The Swiss Banking SectorCompendium Edition 2004

This compendium aims to provide an overview of structures, processesand institutions in the Swiss banking and financial centre. In ouractivity report (www.swissbanking.org) we provide comprehensiveinformation about the key events of the past year. In the compendiumwe focus primarily on the global structures and institutions of thebanking sector and their development, and we only address thoseevents of the past two years which were relevant to these issues.

The compendium is intended for readers outside the industry whoseek to gain a general understanding of the banking sector, as well asprofessional bankers with an interest in obtaining accurate informa-tion on a specific subject. The compendium may also serve as sup-port literature for university level lectures and as a general reference.The 2004 edition is an expanded update of the 2001 version. Thecompendium is updated bi-annually.

The author looks forward to receiving your comments and sugges-tions on his e-mail address: stefan.hoffmann@sba.ch.

Basel, October 2003

Swiss Bankers AssociationPO Box 41824002 BaselSwitzerlandstefan.hoffmann@sba.ch www.swissbanking.org

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Preamble

2

Page 2 Preamble

3 Contents

6 Index of Acronyms

Chapter 1 Economic Function of the Financial System

8 Inter-Temporal Exchange

8 Allocation of Funds

9 Allocation of Risks

9 Supply of Liquidity

9 Information and Monitoring

10 Difference Between Banks and Industrial Companies

Chapter 2 Banks in the Overall Economy

11 High Output and Productivity

12 Important Employer, Above-Average Salaries

12 An Important Taxpayer

12 Asset Management is a Core Competence

Chapter 3 Development of Select Business Areas

14 Lending Business – Profitable and Crucial to the Economy

15 Investment Funds15 Self-Regulation in Fund Business

16 Mortgage Business16 Mortgage Business in a Process of Change

17 Investment Banking

18 Payments18 Swiss Interbank Clearing AG

Contents

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18 Swiss Euro Clearing Bank19 Continuous Linked Settlement (CLS)

19 Investment Advice and Asset Management

20 Safe Custody of Securities and Valuables21 Global Custody21 Draft for a Securities Custody Act

22 Fiduciary Business

22 Derivative Financial Instruments

Chapter 4 Economic Challenges for the Banks

23 Additional Synergy and Savings Potential Exists

24 The Choice of Business Model is Decisive

25 New Challenges in Wealth Management

26 Continued Success Thanks to Standardisation and Disintegration

Chapter 5 Supervision and Regulation of Banks

27 The Federal Banking Commission (FBC)

27 Banking Regulation: Purpose and Basis

28 Reform of Financial Market Regulation

29 Banks, Banking Commission and Auditors29 Impeccable Business Conduct as Requirement for Banking Licence29 Auditors as Instruments of the FBC

30 Reform of Bank Audit30 Compliance

30 Business Activity Requirements30 Equity31 New Basel Capital Accord (Basel II)31 Risk Monitoring31 Liquidity

32 Depositor Protection32 Amendment of the Bank Insolvency Law33 Amendment of the Depositor Protection Agreement

33 Annual Statement and Balance Sheets34 FBC Guidelines on Accounting Regulations (FBC GAR)

34 Self-Regulation and Code of Conduct34 Code of Conduct with Regard to the Exercise of Due Diligence (CDB 03)

35 Swiss Banking Ombudsman

36 International Co-Operation among Supervisory Authorities36 Administrative Co-Operation and In Situ Monitoring37 Consolidated Supervision

37 Bank Customer Confidentiality38 Swiss Tax System38 Direct Withholding Tax as a Correlation

38 Taxation of Savings Interest Earnings in the EU, Tax Retention in Switzerland

39 Anti-Money Laundering Measures39 Public Law and Penal Code40 International Mutual Legal Assistance in Criminal Matters40 Self-Regulation

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Chapter 6 The Banks’ Joint Organisations

41 Position and Significance of the Joint Organisations

42 Swiss Financial Services Group AG (SIS)42 SIS SegaInterSettle AG

42 SIS x-clear AG

42 Telekurs Group43 Telekurs Multipay AG

43 Telekurs Card Solutions AG

43 Swiss Interbank Clearing43 PayNet (Schweiz) AG

43 Telekurs Financial AG

43 Telekurs Services AG

43 Stock Exchanges44 SWX Swiss Exchange44 Swiss Value Chain45 SWX Group

Chapter 7 The Swiss National Bank

46 The Monetary Concept

47 Monetary Control47 Repurchase Agreements

48 Other Duties of the SNB48 Cash Supply48 Non-Cash Payment Transactions49 Creating Currency Reserves49 Monitoring of the System Stability49 International Co-Operation49 Advisor and Banker to the Federal Government

Chapter 8 SwissBanking – The Swiss Bankers Association

50 Safeguarding Interests and Self-Regulation as Primary Objectives

50 Membership List Includes Auditors and Securities Traders

51 General Assembly, Board of Directors and Office

Chapter 9 Categories of Banks

52 Categories of Banks as per SNB Banking Statistics52 The Cantonal Banks53 The Big Banks53 Regional Banks54 Raiffeisen Banks54 Private Bankers55 Other Banks

55 Non-Bank Financial Intermediaries

56 Selection of Basic and Advanced Literature

59 Internet Addresses

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6

Art. Article

SBL Federal Act on Banks and Savings Banks (Swiss Banking Law)

SESTA Federal Act on Stock Exchanges and Securities Trading

FSO Federal Statistics Office

BIS Bank for International Settlement

CBOT Chicago Board of Trade

CHF Swiss franc

CS Credit Suisse

i.e. that is (id est)

FBC Swiss Federal Banking Commission

fed. Federal

EU European Union

EUREX EURopean EXchange

ECB European Central Bank

f./ff. Following page/following pages (folio/folios)

FATF Financial Action Task Force on Money Laundering

GAAP Generally Accepted Accounting Standards

MLA Federal Act on the Prevention of Money Laundering in the Financial Sector

Index of Acronyms

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Psr. Publisher

IAS International Accounting Standards

Intersettle Swiss Corporation for International Securities Settlements

SME Small and Medium-sized Enterprises

DD Direct Debit

m. million

bn. billion

MROS Money Laundering Reporting Office Switzerland

Nasdaq National association of securities dealers automated quotation system

NYSE New York Stock Exchange

OTC Over-the-Counter

p.a. for the year, annual (per annum)

Repo Repurchase Agreement

CR Circular (FBC)

SBA Swiss Bankers Association

FDCB Federal Act on Debt Collection and Bankruptcy

SEC Securities and Exchange Commission

SECB Swiss Euro Clearing Bank GmbH Frankfurt

SECOM SEga COMmunication System

SFS Swiss Financial Service Group

SIC Swiss Interbank Clearing

SIS SegaInterSettle AG

SNB Swiss National Bank

SPC Swiss Penal Code

SWX SWiss eXchange (Swiss stock exchange)

TARGET Trans European Automated Real-Time-Gross-Settlement-Express-Transfer-System

i.a. including, among other things (inter alia)

CDB Agreement on the Swiss banks’ code of conduct with regard to the exercise of due diligence

e.g. for example (exempli gratia)

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Inter-Temporal Exchange

All financial business is conducted on the basis of contracts. Theseagreements form the basis of and regulate the exchange of paymentsat different intervals between two or more parties. The lender makescash or cash-like equivalents available to the borrower on a givenday and receives a promise from the borrower that he or she willrepay the loan in the future. This voluntary exchange has advan-tages for both sides: the borrower has the opportunity to make pur-chases or investments which he or she would otherwise have to post-pone or abandon altogether; to obtain this advantage, the borroweris prepared to pay an interest on the capital borrowed. In return, theinterest payment compensates the lender for agreeing not to use hisor her funds immediately.

Allocation of Funds

Investment capital is always limited. Consequently, a selection ofprojects to be considered is necessary. The decision is driven primarilyby the price: the advantage is with the borrowers who are willingand able to pay the prevailing market rate of interest. Thus thedecision depends on the expected return on the investment to befinanced. At this initial stage, any possible risk to the lender isabstracted. The very existence of such risk means that we need tocheck and monitor (see below).

Economic Function of the Financial System

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Allocation of Risks

The risks (and opportunities) are distributed differently for bankloans and private equity financing.

Different levels of risk and opportunity are inherent in bank loansand private equity financing. In the case of a bank loan, the lenderhas a legal right to claim repayment and interest irrespective of thesuccess of the project to be financed. However, in practice, the bor-rower may be unwilling (lack of repayment discipline) or unable(lack of credit worthiness) to meet his liabilities. In the case of privateequity financing, the lender participates in the success or failure of theproject.

Individual risks can be eliminated by the law of large numbers; systematic risk cannot. Conservative lenders will only assume suchrisk if they receive compensation in the form of a risk premium. Therapid development of financial derivativeshas rounded out the market system: usingderivatives, risks can often be isolated moreaccurately and thus transferred; as a resultthe opportunities for risk allocation haveincreased. Derivatives are based on variouscombinations of three basic types of financial contract: forwards/-futures, swaps and options. Depending on the underlying instruments,a distinction is made between rate, currency and index derivatives.

Supply of Liquidity

Liquidity describes the ability to settle a payment commitment ontime. An asset is deemed liquid if it can be sold, and thus convertedinto legal tender (money), at any time in any volume, without a priceloss vis-à-vis the market rate. Banks help their customers to coverthemselves against the risk of unexpected funding requirements.This is one of the reasons why secondary markets exist. An asset’slevel of liquidity also depends on the market in which it is traded, aswell as the system of that market and the quality and reliability ofinformation about the product (asymmetric information may be anindication for non-liquidity).

Information and Monitoring

The borrower is usually better informed than the lender on the risksand opportunities of the project the latter finances (asymmetricinformation). This means the borrower is in a position to influencethe chances of success of the investment through his or her action(behavioural risk). After all, the loan he or she has promised torepay is equally dependent on the occurrence of random events (e.g.a recession).

There are various ways for the lender to hedge against these risks: he or she can procure additional information about the borrower ex ante (creditworthiness check, financial analysis), continuouslymonitor his or her exposure, demand equity and collateral from theborrower in order to cover his or her secondary liability and, finally,demand compensation for the risk incurred in the form of a premi-

Lenders will only assumerisk if they receive com-pensation in the form of a risk premium.

um on the rate of interest. Financial intermediation is another sourceof information part of which is made available to the public (e.g.when a company is admitted to the stock exchange).

