
Direct economic importance of the banking sector
9
2.1
Value added
9
2.2 Employment
12
2.3 Taxes
13
3
The importance of the banking sector for other areas
14
3.1
Value added
15
3.2 Employment
16
4 Conclusion
18
Executive summary
The Swiss banking sector has seen some extremely dynamic changes to economic and regulatory conditions in recent years. Banks as well as the authorities are confronting the challenges this raises each and every day – a task made all the more difficult by the fraught global economic and political environment. This, in turn, puts the public spotlight on the banking sector: not only because it is so important to the Swiss economy, but also because it occupies a leading international position in a variety of business areas. This study provides an overview of the economic importance of the Swiss banking sector and its significance for other economic sectors. The analyses are based on calculations performed by BAKBASEL, which were commissioned by the Swiss Bankers Association (SBA). According to BAKBASEL‘s findings, in the past 20 years the banking sector made the largest contribution to Swiss economic growth of all sectors of the economy. At 6.1% of gross value added in 2011, the share of gross value added of banks is slightly down on previous years. However, the benefit they create for other economic sectors remains high, since a thriving banking sector is an important consumer of goods and services. This interconnectivity means that for every 100 bank employees, another 115 jobs are created in other sectors by indirect effects. Alongside the CHF 32.4 billion generated by the Swiss banking sector, the indirect effects of this contribute an additional CHF 17 billion of value added, leading to a total 9.3% share of Swiss overall economy. In the years leading up to 2020, the value added created by the banking sector should grow at 1.9%, roughly the same rate as the economy as a whole. Growth could dip in 2012 and 2013 due to the adaptions to new framework conditions, before picking up little by little as the end of the forecast horizon approaches. Accordingly, the banking sector‘s share of gross value added should be almost 6%. The share of the entire financial sector (banks, insurance and other financial service providers) will likely amount to 11.5% by 2020. This level can be achieved despite a slight dip in employment by increasing efficiency in service provision.
The importance of the Swiss banking sector – SBA – August 2012 5
As Figure 0-1 shows, employment is likely to fall slightly as of the current year and then remain broadly constant, while gross value added will increase moderately.
0-1 Gross value added and employment in the banking sector CHF bn
employees
Gross value added
2020
2020
2019
2018
2017
2016
2015
2014
2013
2012
100 000 2011
0 2010
105 000 2009
110 000
5 2008
115 000
10
2007
120 000
15
2006
20
2005
125 000
2004
130 000
25
2003
135 000
30
2002
140 000
35
2001
145 000
40
2000
45
Employment
Note: The dashed line indicates the forecast trend. Source: BAKBASEL
Various analyses of late have shown that margins in banking will continue to fall in the future. In order to compensate for this, the framework conditions need to be improved such that additional services can be offered from Switzerland. Otherwise, more extensive headcount adjustments would appear unavoidable. The figures show that a decline in the business activity at banks would have painful consequences for other areas of the economy. Banks and authorities are therefore called upon to develop promising strategies and to create optimal framework conditions in the interests of the overall economy.
6 The importance of
the Swiss banking sector – SBA – August 2012
1 The banking sector as part of the economy
Banking services are vital for economic development
A well-functioning financial system underpins every prospering economy. It assumes the important role of providing financial services to businesses and the population as a whole. In addition to ensuring money supply, this also includes asset management, bank advisory services and transaction processing for large companies.
Favourable financing conditions for business
Alongside the generous supply of credit – which experienced no restrictions during the last financial crisis – Switzerland as a business location benefits from internationally favourable financing conditions. This is due not only to generally low interest rates, but also to banks’ low margins. Empirical studies show that an ample supply of credit has a long-term impact on economic development.
SMEs are the largest consumers of credit
For many companies in Switzerland, bank loans remain the most important form of finan cing. Small and medium-sized enterprises (SMEs) are especially reliant on this type of financing, since they are too small to access the capital markets. Loans to SMEs account for almost 85% of all business loans in Switzerland (based on volume). At end-2011, this amounted to CHF 260 billion (of a total of CHF 307 billion in outstanding loans). Of this amount, CHF 187 billion (or roughly 70%) of business loans were issued to companies with no more than nine employees. However, according to a survey by SECO, only around onethird of SMEs has a bank loan.