Difference Between Banks and Industrial Companies

In contrast to industrial companies, banks do not provide physicalgoods but services. These consist of liquidity, information and trans-formation services (see above) The credit risk of a bank correspondsto the investment risk of a company; the liquidity risk correspondsto the capital structure risk. The bank is also subject to interest raterisk (due to maturity transformation, a bank risks having to refinanceits long-term loans at rates which exceed the rate of interest on theloan if the interest rate structure changes). The insolvency of a bankcan have a significant external impact on the overall economy;potentially more serious than if an industrial company were to gobankrupt. If, for example, there is a run on a bank, there might be achain reaction, resulting in the collapse of other banks (systemic risk).Because of this danger, banks are generally more heavily regulatedthan industrial concerns.

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High Output and Productivity

With a net output of almost CHF 57bn or 14% of gross domesticproduct, the financial sector was among the key sectors in Switzerlandagain in 2002.

Banks contributed CHF 44.4 bn to the real net output, which corre-sponds to 11% of GDP. Insurances contributed CHF 11 bn or 2.7%of GDP and other financial services companies CHF 1.2 bn or 0.3%of GDP.

200,000 employees work in the financial sector – i.e. 5.3% of thetotal workforce, of which 3.3% work for banks, 1.7% for insurancecompanies and 0.3% for other financial intermediaries.1

The importance of the banking sector in Switzerland is also veryhigh by international standards, its contribution to the overall netoutput being around twice the size of banks in Germany, France orthe USA.

In relation to other businesses, labour productivity (real net outputdivided by the number of employees) in the financial sector is aboveaverage. 5.3% of the total work force work in the financial sectorand deliver 14% of the overall net output, in other words – the pro-ductivity per employee is about triple the average.

2 Banks in the Overall Economy

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1 These figures varyslightly, dependingon the source; weuse the data provid-ed by BAK BaselEconomics AG;these data differmarginally fromthose provided bythe Federal Statis-tics Office (FSO).

The Financial Sector and Other Important Industries in 2002Percentage Percentage Labour productivity

of workforce net output nominal

Financial Sector 5.3 14 264Banks 3.3 11 333Insurance 1.7 2.7 159Other 0.3 0.3 100

Commerce 16.4 11.4 70Hotels and Restaurants 5.8 3 52Construction 7.3 5.2 71Equipment 8 8.1 101Pharmaceutical Industry 1.6 3.3 206Food and Beverages 1.6 1.7 106

* average = 100Source: BAK CH-Plus, April 2003

Real productivity per hour (real net output divided by total numberof man-hours worked) narrowed by around 10% over the past twoyears. Calculations by BAK Basel Economics show that this declinehas been a result of a 5 per cent decline in real net output combinedwith an increase of man-hours worked by 5 per cent. The latter indi-cates that the unfavourable market conditions took the banks bysurprise and the banks therefore failed to reduce their staff in pacewith the declining net output.

Important Employer, Above-Average Salaries

Around 200,000 people are employed in the financial sector, morethan half of them work for banks and almost half of the bank staff

are employed with the big banks. More thanhalf of all insurance staff work for accident anddamage insurances, followed by life insuranceswhich employs around one-eighth of all insur-ance staff.

In the year 2000, the median monthly gross salary in the bankingsector was CHF 7,190, thus exceeding the Swiss median by aboutone-third (as the distribution is skewed right, the arithmetic meanshould be somewhat higher). The respective figure in the insurancebusiness was CHF 6,505 and in other financial services companiesCHF 6,937. These figures reflect, i.a., the high level of labour pro-ductivity.

An Important Taxpayer

Banks are one of the most important taxpayers in Switzerland. Thetotal sum of taxes paid annually by banks, their employees andshareholders amounts to CHF 13 bn (including withholding tax andstamp duty) which represents more than 13% of the total federal,cantonal and municipal tax revenues.

Asset Management is a Core Competence

Banks make a significant contribution to Switzerland’s prosperity.The asset management business is particularly important, as it gen-erates more than half of the banks’ combined net output, and morethan 80% of that is achieved with private customers. Swiss banks

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Around 200,000 peoplework in the financialsector, more than half of them in banks.

*

are global leaders in cross-border asset management (i.e. with cus-tomers domiciled abroad) with a relevant world market share ofaround 33%.

At the end of 2002, security assets held in customer accounts withdomestic banks (parent bank without foreign branches), fell by 13%from the previous year to CHF 2,945 bn. This decline was mainlydue to the weaker valuation of stocks. 47% of total deposits wereheld by institutional investors, 42% by private customers and 11%by corporate customers. 56% of all securities were held by foreigninvestors, and 47% of all securities were denominated in Swissfrancs.

Securities Holdings in Customer Accounts with Domestic Banks Year* All customers Foreign customers Domestic customers Allocation in CHFCHF bn. in % (by all customers)

1999 3,438 1,847 1,591 –2000 3,717 2,056 1,661 492001 3,400 1,901 1,498 472002 2,945 1,659 1,286 47

* at year endSource: Swiss National Bank

Last but not least, the comparatively low rate of interest in Switzer-land is a direct consequence of this strong market position in assetmanagement and has advantages for the country’s entire economy.Such low interest rates represent a significant competitive advantageat the international level, which primarily benefits the Swiss labourmarket.

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Lending Business – Profitable and Crucial to the Economy

Traditional loans are of great importance to the economy. Thedomestic market for construction loans amounts to about CHF 600bn., of which 60% are attributed to private households, 30% tobusinesses and 10% to other financial services companies and thepublic sector. With a share of 78%, mortgages are the predominantform of lending. Bank loans are a major, if not the single, source ofoutside financing for many companies, especially small and medi-um-sized businesses (SME).

The profitability and sustainability of an individual bank’s loanbusiness depends to a large extent on the implementation of an ade-

quate risk policy by the bank. In compensa-tion for its risk, the lending bank has theright to claim a form of risk premium, i.e. acommensurate rate of interest and appropri-ate lending terms. Supervision and regula-tion, including rules on equity and liquidity,are crucial in this context.

The Swiss National Bank’s stability-oriented monetary policy materi-ally supports the banks in defining their risk policy and establishingterms and interest rates. The guiding principle is to use a reliablemonetary policy to contain inflationary expectations. The ultimateobjective is to preserve Switzerland’s autonomy in terms of interestrate policy and thus enable the banks to supply the market withfavourable loans.

Development of Select Business Areas

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The profitability and sustainability of a bank’sloan business depends to a large extent on its riskpolicy.

The banks’ retail business, particularly loans to SME, remains veryimportant. Private and business loans as well as mortgage lendingcontinue to be vital to vast parts of the banking sector.

Investment Funds

Investment funds consist of assets which the fund management solicitspublicly from investors for the purpose of collective investment. Thefund management manages these assets usually on the principle ofrisk diversification on behalf of the investors.

The fund management company acts on the basis of a collectiveinvestment agreement, managing the investment fund independentlyand in its own name for the account of the investors. It makes deci-sions about purchase and sale of investments, keeps the accountsand publishes the financial statements for the investment funds. Thefund management company has to represent the interests of theinvestors. In most cases, fund management firms are subsidiary com-panies of banks. As an independent legal entity, the fund assets areclassed as preferential debt: if the bank or fund managementdeclares bankruptcy, these assets are excluded from the bankruptcyestate.

A manager of a Swiss investment fund as well as the custodian bankwhere the fund assets are held, both need to be licensed by the FBC.Furthermore, the fund prospectus, issued jointly by the fund man-agement company and the custodian bank, is subject to FBC appro-val. The fund management as well as theinvestment fund are supervised by the FBCand audited by an independent auditingfirm which is recognised by the FBC. Pro-fessional fund distributors also require anFBC licence.

The investment fund business is significant domestically as well asby international comparison. In terms of volume of fund assetsunder management, Switzerland ranks ninth worldwide. Banks con-tinuously expand their investment fund services. Above and beyondthe mere investment funds range, this applies also to related servicessuch as fund portfolios, fund accounts or fund savings schemes.

Self-Regulation in Fund BusinessTo promote self-regulation, the Swiss Funds Association (SFA) hasdrawn up the following rules of professional ethics to supplementexisting legal provisions:

– Code of conduct for the Swiss fund industry (30th August, 2000). Ineffect since 1st January 2001, the Code of Conduct specifies minimumstandards in terms of the fund management companies’ duty to exer-cise due diligence, act in good faith and provide fair information.

– Guidelines on the calculation of net asset values and the handling ofvaluation errors in the case of securities funds (11th June, 2001)

– Guidelines on fund distribution, including provisions for fund dis-tributors (22nd October 2001, in effect since middle of 2002).

– Guidelines on the calculation and disclosure of the Total-Expense-Ratio (TER), approved by the FBC in June 2003

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Switzerland ranks ninthworldwide in terms of fund assets under management.

Funds have to publish their TER for the first time in their annual orsemi-annual financial statements closing as from end of 2003. TheTER expresses the costs and commissions charged to a fund’s assetsas a percentage of the fund assets. In the past, many investmentfunds reported only their management and subscription fees. TheTER includes also costs charged to the fund assets on an ongoingbasis such as expenses covering the production of the annual andsemi-annual financial statements, communication to investors,auditing fees and fees for supervision of the fund. Some banks gobeyond these requirements and report not only the TER of theirfunds, but also the all-in fee. The latter includes all expenses relatedto the fund management company and the management of theinvestments. Excluded are only foreign stamp duty and costsincurred on the purchase or sale of investments outside Switzerland.

Mortgage Business

Switzerland has a substantial mortgage lending market. The averageof mortgage lending per capita amounts to CHF 72,000 (by compari-son, average bank savings amount to CHF 44,000 per capita). Mort-gage loans are not only provided by banks, but also by insurance

companies, pension funds, public institu-tions, private enterprises and private indi-viduals. Banks command a market share ofabout 85%. Although other forms of loanshrank over the period from 1998 to 2002by 1.1% p.a., the volume of mortgage

loans provided by banks grew during the same period by an averageof 2.1% p.a. The continuous growth in mortgage lending is animportant growth factor for the primary and secondary constructionindustries (the secondary construction industry includes plumbing,carpentry etc.).

Mortgage Business in a Process of ChangeOver the past ten years, banks have introduced a large variety of new mortgage types, and the variety of mortgage types continuesto expand. With these new products, banks offer their customerscustomised financing solutions to a much greater extent than in thepast. Fixed-rate mortgages account for more than half of the newmortgages in the present day. The interest rate on such mortgages isfixed and remains non-variable for a period agreed between thebank and its customer (usually two to five years). The number ofmoney market mortgages is also growing rapidly. Banks refinancethis type of mortgages in the Euromarket and charge the variablerefinancing cost to their customers. This enables the banks to bor-row close to the market and at matched maturities. Most banks haveceased to offer the traditional variable mortgage with its inherentlack of pricing transparency, or they might only do so on specificdemand.

Mortgage pricing is being based increasingly on a single interest rate(instead of the dual interest rates for first and second mortgages).The single interest rate correlates to the loan-to-value ratio and theborrowers’ credit. The customer benefits from a more transparentpricing structure and is in a position to take individual precautionsagainst general interest rate fluctuations. By fixing the mortgage for

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The continuous growth inmortgage lending is animportant growth factor forthe construction industries.

a certain period, the customer can avoid the effects of interest ratefluctuations completely. In the case of currently inexpensive moneymarket mortgages, the banks offer instruments for minimising theeffects of interest rate fluctuation or fixing the maximum mortgagerate.

Mortgage Debt in Switzerlandin CHF bn.

Creditor 1998 1999 2000 2001 2002Banks 488 501 506 522 541Insurance companies 31 31 32 32 –Pension funds 26 26 25 25 –Federal government 3 3 3 3 3Total 548 561 566 525 –Source: SNB. Die Banken in der Schweiz 2002, S. 47

Asset securitisation, i.e. the substitution of loans for marketablesecurities, is gaining in importance with regard to the mortgage busi-ness. In this process, the bank sells part of its loan claims to a com-pany that is established specifically for this purpose and which refi-nances itself by issuing asset-backed securities (ABS).

Asset securitisation was first applied in the USA in the 1970s andspread on a wider scale in the 1990s. In the USA the volume multi-plied from USD 400 bn to more than USD 2,000 bn between 1991and 2001. At USD 300 bn, the volume was clearly lower in Europein 2001. In 1998, the former Swiss Bank Corporation was the firstbank in Switzerland to securitise domestic mortgage loans. The nexttransaction was carried out in 2001 by the ZKB and is described indetail below, as a model transaction. It remains to be seen whetherABS will establish itself in Switzerland as it has in the USA or someparts of Europe. Major banks in Switzerland are at any rate showingefforts to acquire the skills and competence necessary for engagingin ABS transactions on a larger scale.

Investment Banking

Investment Banking essentially consists of new issues, securities andcurrency trading, money market and treasury business as well asmergers & acquisitions consulting for large companies. These servicesrequire particularly specialised know-how on the one hand, but gen-erate a strong output on the other hand.

Nowadays, it is no longer possible to look at investment bankingform the perspective of a single financial centre. In other words, it isa highly globalised business operating 24 hours a day. Most servicesare now provided mainly out of only onevery large financial centre per time zone;this is the financial centre with a marketsize and concentration of customers suffi-cient to accommodate an adequately spe-cialised community of service providers, andwith a dynamic labour market for a large number of indispensablespecialists (e.g. corporate finance specialists, lawyers). London iscurrently the undisputed investment banking centre in Europe. TheSwiss domestic market for investment banking services is relativelylimited.

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Investment banking is ahighly globalised busi-ness operating 24 hours a day.

Providers of investment banking services typically have a globalstructure. This enables banks to form bespoke groups of specialistsand expert teams to deal with individual transactions on a world-wide level as and when required. Networking, i.e. the simultaneousavailability of various resources, is at the heart of such operationsand crucial to success. Therefore, fairly large corporate size is typicalfor businesses engaging in investment banking.

Asset securitisation plays a special role in investment banking. Several banks have already securitised mortgages, for instance.These transactions are normally complex in financial as well aslegal terms and the costs are still quite high. Consequently, theprofitability of a securitisation transaction still depends on the vol-ume of critical mass.

Payments

Swiss Interbank Clearing AG

Swiss Interbank Clearing AG operates the interbank payments systemin Swiss francs (SIC). sic is a real-time gross settlement system whichprocesses payments online via the participants’ giro accounts withthe SNB. Swiss Post has also been settling its money market trans-actions through SIC since November 2000. The SNB supervises andcontrols the flow of funds. More than 700,000 payments a day witha daily turnover of around CHF 180 bn were processed in 2002. Atthe end of 2002, 329 banks were members of SIC.

Until 1997, access to SIC was restricted to banks domiciled inSwitzerland. Since 1998, the SNB has been granting remote SICaccess to international joint organisations and clearing organisa-tions as well as their bank members. 81 banks outside Switzerlandare currently using SIC.

Since the end of 2002, PostFinance has been holding 25% of sharesin Swiss Interbank Clearing Ltd. as a member. This participationstrengthens the existing cooperation between PostFinance and theTelekurs Group.

Swiss Euro Clearing BankEuroSIC, the clearing system for euro denominated payments inSwitzerland and abroad, processed more than 1.6 million paymentsin 2002, 650,000 of which were cross-border payments. In terms ofnumber of transactions, euroSIC ranks sixth among the 16 clearingsystems connected to TARGET. As per end of December 2002, 122financial institutions were connected to euroSIC.

The SECB controls and supervises euroSIC. As a special-purposebank, the SECB is exclusively in charge of euro denominated pay-ments. Furthermore, it provides all cash and collateral managementservices related thereto. Via SECB, euroSIC is connected to the Ger-man euro clearing systems EAF (Euro Access Frankfurt) and ELS(Euro Linking Settlement), as well as to TARGET via ELS. The mem-bers of euroSIC in Switzerland thus benefit from all essential accessfacilities to and from “Euro-land”.

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Continuous Linked Settlement (CLS)The launch of the CLS system in the autumn of 2002 has been a mile-stone in the control of credit risks in currency trading. With head-quarters in New York, the CLS bank provides a system for eliminat-ing settlement risks in currency trading known as the Herstatt risks.In the past, the two sides of a currency transaction were processed ata time shift. In a purchase transaction of dollars against Swissfrancs, the Swiss francs had to be delivered during European tradinghours, whereas the corresponding dollar amount was credited onlyseveral hours later during American trading hours. In the meantime,there was a credit risk for several hours. Were one of the banks to beclosed down in this period, the counter-party would incur a poten-tially enormous dollar loss. The CLS bank now processes currencytransactions in the major currencies according to the “payment ver-sus payment” principle which eliminates the settlement risk for suchpayment transactions.

42 Settlement members are currently linked to the system and useCLS to process their currency payments in seven different currencies,including the Swiss franc. Three Swiss banks – UBS, CS and ZKB –are members of CLS. Two other financial institutions – HSBC andBank of America – also settle their Swiss franc currency transactionsvia CLS. These five institutions enter a total of 1,400 payments atCLS per day worth CHF 20 bn. The settlement is processed througha direct link between the Swiss Interbank Clearing System (SIC) andthe CLS bank. These five banks resort to intraday liquidity to covertheir Swiss franc delivery commitments. The SNB provides intradayliquidity through interest-free repo business. CLS currently process-es around 35,000 transactions per day, worth a total of ca. USD 400bn. CLS helps eliminate the settlement risk and contributes thus tothe safety of the international financial infrastructure.

Investment Advice and Asset Management

According to a survey carried out by Merrill Lynch and Gemini Con-sulting, assets invested by wealthy private individuals world-wide as at the end of 2002 was estimated at USD 27,200 bn. (up 2.3%year-on-year). Wealthy private individualsare defined as persons with a net dispos-able income in excess of USD 1 million.There are around 7 million such individuals world-wide; 2.2 million in North America,2.6 million in Europe (including EasternEurope), 1.8 million in Asia and 0.3 million in Latin America.According to the survey, around 175,000 wealthy individuals livedin Switzerland as per end of 2002. Nearly one-third of global privateassets, i.e. USD 7,900 bn, can be attributed to the wealthiest segmentwith a net disposable income of at least USD 30 million; there are anestimated 58,000 such individuals world-wide.

An estimated 80% of the assets of wealthy private individuals are managed by asset managers domiciled in the beneficiary’sdomestic market (= onshore); the remaining 20% of those assets aremanaged and invested by trustees resident in foreign jurisdictions (=offshore). Swiss institutions are among the global leaders in terms ofmanagement of private as well as institutional assets. An estimated30% of internationally invested private assets world-wide are man-aged in Switzerland.

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Swiss banks are globalleaders in managing private and institutional assets.

As at the end 2002, the value of securities held in customer accountswith all Swiss banks amounted to CHF 2,945 bn; foreign customersaccounted for CHF 1,659 bn (or 56%). This figure does not includelife insurance, customer assets in bank balance sheets and fiduciarydeposits.

The banks’ contribution to gross output and the creation and pre-servation of jobs in the overall economy is mainly due to the highlevel of productivity in the banking sector. The productivity alsoreflects the banking sector’s competitiveness on an internationalscale. Asset management plays a crucial role in this respect, as it gen-erates more than half of the banks’ total output. That is CHF 25 bnor 6% of GDP. Private customer business accounts for an estimated80% of this output.

In recent years, a moderate trend towards concentration has beenobserved in private banking. Nonetheless, private banking remains awidely fragmented business area at both the domestic and the glob-al level: for instance, UBS AG, the global market leader, controls amarket share of 2% of the financial assets managed on behalf ofhigh net worth individuals” world-wide (the world top ten togethermanage approximately 8%).

The banks’ success in asset management is attributed to their long-standing tradition in the business, traditionally stable legal andpolitical conditions, a stable currency, the high efficiency and relia-bility of the banks and last but not least a good long-term perform-ance of investments. Performance is a crucial factor especially forinstitutional investor, although private customers are taking anincreasing interest in performance, too. The big banks have expressedtheir intention to strengthen their onshore private banking activities,i.e. to service customers at their domiciles.