Multinational companies benefit from banking services in Switzerland
Alongside these important functions for SMEs, the Swiss banking sector also offers services that cater for the special financing requirements of multinational companies. Multinationals use services in the areas of payments, foreign exchange, securities and institutional asset management and are important clients for the credit business, export financing, and restructurings and takeovers. What is more, many multinational groups process their treasury management via banks in Switzerland. Syndicated loans are an important source of funding for large companies.
Banks are drivers of growth
The banking sector has seen above-average growth in recent decades, and its high value added has made it the growth driver of the Swiss economy. Over the last 20 years, however, the banking sector has grown significantly faster than the overall economy, at an annual increase of 2.4%. During the global financial crisis in 2008 and 2009, however, the Swiss banking sector‘s real gross value added fell by 10%. This negative development during the crisis years caused value added to decline by an average of 0.3 percentage points per year from 2000 to 2011.
The importance of the Swiss banking sector – SBA – August 2012 7
1-1 Contribution of the financial sector to real GDP growth in Switzerland Average growth 2000 – 2011 0.4%
12% 10%
0.2%
8%
Construction and real estate
Other financial service providers
6%
Liberalised sectors
4%
Ø Contribution to growth 2000 –2011
Retail
Banks 1990 –2011
2%
Insurers
Industry
0%
Business services
-2%
Financial sector
Political sector
Banks 2000–2011
-4% 0%
5%
10%
15%
20%
25%
Share of total economy 2011 Source: BAKBASEL
Improvement necessary in framework conditions
8 The importance of
In order to successfully respond to the ongoing fall in margins in the banking sector, the framework conditions need to be improved such that additional services can be offered from Switzerland, which will have a positive knock-on effect on business volumes. The quality of the available workforce and capacity for innovation will be decisive factors here over the long term, both for business and for the banking sector. The resources of both economic sectors – banking and real economy – should therefore be pooled and not played off against one another. What needs promoting is not real economy or banking, but Switzerland as a business location and a centre of innovation and research. This will enable Switzerland to maintain its top position among international locations over the long term.
the Swiss banking sector – SBA – August 2012
2 Direct economic importance of the banking sector
2.1 Value added Banks are key driver of economy
By ensuring the supply of money and providing services such as wealth management, consulting and transaction processing for large companies, banks create key added value for the economy during their production process. Added value is the difference between value of production and the inputs used to produce goods and services. Gross value added measures the amount that is available for salaries and wages, financial capital, profit and interest on loans excluding gross margins of banks and after write-downs on physical capital. Over an extended period, the Swiss banking sector has grown significantly above the sector average. Between 1990 and 2011, real value added increased by an average of 2.4% per year, compared with an annual growth rate of around 1.6% for the overall economy.
Correction due to the financial crisis
During the global financial crisis in 2008 and 2009, the Swiss banking sector‘s real value added fell by 10%. In a time of rapid global economic change, more stringent regulatory conditions and protectionist tendencies have amplified the challenges facing banks on a broad front, while rising risk premiums and falling margins have hampered their earnings power. The adverse developments triggered since the crisis broke out in 2007 caused value added in the banking sector to decline by an average of 0.3 percentage points per year from 2000 to 2011. What is striking here is the rapid growth of other financial service providers during this period, which today account for around 10% of the financial sector. These include independent asset managers or stock exchanges and securities dealers. The reasons for this significant growth lie in the settling of new hedge funds, outsourced insurance activities and higher share prices.
The importance of the Swiss banking sector – SBA – August 2012 9
2-1 Real gross value added in the financial sector Average growth 2000 –2011
9.7%
10% 8% 6% 4%
1.7%
2% 0.3%
0% -0.3%
-0.3%
Banks
Insurers
-2% Financial sector
Other financial service providers
Overall economy
Source: BAKBASEL
Development of banking sector abroad is more dynamic
With the value added of its banks stagnating, Switzerland has lagged behind its competitor locations in Europe and overseas over the last decade (see Figure 2-2). Note, however, that most other financial centres enjoy a massive level of state involvement, which puts the modest development of Swiss banks during this economically difficult observation period in context.