Asset management has a strong positive impact on the securities andunderwriting business in Switzerland. Thanks to the volume of assetsthey manage, the banks in particular have substantial placementpower, which translates into an important competitive advantage inthe underwriting business: approximately half of all new Eurobondissues are placed in customer portfolios managed by Swiss banks.

Safe Custody of Securities and Valuables

Safe custody of securities and valuable items (jewellery, documentsetc.) is one of the original bank services. With a view to rationalisingthe custody of securities, banks began establishing external collectivecustodies (SEGA) some thirty years ago. An increasing demateriali-sation of securities has resulted from the banks’ efforts to furthersimplify safe custody. Although shareholders in listed companies arestill entitled to hold physical shares, such physical shares are issuedonly on explicit request (deferred printing of securities).

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Global CustodyLarge institutional investors typically hold securities in severalcountries. Big banks specialising in the securities business hold suchsecurities in safe custody, and they monitor and manage them irre-spective of the place of custody. This service is known as “globalcustody”. Above and beyond safe custody, it includes settlement,collection of interest and dividend payments, providing informationon corporate policies (e.g. capital increases) and tax returns. Further-more, added value services such as securities lending and variousinformation services (portfolio analyses, performance calculation,fund accounting etc.) are gaining in importance.

Safe custody, and especially global custody, is a fast growing business.However, global competition is causing a decline in margins and agrowing cost squeeze. Moreover, growing customer expectations aregiving rise to continuous costly investments in processing systemswhich can only be justified by sufficiently high business volumes.

Providers of financial services are also attracted to Switzerland bythe efficiency of its capital market logistics, which facilitate thesmooth settlement of securities transactions. The joint organisationsof the banks and stock exchange are themain providers of logistics. The banks inSwitzerland are thus well equipped to par-ticipate successfully in the global custodymarket.

Draft for a Securities Custody ActAt the initiative of the SBA, and in co-operation with the SwissFederal Banking Commission (FBC) and the Swiss National Bank(SNB), a draft for a Securities Custody Act was submitted to theSwiss Federal Department of Finance (SFDF) in early 2003. The FDFmanages the current revision of this draft. The final draft is expectedto be submitted for consultation in 2004.

The new law is devised as a supplement to existing securities laws,and reflects global developments in securities trading. There is aglobal trend towards dematerialisation and away from physical circulation of conventional securities. The association of ownershipright and certificate, typical of conventional securities, is becomingincreasingly fictional. This is manifested in the fact that securitiesare no longer held directly by the beneficiaries but centrally in col-lective custody and that securities are replaced by stock rights, i.e.non-certificated rights equivalent to securities. The Swiss SecuritiesAct has not been amended since 1936. There is a need for clear reg-ulation with regard to securities held in collective custody. Moreoveruncertainties in the transfer of stock rights need to be eliminated.

The new Securities Custody Act aims to close the existing loopholesand thus enhances the legal basis for the securities business. It governs in particular the collective custody of securities and globalcertificates which comprise several securities. In addition, it providesclear regulation of stock rights, which become inscribed stock byentry in the public central registry of a central custody organisation.Stock rights thus obtain a qualitative status that exceeds the status

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Financial services pro-viders are also attractedto Switzerland by the efficiency of its capitalmarket logistics.

of a common receivable, and become equivalent to securities held incollective custody. Moreover, the draft also provides standards forthe transfer of rights to securities, global certificates and inscribedstock in collective custody, as well as for the appointment of securityinterest.

Fiduciary Business

Fiduciary business includes investments, loans and equity interestswhich the bank holds or grants in its own name, but for the accountand at the risk of a customer, on the basis of a written agreement.The instructing customer bears the full currency, transfer, price andcollection risks on the one hand, and is the exclusive beneficiary ofall accruals from such transactions on the other hand. The bankcharges a commission for its services.

Fiduciary business is still very important. The volume of assetsunder fiduciary contracts totalled CHF 339 bn as per end of 2002.Over the past ten years, about four-fifths of all fiduciary money hascome from outside Switzerland. About 40% of fiduciary depositsoriginated from European countries. Banks invested 90% of fiduciarydeposits in Europe. The largest investments were made in the UK,followed by Belgium, Luxemburg, the Netherlands and France. Lessthan 1% of fiduciary deposits were invested in Switzerland.

Derivative Financial Instruments

Derivative financial instruments are financial contracts whose pricesare derived from the market value of their underlying instruments.Nowadays, however, the derivatives market often dominates thatmarket for underlying instruments, i.e. the derivatives market deter-mines the prices in the underlying market. One of the reasons is thatturnover volume in many derivative markets far exceed those in theunderlying markets.

Derivatives are based on various combinations of three basic typesof financial contracts: Forwards/futures, swaps and options. Theunderlying instruments are subdivided into interest rate, currencyand index derivatives. Derivative contracts are further categorised asexchange-traded contracts and over-the-counter (OTC) contracts.

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As a result of the economic downturn and the protracted bear market,the banks have suffered a decline – in some cases considerable – infee and commission income over the past two years. Investmentbanking and wealth management houses have seen their revenuescontract. In addition, some banks incurred considerable losses fromtheir proprietary equity holdings. The overall picture is nuancedslightly by the fact that despite lower revenues from asset manage-ment, trading and securities underwriting as well as losses on pro-prietary equity holdings, income from traditional interest activities,especially in the retail segment, continues to be relatively strong.Retail-oriented banks achieve comparatively stable results, particu-larly if they have their credit risks under control. This is the case forthe overwhelming majority of players in the sector, not least due tothe lessons learned from the painful experiences of the nineties.

Additional Synergy and Savings Potential Exists

The continued stagnation also raises questions about proportionatecapacity. Wealth management and investment banking are areaswhich were expanded rapidly in the nineties. As stock prices andbusiness volumes rose, so, too, did the personnel capacities in anumber of the banks – to a level that in many cases is unsustainableover the medium term. Moreover, we must assume that employmentcannot be maintained at present levels even if revenues stagnate.Technological progress has a “labour-saving” effect, albeit not to the same degree in all areas. The greatest potential for synergies andsavings lies in back-office processing and IT where there is a high fixed

4 Economic Challenges for the Banks 1

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1 This chapter is alsopublished in the SBA Annual Report2002/2003

cost component. However, fully exploiting this potential generallyrequires some form of cooperation between the banks. Faced withthe twin pressures of rising costs and falling margins, the banks arestriving to reduce recognised overcapacities in a targeted manner. Inmost cases, this is impossible without reducing headcount. Betweenthe end of 2001 and the end of 2002, Swiss banks cut a net total (i.e.taking into account newly-created positions) of around 2,000 jobs,a fall of 2%. This in a sector which for decades had been a job creator; a sector, moreover, which employs people with superiorqualifications and remunerates them accordingly – a developmentunprecedented in the annals of Swiss economic history.

The banks are reacting to the unfavourable environment by manag-ing costs more closely, concentrating on their core business and insome cases cutting jobs. Necessary though these measures may be,they are rarely sufficient in their own right. In order to get back ona more stable course over the medium term, it is also necessary insome cases to adapt business models, rethink value chains, open upstructures and rationalise processes.

The Choice of Business Model is Decisive

The difficult situation currently facing the banks is due in large partto the ongoing stagnation of the overall economy. At the same time,structural challenges are also evident. For the individual bank, orrather its Board of Directors and Management, the key issue is toidentify the medium-term business model most adequately suited tosecuring the bank’s long-term earnings power. Every bank seeks tocreate and maximise cost advantages and economies of scope bychoosing a business model that best matches its particular strengthsand resources, for example by fostering a high level of integrity(economies of trust) as a value proposition in the wealth manage-ment business, through the quality and scope of the products andservices it offers (economies of scope), by bundling large volumes for processing and/or providing superior back-office execution(economies of scale) – or through a combination of these strategies.

In principle, a bank can narrow or widen the focus of its businessactivity. In the late nineties, for example, a model in which bankingoperated as part of a broadly diversified financial conglomerate thatalso encompassed insurance was considered to have massive potential.In part due to the negative performance of the stock markets, whichhad a marked impact on the insurance sector and led to a drasticreduction in the equity component of investment portfolios, thebanc assurance option is now viewed with a good deal more caution.

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In recent times, the traditional model of a universal bank has comemore to the fore, complemented and extended by the philosophy ofwhat is known as “open architecture”. The idea, taken originallyfrom fund distribution, involves a bankalso delivering funds from third-partyproviders, provided that such funds satisfydefined quality requirements. The conceptcan be extended not only to other bankingservices like mortgages, but also to internalbank processes such as the processing and settlement of securitiestransactions. Taken to its logical conclusion, the philosophy leads toa banking model whose value is based primarily on its reputation asa hub for sales, quality assurance and customer service, with themajority of the products and services sold actually being bought in.The core competences of a networked bank of this kind wouldinclude branding, product range policy and of course advisory ser-vices. In the case of companies concentrating on product manufac-ture (not necessarily banks), however, the core competencies wouldinclude the quality of process management, cost leadership and sim-ilar. Larger universal banks in particular are probably in a positionto act not only as providers of products and services to other banksbut also as buyers from them. The majority of banks are likely to actas providers, complementing their product range by offering target-ed third-party products and outsourcing some internal processes toexternal service providers, some of whom may be other banks.

New Challenges in Wealth Management

Various and at times conflicting developments are also evident atindividual business level, for example in asset management, which isthe largest sector for the Swiss banks and accounts for 50% of theiroutput. This business is still highly fragmented throughout theworld, although a trend toward concentration has been evident forsome time. In general, the financial markets in the industrialisednations are highly information-efficient, and this makes it difficultto outperform a benchmark over the long term and on a risk-adjust-ed basis. As a result of this, and for reasons of cost efficiency, someinvestors are increasingly favouring passive investment strategies,whereby the asset managers wholly or partially replicate the returnsof a prescribed index portfolio (index tracking). An index trackingstrategy tends to favour the big asset managers, as they are betterable to spread the costs of such a strategy over the assets under man-agement. In the United States, for instance, one-third of pensionfund assets is managed passively. Large asset management firms arelikely to benefit more from index tracking strategies, as they aremore in a position to spread the cost of such strategies (economies ofscale). There is also a tendency towards specialisation. This can betraced back to the fact that the number of asset classes and invest-ment instruments is growing constantly and also includes a largenumber of non-traditional or alternative vehicles such as hedgefunds, private equity, real estate or high-yield bonds. The manage-ment of these investments generally requires a great deal of time andeffort, which encourages increased focus and specialisation on the

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Universal banks with “open architecture”have come more to the fore.

part of providers. Only a relatively small band of providers are in aposition both to implement the economies of scale afforded by pas-sive investment strategies and to realise specialisation gains withregard to the marketing of alternative investments.

Continued Success Thanks to Standardisation and Disintegration

In view of the foregoing, what can we expect from the Swiss banksover the next few years in terms of the development of their serviceoffering and their market behaviour? For one thing, an increasedstandardisation of products, services and processes, primarily with aview to further improving cost efficiency. The accompanying disin-

tegration of the production structure, in otherwords an increased tendency towards spinningoff parts of the business and instead buying inproducts and services (outsourcing), willenable banks to take full advantage of anyeconomies of scale. The trend already evident

today towards customising pricing to individual customers on thebasis of risk, creditworthiness and membership of a specific segmentdoes not stand in contradiction to this. Competition among banksfor profitable customers and good risks is set to intensify further inthe future, and banking regulation (notably the Basel II capital ade-quacy requirements) has a clear role to play in this process. Finally,systems and processes (built for instance around common platforms)as well as the range of products and services offered are likely to beincreasingly opened up to attractive third-party providers.

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Competition amongbanks for profitable cus-tomers and good risks is set to increase.

The Federal Banking Commission (FBC)

As an independent federal administrative agency, the FBC supervisesbanks and financial markets. Its supervisory authority also coversinvestment funds, central mortgage bond institutions, stock exchanges,brokers as well as the disclosure of holdings and public offers.

The FBC safeguards the rights of creditors and investors, and guar-antees the proper functioning of banking and securities markets.Furthermore, it supervises compliance with legal regulations andpasses all necessary ordinances and decrees to this effect. The combatof money laundering also falls to the FBC. It is responsible for monitoring the prevention of money laundering and ensuring thatunderlying financial intermediaries comply with the Anti-MoneyLaundering Act. At the international level, the FBC is member of theBasel Committee on Banking Supervision, a body founded by centralbanks and banking supervisors in 1975.

Banking Regulation: Purpose and Basis

Swiss banking law does not provide an explicit definition of pur-pose. However, individual articles as well as the inception and prac-tice of the supervisory authority clearly stipulate that the primaryfunction is to protect the banks’ creditors, in particular depositors.Over the past years, great attention has been awarded not only tothe protection of individual customers, but also to overall functions.The latter include protecting the system (avoiding chain reactions)as well as confidence. Both the protection of individual customersand functions ultimately serve to maintain the stability of the finan-cial system (institutions and markets).

5 Supervision and Regulation of Banks

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Banking legislation pursues primarily public interests. It protectsbank customers (industrial protection) and ensures in part the fulfil-ment of constitutional economic assignments; most provisions formpart of public law. Banking legislation consists of the following:

– Federal Act on Banks and Savings Banks (Swiss banking law, SBL)– Federal Investment Fund Act (Investment fund law, IFL)– Federal Act on Stock Exchanges and Securities Trading

(Stock exchange law, SESTA)– Central Bank Act (CBA)– Currency and Means of Payment Act. (CMP)

These are complemented by relevant ordinances and a growing numberof special laws (on consumer lending, bonds, money laundering).Banks must also observe the circulars issued by the FBC, the Code ofconduct issued by the SBA, and in particular the Swiss Banks’ Codeof Conduct with Regard to the Exercise of Due Diligence (CDB), aswell as the regulations of the Swiss Stock Exchange and the SwissStock Exchange Admission Board.

Reform of Financial Market Regulation

The “Zufferey” group of experts, commissioned by the Swiss Fed-eral Department of Finance, published their summary report inNovember 2000. In it, the experts proposes that insurance andbanking supervision be merged into one supervisory authority. TheSwiss Federal Council subsequently appointed another group ofexperts headed Prof. Ulrich Zimmerli. This panel had the task ofpreparing the legal grounds for the proposed integration of thefinancial market regulation.

In July 2003, the Zimmerli group of experts submitted their firstpartial report on financial market regulation and their draft for therelevant federal law to the Swiss Federal Department of Finance(FDF). This set of documents will be submitted for consultation inautumn 2003. The legal message to parliament should follow in2004.

The draft of a new Federal Law on Financial Market Regulation(“FINMAG”) provides for the creation of a federal financial marketregulator (“FINMA”) as a public legal entity. The FINMA is intended

to assume the tasks which are carried outat present independently by the FBC andthe Federal Office of Private Insurance.Apart from containing structural provi-sions, the bill also standardises the sanc-tioning instruments of the future regulato-

ry body. Material supervisory regulations will, however, remain ineffect, in due consideration of the specific sector requirements. Stan-dard regulation will also apply to the co-operation with domesticand foreign authorities. The future integration of the Money Laun-

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The tasks at present carriedout by the FBC and FederalOffice of Private Insuranceare to be integrated.

dering Control Authority within the new regulatory body remains yetto be decided. The question whether independent wealth managers,securities and foreign exchange dealers should also be regulated bythis authority, is to be examined in greater detail, as well.

Banks, Banking Commission and Auditors

Impeccable Business Conduct as Requirement for Banking LicenceThe exercise of banking activities is subject to a licence issued by theFBC. Banks must meet legal requirements in order to obtain thelicence. Accepting money from the public and the management ofsuch money in one’s own name on a professional business scale issubject to a licence on principle. Professional business is defined asany activity that involves more than 20 customers. The term bank-ing business is applicable, if the money accepted is used to extendloans to third parties. Investment funds are subject to a licence,because they accept money from the public on a professional basisfor the purpose of collective capital investment under the manage-ment of a third party.

The principal requirement for a licence is the assurance of a perma-nently impeccable business conduct. Otherwise, the FBC has theauthority to withdraw the licence. In this case, thus inevitably causingthe bank to be liquidated.

Auditors as Instruments of the FBC

Banks and their corporate bodies must primarily ensure that regulationsare observed internally. The law has also provided for an additionalmeans of supervision consisting of the FBC and external auditors.

In contrast to most other countries, banks in Switzerland are super-vised by external auditors and not by the FBC directly. The supervi-sion by statutory bank auditors is the principal means of protectionfor bank customers. Swiss auditing associations and fiduciary com-panies are deemed eligible statutory auditors. They must be entirelyindependent from their clients, in economic as well as personnelterms, and they have to be adequately qualified. The FBC authorisesand supervises the auditors.

Within the annual audit, the auditor usually examines the compli-ance of the layout and contents of the annual report with legal andstatutory regulations, general compliance with the bank law and thebanking ordinance as well as compliance with other bank licencerequirements.

The auditing report is initially sent to the body responsible for overallmanagement, supervision and control, i.e. the Board of Directors or,in the case of cantonal banks, the banking council. The body in turnforwards the report to the FBC. The auditors thus act as the extend-ed arm of the FBC (dual supervision). The auditor’s report furnishesthe FBC with a detailed view of the bank’s overall condition. TheFBC is also entitled to demand further information and documentsfrom the bank as well as the auditor, and to impose extraordinaryaudits.

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Reform of Bank Audit In the year 2000, the FBC appointed a panel of experts chaired byProf. Peter Nobel, to elaborate a comprehensive reform of the auditsystem. While the experts gave good ratings to the system of dualsupervision, they recommended reforms in many other areas. AnFBC commission is currently elaborating the specific measures to thiseffect. The report by the Zimmerli panel of experts (financial markets regulation) also proposes improvements in this area. TheFBC is already in the process of building an administration unit within the banking commission, who will be in charge of supervisingthe auditors. Moreover, all banks and securities traders, except thebig banks, will be examined in future at regular intervals by anauditor other than their regular auditing firm (second audit). Clearlydefined areas of the big banks will also be audited in greater depthat least once per year.

ComplianceThe FBC supervises the banks with regard to their economic stabilityand management integrity. However, banks are autonomous interms of their business policies: within the perimeters of due dili-gence, every bank is free to choose its business. Neither does the SBLdefine the contractual relationship between banks and their cus-tomers. This area is governed by private law. The supervisory bodiesof the bank supervise compliance with all the relevant laws as wellas the articles of association, the regulations and directives, and theyensure that a bank always acts in accordance with the applicableregulations and its internal guidelines. The regulatory bodies includein particular the internal controlling department, internal audit andsupervision by the Board of Directors.

Business Activity Requirements

The pursuit of banking activities is subject to a licence issued by theFBC. Banks must meet the legal requirements in order to obtain thislicence. Such requirements relate in particular to minimum capital,the bank’s internal structure and the integrity of management. Otherprerequisites pertain to business activities, in particular equity, liquidity, diversification of risk, market risks, netting and reporting.

EquityThe balance sheet of a bank differs substantially from that of anindustrial company. The assets of a bank are typically 95% financialassets, while liabilities are primarily deposits and borrowed funds(the majority of which are short term); the bank’s equity capitalaccounts for only around 10% of the balance sheet total.

The SBL requires that banks provide enough equity capital to ensurethey can cover substantial losses before creditor claims are impaired.Equity is then used as a buffer to cover any losses. The weighted(with various rates) assets on the balance sheet that involve risk, certainoff-balance sheet transactions, as well as open securities positions,foreign exchange and derivative transactions must be covered by 8%equity. The size of the rates is inversely proportionate to the securi-ty of the positions to be covered. The capital adequacy requirementsmust be met both individually and on a consolidated basis. Statutory

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equity capital covers the market and credit risks of the banks. Since1998 banks have been able to choose between the standard proce-dure and their own model when covering their market risks. The lat-ter requires the approval of the FBC.

New Basel Capital Accord (Basel II)Today’s national equity capital provisions for banks are based on theBasel Capital Accord” of 1988 which is currently being revised(Basel II). The objective of the revision is in particular to increase therisk awareness, i.e. the equity capital requirements for banks willreflect the individual bank’s own risk structure more strongly thanthey do at present. Basel II will thus have a significant impact on thebanks’ risk management.