2-2 Real gross value added in the financial sector compared with international peers Uniform currency basis (adjusted for purchasing power parity) 2000–2011 7% 6% 5% 4% 3% 2% 1% 0%
Frankfurt
Germany
Paris
France
Milan
Italy
Spain
Zurich
Switzerland
Sweden
Netherlands
New York
US
London
United Kingdom
Luxembourg
Belgium
Ireland
-1%
Source: BAKBASEL
Banks in Switzerland have made an active effort to reduce the pressure on costs and margins in their various business areas. In spite of the challenging international environment, this led to profits of around CHF 13.5 billion in 2011, almost equalling the prior-year result. The banking sector generated gross value added of CHF 32.4 billion, equivalent to 6.1% of Switzerland‘s gross value added. Figure 2-3 shows that this share has gradually fallen since its 2000 level of 8.9%.
10 The importance of
the Swiss banking sector – SBA – August 2012
2-3 Share of the overall economy’s nominal gross value added Banking sector‘s share of gross value added is 6.1%
15%
12%
11.3%
13.1%
11.4%
0.4% 0.6%
3.8% 9%
0.7%
12.2% 0.8%
3.2%
3.7%
4.1%
7.5%
7.1%
7.3%
12.1% 0.8% 4.1%
11.9%
12.7%
13.6%
1.0%
0.9%
12.1%
1.2%
11.6%
11.5%
1.2%
1.2%
4.4%
4.0%
4.2%
6.4%
6.4%
6.1%
1.2%
4.4%
3.9%
3.4%
12.6%
1.2%
4.4%
6% 8.9% 3%
7.2%
7.8%
7.6%
8.0%
6.9%
0% 2000
2001
Financial sector
2002
2003 Banks
2004 Insurers
2005
2006
2007
2008
2009
2010
2011
Other financial service providers
Source: BAKBASEL
Including insurers, the financial sector as a whole contributed 11.5% to gross value added in 2011, on a par with its value added ten years ago. Figure 2-3 clearly shows the two boom periods in the finance industry before the dotcom bubble burst in 2001 and the financial crisis in 2008. In future, the banking sector will grow at the same rate as the overall economy
In future, the banking sector‘s value added will grow at a similar rate to the overall economy, at 1.9% per year. After a sluggish start given the rather unfavourable near-term environment, growth will pick up once the sector has realigned itself to the expected framework conditions. Based on this forecast growth, the banking sector‘s contribution of value added to the overall economy should remain at around 6% over the next ten years. 2-4 Forecast real gross value added in the financial sector Average growth 2012–2020 1.9%
2.0%
1.9% 1.8%
1.8%
Financial sector
Overall economy
1.6% 1.5%
1%
0.5%
0% Banks
Insurers
Other financial service providers
Source: BAKBASEL
The sector‘s forecast development – stagnation and restructuring in the next few years, then higher growth – will see banks’ share of gross value added level out at 5.7% from 2013 to 2015 before climbing back to today’s level.
The importance of the Swiss banking sector – SBA – August 2012 11
2.2 Employment Around 146,000 people (corresponding to 108,100 full time equivalents) were employed in the banking sector in 2011, compared with 240,000 people (corresponding to 195,800 full time equivalents) in the financial sector as a whole. This is equivalent to shares of 3.1% and 5.1% of the overall economy. The discrepancy between the respective shares of wealth creation and employment of the overall economy is due to two factors: on the one hand, the banking sector has significantly fewer part-time positions than other sectors, which is not taken into account in the employment share figures. On the other hand, the sector is more productive than other industries. If we take full time equivalent employment as a basis, the share of the overall economy comes to 3.1%, respectively 5.7%. 2-5 Share of employment in the overall economy 6% 5% 4%
4.9% 0.4%
5.1% 0.5%
1.5%
1.5%
3.0%
3.1%
5.3%
5.2%
5.2%
5.2%
5.1%
5.2%
5.2%
5.3%
0.6%
0.6%
0.6%
0.7%
0.7%
0.7%
0.7%
0.8%
1.4%
1.4%
1.4%
1.4%
1.3%
1.3%
1.3%
3.3%
3.2%
3.1%
3.1%
3.1%
3.2%
3.2%
5.1%
5.1%
0.8%
0.8%
1.3%
1.2%
1.2%
3.2%
3.1%
3.1%
3% 2% 1% 0% 2000
2001
2002
Financial sector
2003 Banks
2004 Insurers
2005
2006
2007
2008
2009
2010
2011
Other financial service providers
Source: BAKBASEL
Stable employment
In the last decade, the workforce has increased in line with employment in the overall economy (see Figure 2-5). In this respect, the banking sector is more stable with regard to employment than value added. In terms of hours worked, however, the financial sector has significantly higher growth (18%) than the industry average for the overall economy (13%).