Chronology Basel II1988 July Publication of Basel Capital Accord (Basel I)1992 End Entry into force of Basel I1996 January Basel market risk paper1999 June First consultative paper on revising

the Capital Accord (Basel II)2001 January Second consultative paper on Basel II2003 May Third consultative paper on Basel II2003 Autumn Publication of the new Capital Accord2006 End Entry into force of Basel II

The Basel Capital Accord is based on a concept made up of three pillars: There has been no change to the first pillar which continuesto stipulate the minimum capital require-ments for banks. Previous equity require-ments based on credit and market risks arecomplemented in future by the obligationto provide additional equity cover for cer-tain operative risks. A new feature is thatbanks can now choose between various procedures for the assess-ment of risks (i.a., external ratings may be applied to the assessmentof credit risks if certain conditions are met). The second pillar tight-ens up national supervision procedures. This aims to improve condi-tions that will allow any irregularities to be identified at an earlystage. The third pillar aims to improve market discipline by requir-ing banks to disclose specific information.

The publication of the final “New Basel Capital Accord” is sched-uled for end of 2003. As an international “soft law”, “Basel II” willsubsequently need to be implemented on a national scale by therespective supervisory authorities and legislative bodies. The imple-mentation is expected to be concluded by end of 2006. In Switzerland,the implementation is being prepared by a mixed task force headedby the FBC.

Risk MonitoringBanks should be prevented from building up excessive risk whichcould harm depositors (and taxpayers). Among the measures aimedat ensuring this are regulations governing concentrations of risks(lump risks) and loans to bank directors and senior bank executives(intergroup loans, to prevent a conflict of interests).

LiquidityBy using short-term deposits to grant long-term loans, banks “trans-form” maturities. The varying lengths of interest rate lock-downperiods for the loans extended and amounts due in make banks vul-

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A new feature is thatbanks can choose between various proce-dures for assessing risks.

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nerable to changes in interest rates. Banks also have a direct liquidityrisk, however, if an unexpected number of customers withdraw theirassets at the same time, subsequently forcing the bank to liquidate apart of its assets early, a move which may result in a loss for thebank. The SBL therefore prescribes a reasonable ratio between, onthe one hand, tangible assets and assets that can be readily sold and,on the other hand, the short-term liabilities owed to the banks.

Depositor Protection

In the event of bankruptcy, bank creditors’ claims are satisfied in anorder of ranks fixed by law. Claims protected by pledge, are acquittedfirst through the liquidation of the pledge. Other claims are cate-gorised in three ranks of creditor claims. Claims by 1st rank creditorshave first priority, followed by 2nd and 3rd rank creditors, alwaysdepending on the availability capital stock. Claims by 3rd creditors,which usually account for the largest part of claims, may be satisfiedonly in part. However, in deviation from the ranks provided by theSwiss Bankruptcy Act, SBL provisions stipulate that certain claimsup to an amount of CHF 30,000 per creditor have to be categorisedin a rank between the 2nd and 3rd rank of creditors. These claimshave priority versus (other) 3rd rank creditor claims (consideringstrict equity capital requirements, such claims are virtually guaran-teed). Bank depositors are more privileged to the effect that theirdeposited assets are treated as preferential claims in the case ofbankruptcy, i.e. such assets are excluded a priori from the bankruptcyestate and paid out directly to the depositors.

Amendment of the Bank Insolvency LawIn November 2002, the Federal Council drew up a legal message tothe parliament concerning changes to banking legislation in the areaof reorganisation and liquidation of banks and the protection ofdepositors. The draft awards a broader authority to the FBC in the

reorganisation and liquidation of banks. If theFBC has “legitimate reasons to assume” that abank has a debt overload, liquidity problems ordoes no longer meet equity capital requirementsdespite warnings, the FBC should have theauthority to impose measures of protection,reorganisation procedures or the liquidation.

The draft also contains proposed measures for system protection inpayment transfers and securities trading, in particular the irre-versibility of system entries. In the case of a “legitimate prospect forreorganisation”, the FBC may impose reorganisation proceedings.The liquidation procedure as a result of a bank’s bankruptcy shouldbecome simpler, faster and less expensive. To this effect, the powerof decision (hitherto split between the FBC and the civil courts) willbe assigned entirely to the FBC.

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The liquidation procedure following abankruptcy should become simpler, faster and less expensive.

Amendment of the Depositor Protection AgreementLast but not least, a mandatory deposit protection is to be intro-duced. It should be arranged internally by the banks within theirself-regulation area and require FBC approval. In future, the prefer-ential treatment in the event of bankruptcy will be extended aboveand beyond savings, deposit, salary and pension accounts, to allbank deposits.

Experience has proved that there is usually sufficient cover for abank’s preferential liabilities – not least due to the equity capitalrequirements stipulated in the Banking Ordinance. To ensureprompt payment of preferential deposits to bank creditors in theevent of a bank’s collapse, there needs to be a system which willadvance the liquidity for such payments.

The SBA Depositor Protection Agreement was established for thispurpose in Switzerland. If a signatory bank files for insolvency pro-ceedings or bankruptcy, the SBA will ensure expeditious remittanceof protected assets to the respective customers. When a case arises,the SBA will apply an agreed quota to raise contributions from thesignatories of the Agreement. Since this assessment system takestime, the SBA may borrow the funds required for interim financing.For the remaining part of the liquidation procedure, the SBAassumes the role of the creditors for the amount it remitted.

The maximum amount under the Depositor Protection Agreement iscurrently set at CHF 1 bn. In the revised SBL this amount should beraised to CHF 4 bn. Banks will have to hold additional liquidity forhalf of that amount.

Annual Statement and Balance Sheets

Banks are primarily involved with other people’s money. Theirfinancial statements are therefore particularly important for creditors(and owners) as a reporting instrument. Moreover, regulations gov-erning financial reporting are an essential part of the protectionafforded to functions.

Although banks have to comply with the accounting standards setout in company law (art. 662–670 Swiss Code of Obligations), theyare governed primarily by the provisions of the SBL (art. 6) and the related Implementing Ordinance (art. 23–28) which, as a “lex specialis”, take precedence over company law. More detailed infor-mation on accounting requirements can be found in the FBC Guide-lines on Accounting Regulations and the FBC circulars.

Banks with global operations increasingly use international account-ing standards (specifically IAS). The FBC permits this practice, butrequires an explanatory statement, in the form of notes, drawn up inaccordance with Swiss law.

The annual financial statement consists of a balance sheet, a state-ment of income and notes. The statement is complemented by anannual report setting out detailed information on all importantevents that occurred after the balance sheet date. Banks disclosingtotal assets of CHF 100 million or more and involved in balancesheet transactions to a significant extent also have to issue a cashflow statement as part of their annual statement requirements.

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FBC Guidelines on Accounting Regulations (FBC GAR) The new FBC Guidelines on Accounting Regulations (FBC GAR)were enacted at the end of 2002. However, they become only bind-ing for annual statements closing as from 31st December 2003. Forthe most part, the revision of the FBC GAR is “technical”. Amongother things, it includes the incorporation of the fundamental provi-sions of the Swiss GAAP FER 19. The listing regulations of the SWXrequire listed banks which publish a consolidated annual statementto publish also individual accounts established on the basis of thetrue-and-fair-view principle. Banks whose gross income consists toat least one-third of commission and services business, have to pres-ent the managed and deposited assets.

Self-Regulation and Code of Conduct

The banking, stock exchange and anti-money laundering laws areminimum standards which leave scope for specification by the codeof conduct. The code of conduct forms part of the banks’ and securities

traders’ system of self-regulation and plays animportant role in the Swiss banking sector. Theessential advantages of self-regulation lie in thefact that they relate closely to business practice,they are established by regulators with profes-sional expertise and they are more readilyaccepted and implemented.

The SBA passes the code of conduct and the FBC enforces it in itscapacity as a public supervisory authority. This sovereign enforce-ment ensures that the SBA code of conduct is binding for all banks.For the purposes of the FBC, compliance with the code of conduct isequal to the “assurance of impeccable business conduct” and thusforms part of the banking licence requirements that financial servic-es companies have to fulfil permanently. This private code of con-duct thus ranks in fact as a public standard and is therefore subjectto sanctions by banking law. The FBC currently recognises 14 guide-lines and agreements as part of the code of conduct; auditors have toexamine the banks’ and securities traders’ compliance with theseguidelines and agreements.

Code of Conduct with Regard to the Exercise of Due Diligence (CDB 03)The Code of Conduct with regard to the Exercise of Due Diligenceis of particular importance. The 6th version (CDB 03) entered intoforce on 1st July 2003. The identification of contracting parties and

the establishment of the beneficial owners arestill the core elements of the CDB. The CDBcontains detailed instructions as to the identi-fication procedures and document verifica-tion duties. The CDB also includes provisionson mandatory records. The CDB further pro-hibits active assistance by the banks in the

flight of capital in countries with restrictions with regard to invest-ments abroad. In the same vein, the CDB prohibits active assistanceby the banks in tax evasion and similar acts by issuing incompletecertifications. An independent supervisory commission monitorsand sanctions violations against the CDB, and may impose fines ofup to CHF 10 m.

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Self-regulation of banksand securities tradersplays an important rolein the Swiss bankingsector.

Identification of con-tracting parties and esta-blishing the beneficialowners are still core ele-ments of the CDB.

Some provisions regarding customer identification have been tight-ened in the 2003 version of the CDB. For instance, in establishing thebeneficial owners, banks must require also require information onthe date of birth and citizenship, in order to facilitate any futureidentification of persons and exclusion of neutral third parties. Fur-thermore, the verification of the identity of legal entities not listed inthe Commercial Register must include the identity verification of thepersons opening the account. If an account is opened through corre-spondence, mere exchange of correspondence is no longer sufficientas a method of identification, but the bank must obtain a certifiedcopy of the contracting person’s passport or identity document. Theidentity verification option “known personally” has been cancelled.Proof of identity is mandatory also for individuals personally knownto the bank staff.

Swiss Banking Ombudsman

The SBA established the “Swiss Bank Ombudsman Foundation” inthe fall of 1992. The Ombudsman acts as an impartial mediatorbetween banks and their customers. He can be called upon by everybank customer, in particular those little acquainted with the bankingbusiness, e.g. private individuals or SMEs. The Ombudsman suggestssolutions on the basis of statements he receives from both parties.His recommendations are highly respected although they are notlegally binding. This forum enables dissatisfied bank customers tosettle disputes with their banks in an efficient and unbureaucraticmanner, and dispenses of the necessity to take tedious and costlylegal action.

The Ombudsman is also a port of call for people with enquiriesregarding assets which became dormant subsequent to 1945. Assetsare deemed dormant if the respective customer contact has ceased

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Overview of Key SBA Codes of Conduct

Agreement on Due Diligence (CDB). The CDB obliges banks toknow their customers, to identify the beneficial owners, and toprovide no assistance in tax evasion or illegal export of capital.Directives on the Independence of Financial Research.Reduction and elimination of possible conflicts of interest infinancial research and analysis.Agreement on depositor protection. Guarantee to bank’screditors (depositors) for expeditious repayment of up to CHF

30,000 should the bank collapse.Code of conduct for securities traders. Basic regulation governing all securities traders under the Stock Exchange Law,specifying their responsibility with regard to disclosure, duediligence and loyalty.Guidelines for the management of country risk. Minimumrequirements for banks with regard to internal structures andprocesses for managing country risk.Guidelines for risk management in trading and the use offinancial derivatives. Formulation of internal guidelines withregard to risk management.Guidelines on portfolio management agreements.Principles of customer portfolio management.Guidelines for the treatment of dormant assets. Avoidinginstances where assets become dormant, re-establishing contact with the customer, the banks’ duties with regard todormant assets, procedures for tracing dormant assets.

and cannot be established despite the bank’s active search efforts.The SBA has issued guidelines on this subject.

International Co-Operation among Supervisory Authorities

Legal co-operation governs the co-operation between judicial author-ities, whereas administrative co-operation governs the co-operationbetween administrative and supervisory authorities. Statutory guar-antees warrant in both instances the safeguarding of justified cus-tomer interests.

Administrative Co-Operation and In Situ MonitoringOn principle, the FBC may furnish foreign supervisory authoritieswith information which falls within official confidentiality and isnot available to the public. The release of such information (admin-istrative co-operation) is subject to three statutory conditions:

– Information may be conveyed exclusively for the purpose of directsupervision of banks and other authorised financial institutions.Administrative assistance to tax authorities is prohibited.

– The foreign authority seeking co-operation must be bound by offi-cial and professional discretion and it must be the direct recipient ofthe information.

– The foreign authority seeking co-operation is not permitted to conveyinformation to other authorities or public supervisory bodies, otherthan by the FBC’s prior consent or a general treaty authorisation.

Information may not be conveyed to pros-ecution authorities if legal co-operation incriminal cases is restricted. This is to pre-clude an evasion of prosecution assistancerequirements.

The revised SBL enacted on 1st October 1999 provides a legal basiswhich enables in situ monitoring in Switzerland by foreign supervisionauthorities. Such monitoring is restricted to information which isnecessary to ensure a consolidated supervision of the banks con-cerned. Moreover, the monitoring is subject to the provisions onmutual administrative assistance.

Investigations into issues pertaining directly or indirectly to assetsmanaged on behalf of individual customers or deposits, can only becarried out by the FBC. Such investigations are governed by the Fed-eral Act on Administrative Proceedings. Bank customers have a rightto appeal against an injunction issued by the FBC, at the Swiss Feder-al Court. Both, the FBC and the Federal Court must grant bank cus-tomers a fair hearing and access to the relevant documents.

The Swiss Federal Court takes these requirements very seriously. Ithas forestalled administrative assistance interaction between the FBCand the SEC on several occasions, because the SEC is governed byAmerican laws and therefore does not fully comply with the Swissrequirements for official confidentiality and the principle of speciality.

Particularly with a view to the combat of terrorism and money laun-dering, international understanding has prevailed that monitoring ofdue diligence compliance in terms of customer identity verificationconstitutes an element of supervisory authority responsibilities. Thisalso comprises in situ monitoring, i.e. the examination of customerdocuments by authorities of the bank’s country of origin. The FBC

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The foreign authority seeking co-operation mustbe bound by official andprofessional discretion.

deems current Swiss provisions in this context too restrictive to beapplied in a meaningful manner in practice. Therefore, the FBC hastaken the initiative to amend the Swiss laws governing administrativeassistance. The SBA fundamentally supports this initiative. Conse-quently, a mixed task force of FBC and SBA representatives has elab-orated a proposal for a solution. In cases where customer relatedinformation is transferred abroad, it is crucial from our perspectivethat legal protection remains warranted to the parties concerned(applicability of administrative procedure).

Consolidated SupervisionDue to the international orientation of the Swiss financial centre,many foreign banks have long established their branches and sub-sidiaries in Switzerland. The principle of consolidated supervision ofsuch foreign banks by authorities in their countries of origin isgranted under the condition that such supervision is conducted inaccordance with Swiss law. Subject to compliance with certainrequirements, banks may convey to their foreign head offices anysuch information and documents as may be necessary for the pur-pose of consolidated supervision. Consolidated supervision bybanks in the country of origin is thus warranted.

Bank Customer Confidentiality

The banking secret is not a secret in relation to the bank but to thebank’s customers. It is therefore more appropriately called the bankcustomer confidentiality. The Swiss bank customer confidentialitydiffers from that of other countries mostnotably in that it is strictly protected notonly by civil law but also by penal law. Theprotection of privacy strongly fosters thecustomers’ confidence in their banks. Thisprotection constitutes a fundamental rightwithin the Swiss legal system. It also reflects the citizens’ right topersonal freedom – a traditional and treasured fundamental right.The bank customer confidentiality also pursues the principle ofequality by granting equal protection to Swiss and foreign cus-tomers.

Contrary to common belief, anonymous accounts do not exist inSwitzerland. Though customers may hold a so-called numberedaccount, the bank must invariably establish the customer’s identity.The purpose of a numbered account is only to restrict access to theinformation about the holder’s identity to a limited number of bankemployees, thereby offering an additional protection against a viola-tion of confidentiality provisions. However, numbered accounts andordinary named accounts are equal in all legal aspects. Therefore,for instance in the course of criminal investigations, the relevantcourt is entitled to demand information from the bank.

The Swiss bank customer confidentiality is not and has never beenabsolute. The SBL explicitly reserves the federal and cantonal provi-sions about the banks’ duty to report and testify to authorities. Theduty to report is in particular part of the civil law, the law of civilproceedings, debt collection law and bankruptcy law. The duty toreport to the relevant investigation authorities is especially part ofthe criminal proceedings law and legal co-operation treaties.

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Banking secrecy is notsecrecy in relation to thebank but to the bank’s customers.

Swiss Tax SystemThe Swiss tax system is based on the principle of the tax payers’ owndeclaration. The bank has no duty to report to tax authorities, nei-ther in the bank customer’s tax assessment process nor in the taxreview. It must, however, submit statements to the customer. Thesame applies to cases of tax violation and tax evasion prosecuted inadministrative proceedings. However, banks cannot take recourse totheir duty of discretion in cases of tax fraud which qualify as anoffence in several cantons and on federal level and are subject tocriminal proceedings. A case of tax fraud is given if a tax payerdeliberately submits false or forged documents in order to deceivethe tax authorities and thereby attain unlawful tax advantages.

Direct Withholding Tax as a CorrelationOn the federal level, the direct withholding tax represents an impor-tant tool against tax evasion. Most forms of capital income inSwitzerland are subject to this withholding tax at a usual rate of35% which is rather high by international comparison. The directwithholding tax is designed to motivate recipients of taxable rev-enues to disclose such income. Shareholders and recipients of inter-est payments resident in Switzerland are entitled to claim a fullreturn of the withholding tax at receipt of the taxable amount. Thisalso applies to tax payers resident abroad, provided that the with-holding tax may be offset against the taxes payable in the country ofresidence on the basis of a double-taxation treaty.

Taxation of Savings Interest Earnings in the EU,Tax Retention in Switzerland.

Switzerland opposed the EU’s original plans for a routine exchangeof information on savings income of private individuals, because thiscontradicted Swiss laws. Extensive negotiations have yielded a solutionwhich is acceptable to both parties. In particular, Switzerland wasprepared to consider raising a tax on interest payments to accountsheld at a bank in Switzerland by EU residents, under the conditionthat the EU actually implements the proposed measures within itsown territory and its dependencies, and provided that the majorfinancial centres outside the EU also accept equivalent regulations.

Following extensive and thorough negotiations, the EU Ministers ofFinance passed the guidelines on cross-border savings income taxa-tion on 3rd June 2003. As from 1st January 2005, 12 EU memberstates are expected to automatically exchange information amongtheir respective tax authorities and thus ensure that savings income

is taxed at the investor’s tax domicile. Forthe time being, Belgium, Luxembourg andAustria will be raising a withholding tax andforwarding 75% of the proceeds to theinvestor’s tax domicile.

The draft agreement with Switzerland envisages a similar solutionwith a tax retention on savings income earned in Switzerland by EUnationals. The core of this agreement is Switzerland’s commitmentto the introduction of a system of tax retention initially of 15%, ris-ing to 20% and then of 35% from 2011. These figures also apply toBelgium, Austria and Luxembourg. This tax retention will be appli-cable to all interest payments made by a paying agent on Swiss ter-

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The withholding tax is an important tool againsttax evasion.

ritory to private individuals resident for tax purposes in an EU mem-ber state. Switzerland will forward 75% of the withholding tax tothe respective EU member country and retain the rest.

The subject of savings income taxation having thus been successfullyclosed, two specific items remain to be resolved within the secondseries of bilateral negotiations: Swiss accession to Schengen/Dublinas well as all issues concerning the combat of fraud. In both cases,Switzerland focuses on solutions along the benchmarks agreed in thecontext of savings income taxation. The agreements under the secondseries of bilateral negotiations are subject to Swiss parliamentaryendorsement; if a referendum is called, they also have to be ratifiedby the Swiss electorate.

Anti-Money Laundering Measures

The fight against money laundering and organised crime is a per-manent and important task for the authorities. Over the past years,a number of decrees have been passed in this context: The FederalAct on the Prevention of Money Launder-ing in the Financial Sector, the FBC Guide-lines Concerning the Prevention and Com-bating of Money Laundering as well as theprovisions of the Swiss Penal Code. Withan interest to preserve their reputation,banks are also anxious to ensure that their services are not misused.The banks’ self-regulation is an important factor in the combatagainst money laundering.