Efforts to reduce personnel expenses …
The efforts made in Switzerland to reduce the pressure on costs and margins are already bearing their first fruits from an economic perspective. In spite of increased regulatory requirements, the cost/income ratio – personnel and administrative expenses to total income – fell from 82.4% in 2008 to 68.3% by end-2011. The cost reductions did not have any impact on employment figures, which were largely unchanged versus 2010. This suggests that savings in personnel expenses were primarily made in remuneration.
… will be continued going forward
Due to the enhanced focus on efficiency gains and given the moderate growth forecast for the banking sector, employment is expected to decline by 0.3% each year until 2020. These cuts will be driven primarily by measures to exploit economies of scale, for example by centralising and automating process or outsourcing them to more cost-effective locations. This is attribuable not least to the results of increased regulatory requirements banks have to cope with. Since insurers and the other areas of the financial sector are also likely to create only a few jobs, we assume that barely any additional jobs will be created in the financial sector as a whole, with an expected annual decline of 0.1% until 2020.
12 The importance of
the Swiss banking sector – SBA – August 2012
2-6 Forecast for employment in the financial sector Average growth 2012–2020 0.6%
0.4%
0.3% 0.2%
0.2%
0.0%
0.5% -0.1%
-0.2%
-0.4%
-0.3% Banks
Insurers
Other financial service providers
Financial sector
Overall economy
Source: BAKBASEL
2.3
Taxes
Tax revenue from the banking sector amounted to CHF 11.2 billion in 2011
The provision of banking services brings the state substantial tax revenue. The figure for 2011 was CHF 11.2 billion, with CHF 5.2 billion or 46% of this generated by direct taxes. These included income tax on dividends, income tax and capital tax for companies, and income tax for employees, which at CHF 3.4 billion accounts for the lion’s share of tax receipts. The amount received by the state through indirect taxes was even higher at CHF 5.9 billion or 53%. This figure comprises value added tax, Swiss anticipatory tax and stamp duty. After factoring in EU tax retention, state receipts totalled CHF 11.2 billion – almost 10% of the average tax revenue of the federal government, the cantons and the municipalities combined.
2-7 Tax revenue generated by activities of the banking sector, CHF bn, 2011 EU tax retention 0.1 Value added tax 1.4
Stamp Duty 1.8
Indirec
Swiss anticipatory tax 2.7
es t tax rec Di
t ta xe s
Income and capital taxes 1.3
Income tax for employees 3.4
Income taxes on dividends 0.5
Source: SBA, FDF, FTA
The tax revenue generated by the banking sector which is available for public remits is extremely high relative to its size.
The importance of the Swiss banking sector – SBA – August 2012 13
3 The importance of the banking sector for other areas
Economic effects greater than ascribed in terms of value added
The Swiss banking sector, in making a major contribution to overall economic performance, is a key driver of wealth. However, its vital role is not reflected solely in value added and employment levels: the real economic importance of the banking sector is much greater, since the other sectors of the economy also benefit from the effects of the supply and demand it creates in terms of value added and employment. However, these effects are not reflected in the official statistics.
Banking sector is a network sector
On the supply side, a well-functioning domestic banking system creates value added for all economic players, which gives it the character of a network sector. The main importance of network sectors is that they generate additional benefit for other economic players through the infrastructure they provide. The better this infrastructure is set up, the more competitive the players are that use it. A well-functioning banking sector is just as important a part of a country’s infrastructure as its transportation network or power grid.
3-1 Capital costs compared with international peers Modified net interest margin 6.8%
7% 6% 5% 4%
3.8% 2.8% 2.8%
3%
2.3%
2%
1.8%
1.6% 1.7%
1.7%
2.0% 1.5%
1.5%
1% 0% Germany
Netherlands 2000–2010
2010
Sweden 2000–2010
United Kingdom
Austria
Switzerland
2010
Note: modified net interest margin = net interest income/credit volume Source: National central banks, OECD
Service offering benefits other sectors
14 The importance of
Figure 3-1 shows that Swiss banks had a lower modified net interest margin in 2010 than their international counterparts. Furthermore, this margin has fallen more sharply in Switzerland than in its peer countries versus the average of the last ten years. This low margin can be explained by the efficiency of service provision and the high level of competition. Combined with Switzerland’s already low interest rates, it gives companies a cost effective way of obtaining funding. The locational advantage enjoyed by Switzerland over its international peers, which over the decades has become a major driver of the overall economy, has even increased in recent years.
the Swiss banking sector – SBA – August 2012
Companies benefit from demand-side effects, such as …
On the demand side, too, the banking sector‘s economic activity has a positive impact on the value added, employment and income of companies in other sectors as well. These companies act as suppliers and fulfil demand from the banking sector and companies upstream of the entire value-added process. Naturally, supplier sectors also procure goods and services from other companies, which creates added value there as well.
… demand for inputs and …
According to the production account of the Swiss Federal Office for Statistics, in 2010 banks bought goods and services worth CHF 26.5 billion. More than half of the inputs relate to payment streams within the sector, i.e. to input relationships between various companies within the financial sector. The remaining inputs originate from other sectors, for example, consultancy firms and IT service providers. A portion of the gross value added created here comes from demand for services from the financial sector. But other inputs, such as for building services used, also create added value further down the line, namely in the construction industry.
... consumer spending by bank employees
In addition to demand for inputs, further down the line private consumer spending by bank staff also benefits other sectors of the Swiss economy. People working in the banking sector enjoy above-average incomes, and the provision of these consumer goods and services therefore leads to high value added, employment and income in other sectors.
3.1
Value added
Demand-side value-added effects amount to CHF 17 billion
The BAKBASEL impact analysis shows that – alongside the CHF 32.4 billion that the banking sector directly contributes to overall economic performance – an additional CHF 17 billion of gross value added is also generated. The effective value added effect of the banking sector thus amounted to CHF 49.4 billion in 2011. Approximately 9.3% of overall economic gross value added was therefore directly (6.1%) or indirectly (3.2%) attributable to the economic activity of the banking sector. 3-2 Gross value added effects from production in the banking sector, 2011 Gross value added
Share of gross value added
CHF 32.4 bn
6.1%
Indirect effects
CHF 6.1 bn
1.2%
Induced effects
CHF 10.8 bn
2.0%
Direct effects
Source: BAKBASEL
Indirect effects Other sectors generated CHF 6.1 billion in added value from inputs
The demand for inputs from other sectors leads to indirect value added effects in other sectors as a result of the economic links in overall economic production. The banking sector has an input ratio of 42.5%, i.e. every one million Swiss francs of income that banks generate triggers CHF 425,000 of demand in other companies. Since there is a high level of interconnectivity in the banking sector, companies outside the banking sector are left with a comparatively small share of this. Nevertheless, the banking sector generates value added of around CHF 6.1 billion in other sectors as a result of demand for inputs. This is equivalent to a good 1% of Swiss overall economy.
The importance of the Swiss banking sector – SBA – August 2012 15
Induced effects Consumer demand from bank employees generates CHF 10.8 billion
In addition to demand for inputs, other sectors also benefit from induced effects triggered by consumer demand from employees permanently employed in the banking sector or from expatriates. In the case of expatriates, traditional forms of consumer expenditure are supplemented by services such as relocating, assistance in finding accommodation, sale/ rental of real estate, tax advice, procurement of work permits, integration services (e.g. language courses), etc. Furthermore, international workers are important sources of demand for international schooling, private teachers and au pairs. Through sector interconnectivity, this creates gross value added of CHF 10.8 billion in areas outside the banking sector. The reason why this figure is relatively high is due to the fact that employees in the banking sector have especially high purchasing power and specific consumer wishes. If we consider the contribution made by the individual areas within the financial sector, it becomes clear that the banking sector has an above-average share in the overall effect, especially in the case of direct and directly induced effects.
3.2 Employment Indirect effects are crucial to employment
Around 146,000 people were employed in the banking sector at end-2011, and indirect and induced effects created an additional 168,000 jobs in other sectors. The Swiss banking sector therefore created employment for some 313,000 people – equivalent to about 6.6% of all employed people in Switzerland. 3-3 Employment effects from banking sector production, 2011 Employment
Share of total employment
146,000
3.1%
Indirect effects
63,000
1.3%
Induced effects
105,000
2.2%
Direct effects
Source: BAKBASEL
Additional jobs created in other sectors by demand effects
The number of people employed in the banking sector has decreased slightly compared with the end-2009 figure of 151,000. In spite of this, the increase in demand for goods and services was such that employment in other sectors rose by 15% within the space of two years. These figures show that a robust Swiss economy is reliant not only on a strong banking sector as a source of demand but also on a high-performance workplace as a source of supply 1.
1
16 The importance of
Bi-directional interconnectivity, see BAKBASEL (2011).
the Swiss banking sector – SBA – August 2012
Cuts in banking jobs affect other sectors disproportionately
Generally speaking, this interconnectivity means that, per 100 bank employees, indirect effects create 115 extra jobs in other sectors. The major importance of the banking sector for the rest of the economy will also apply if jobs are cut in the near term: for every 100 jobs that are cut in the banking sector, 115 are lost in other sectors. The prevailing framework conditions in the banking sector, such as cost disadvantages due to certain taxes or to compliance with more stringent regulatory requirements for banks in Switzerland, will trigger consequences in other economic sectors that even outweigh those in the banking sector.
Spillover effects further enhance impact of banking sector
The figures in tables 3-2 and 3-3 underestimate the value added and employment effects in other economic sectors that can ultimately be attributed to the banking sector, since they do not include the supply-side effects on other economic sectors. They also do not take account of positive externalities. The banking sector contributes to Switzerland as a centre of knowledge through its high level of education and training; cooperative over research enhances the international appeal of Swiss universities; network effects and clusters enrich other industries. For example the tourism industry and watch and jewellery businesses benefit from wealthy private banking clients who combine their visit to the bank with an extended stay or luxury purchases.
The importance of the Swiss banking sector – SBA – August 2012 17
4 Conclusion
Banking remains a key sector of the economy
In spite of the setbacks suffered during the crisis years, banking remains one of the key sectors of the Swiss economy. It continues to make a significant contribution to gross value added and is inextricably linked to the other economic sectors. The other sectors benefit from the banks in several ways. On the one hand, as a provider, they generate inputs for the banking sector or offer consumer goods and services to bank employees. On the other hand, business benefits from the banking sector’s role as a network sector, which means access to credit is easy and interest rates are lower than in other countries. Multinational companies have numerous specific services at their disposal.
„Made in Switzerland“ is a stamp of quality
In return, banks in Switzerland benefit from the good reputation of Swiss industry. Were it not for the „Made in Switzerland“ stamp of quality shaped by the engineering and watch industry, the banking sector may not have grown to the size it is today. Both business and the banking sector are reliant on good framework conditions. However, regulatory tightening in the wake of the financial crisis added to the pressure already placed on the Swiss banking sector by falling margins. To be competitive, a financial centre requires sensible and appropriate regulation, which can only be developed through banks and the authorities working together in dialogue. In light of the interconnectivity, it is important they compete as a united front against international locations, but given the new political realities, this is also an imperative.
18 The importance of
the Swiss banking sector – SBA – August 2012
• Swiss Bankers Association
Aeschenplatz 7 PO Box 4182 CH-4002 Basel T +41 61 295 93 93 F +41 61 272 53 82
[email protected] www.swissbanking.org 20 The importance of the Swiss banking sector – SBA – August 2012