Public Law and Penal Code– The Federal Act on the Prevention of Money Laundering in the

Financial Sector (in effect since 1st April 1998) is applicable to allfinancial intermediaries who accept third-party assets, i.e. banks,investment fund managers, securities traders, insurance companies,attorneys, independent wealth managers, trustees, investment advi-sors, money brokers. Its due diligence requirements are based on theAgreement on the Bank’s Code of Conduct with Regard to the Exer-cise of Due Diligence (CDB) and the FBC Anti-Money LaunderingOrdinance. The Anti-Money Laundering Act further contains theobligation for financial intermediaries to report all cases of justifiedsuspicion of money laundering to a federal control authority. Theimplementation of the law is based on self-regulation and publicdirect supervision. Trustees, wealth managers, finance companiesand money brokers, thus far not subject to supervision under feder-al law, have formed self-regulatory associations. These associationshave to issue regulations in line with legal requirements, analogousto the CDB for banks.

– The FBC Anti-Money Laundering Ordinance came into effect inmid-2003. The Guidelines against money laundering and money ofpolitically exposed persons, thus far embedded in FBC circulars,have thus been tightened and lifted to the level of an ordinance andextend also to the financing of terrorist activities. The ordinancecommands i.a. systematic and electronic global monitoring of riskybusiness relationships. Moreover, terms related to politicallyexposed persons and the obligation to exercise tightened due dili-gence have been embedded in material law for the first time.

– The Swiss Penal Code anti-money laundering provisions (art. 305bis)of 1990 stipulate punishment measures for any action designed toobstruct investigations into the origin or location, or prevent the

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In order to preserve theirreputation banks are anxious to ensure their ser-vices are not misused.

confiscation of assets, if such assets are known or must be assumedto be proceeds from a crime. Professional financial intermediariesare statutorily obliged apply the “know-your-customer” principle.Insufficient identity verification of a contracting partner or benefi-cial owner is deemed an offence, pursuant to SPC (art. 305ter, par. 1).Financial institutions are allowed to report to authorities any obser-vations leading to the conclusion that assets originate from a crime.Such reporting does not constitute a violation of bank customer con-fidentiality (SPC art. 305ter, par. 2).

– The new penal provisions on corruption (SPC art. 322ter–322octies)have been in effect since 1st May 2000 and stipulate punishments forthe act of offering and receiving a bribe or preferential treatment byor vis-à-vis Swiss officials and the act of offering a bribe to foreignofficials.

International Mutual Legal Assistance in Criminal MattersMutual legal assistance among judicial authorities is also customaryon an international level. Switzerland provides mutual legal assis-tance to foreign authorities, according to the Federal Law relating toInternational Mutual Assistance in Criminal Matters of 1981(amended in 1995). The course of such mutual assistance allowsinformation to be exchanged, assets to be frozen and if necessaryhanded over to the foreign authorities concerned.

International mutual assistance in criminal matters is based essen-tially on the principles of dual criminality, speciality and propor-tionality. Under the dual criminality rule, Swiss courts will applycoercive measures, such as lifting the requirement of bank customerconfidentiality, only if the act under investigation is punishable bythe laws in both Switzerland and the requesting country. Pursuant tothe speciality rule, information obtained through the mutual assis-tance arrangement can only be used for the purposes of the criminalproceedings for which the assistance is provided. The proportional-ity rule serves to ensure that the measures sought in conducting therequest for assistance must be proportionate to the crime, and dis-cretion must be exercised if the proceedings may adversely affect theinterests of persons not directly involved. In mutual legal assistanceproceedings, bank customers as well as banks have a single right ofappeal. Final cantonal judgements and Federal Police directives aresubject to a single administrative appeal to the Federal Court.

Self-Regulation The self-regulation of banks plays a particularly important part in thecombat of money laundering. The Agreement on the Code of Con-duct Regarding the Exercise of Due Diligence (CDB) was in effect along time before the enactment of the Anti-Money Laundering Actand the inclusion of relevant provisions in the Federal Penal Code.

In co-operation with nine other international banks, the two bigbanks elaborated the Wolfsberg Anti Money Laundering Principlesin 2001, a set of global due diligence standards based on the CDB.Unlike the Swiss regulations, the Wolfsberg Principles do provide forany sanctions or fines. Financial institutions are free to adopt theseself regulation standards. The signatory banks commit to apply thestandards globally, thus closing a loophole in international preven-tive measures.

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6 The Banks’ Joint Organisations

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Position and Significance of the Joint Organisations

The Swiss banks’ joint organisations are based on a long-standing tra-dition. Against the backdrop of growing international links on the onehand and increasing competitive pressure on the other hand, not allbusinesses once deemed worth joining up with one another are stillviewed as such. However, at the same time new global associationsand networks are emerging to cope with cross-border transactions.

Basis systems capable of leveraging large volumes and uniformstructures to produce cost and logistics benefits for all participantshave a promising future ahead of them. Foremost among these sys-tems is the Swiss franc clearing system provided by the Swiss Inter-bank Clearing SIC.

However, conflicts can easily surface withjoint organisations with direct interfaces tobank customers. Such systems are involvedat critical points in the banks’ output chains.The credit card business is one example:most banks use credit cards as a customer “loyalty” instrument;however, since they want to shape the customer relationship them-selves, they are often not prepared to cede the control of their creditcard business to a joint organisation.

In the future, joint organisations will operate outside national borders.Global infrastructures, such s Continuous Linked Settlement (CLS)will increasingly shape the cross-border transactions of the future.Typically, small and medium-sized banks will not be direct membersof such international groups, but are more likely to make use ofthese groups’ services or parts thereof through big banks.

Systems producing costand logistics benefits for all participants have a promising future.

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Outsourcing parts of banking business is also becoming increasinglywidespread on an international level. For individual banks, out-sourcing is first and foremost a matter of business policy. However,it also affects the financial centre as a whole. It does so to such anextent that in 1999 the FBC was compelled to specify in one of its cir-culars the conditions that had to be met to safeguard banking secre-cy and data protection within the outsourcing process. One suchcondition makes the approval to outsource a business area to a loca-tion outside Switzerland contingent on proof being provided that thecompany outsourcing the business, its internal and external auditorsand the FBC have unrestricted access at all times to the business areoutsourced, for the purposes of inspection and audit. The amend-ment of this circular entered into effect on 1st November 2002.

Swiss Financial Services Group AG (SIS)

The SIS Group provides securities services to the domestic and inter-national securities business. SIS is the holding group of the compa-nies SIS SegaInterSettle AG, SIS Systems AG, S A G SIS AktienregisterAG und SIS x-clear AG. The SIS Group employs a workforce ofaround 700 at its locations in Zurich and Olten.

SIS SegaInterSettle AG

As the central point of turnover for Swiss securities trading, SISSegaInterSettle is the central depository for all Swiss securities andacts as central clearing organisation for all transactions in Swiss secu-rities. The settlement of international transactions in Swiss securitiesis provided by SIS through its SECOM system.

SIS x-clear AG

The SIS x-clear AG is bank domiciled in Zurich and established bySwiss law on 5th May 2003. It acts as a central counter-party intransactions effected at the virt-x.

Telekurs Group

The Telekurs group offers services and products related to non-cashmeans of payment, financial information and IT services. Telekursregards itself i.a. as the banks’ partner for outsourcing. Its group com-panies process entire chains of tasks or parts thereof on behalf of thebanks. The group consists of six companies with a total workforce ofaround 2,000 employees:

1 Telekurs Multipay AG2 Telekurs Card Solutions AG3 Swiss Interbank Clearing4 PayNet (Schweiz) AG5 Telekurs Financial AG6 Telekurs Services AG

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Telekurs Multipay AG

Telekurs Multipay AG markets and manages non-cash means of pay-ment and electronic payment systems on behalf of private individu-als, companies and banks. This includes credit cards (MasterCardand Visa) as well as the ec/Maestro debit card and CASH

Telekurs Card Solutions AG

Telekurs Card Solutions AG develops and operates an open platformfor card based payment transactions. This includes products for theassessment of payment transactions (such as card processing termi-nals), networks (such as automatic cash tellers), card processing,domestic and international clearing.

Swiss Interbank ClearingSwiss Interbank Clearing manages the Swiss Interbank Clearing Sys-tems SIC for Swiss franc payments and euroSIC for Euro payments inand outside Switzerland. euroSIC warrants the connection to Euro-pean payment systems, thus providing an efficient cross-border pay-ment gateway. In addition, Swiss Interbank Clearing AG operatesthe DTA and DD (LSV) systems.

PayNet (Schweiz) AG

As a SAP licence holder, PayNet (Schweiz) AG plans to operate andmarket the Electronic Bill Presentment and Payment (EBPP), a pro-prietary development of the Telekurs Group. The EBPP system per-mits the posting and presentment of invoices via internet, as well assubsequent automatic processing and payment. In 2002, the Ger-man software company SAP entered upon the onward developmentand maintenance of this software.

Telekurs Financial AG

Telekurs Financial AG specialises in the procurement and transmis-sion of international financial information for investment advisors,asset managers, financial analysts and securities administrators. Aglobal network of local financial market specialists supply first-handstock exchange information direct from the major financial centres.

Telekurs Services AG

Telekurs Services AG develops and operates systems for processingbank and card payments.

Stock Exchanges

Swiss stock exchanges are organisations governed by private law.The SESTA assigns them a high level of autonomy and it stipulatesthe principle of self-regulation.

The history of Swiss stock exchanges goes back more than 150years. In 1996 traditional floor trading at the stock exchanges inGeneva (founded in 1950) and Zurich (founded in 1873) wasreplaced by fully electronic trading SWX.

The operation of a stock exchange in Switzerland is subject to alicence from the FBC. The FBC examines whether transparency andthe equal treatment of investors are warranted and whether thestock exchange is able to guarantee proper functioning of securitiesmarkets.

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SWX Swiss ExchangeThe SWX has 95 domestic and foreign member banks. Foreign banksand brokers are allowed to trade at the SWX directly from abroad as“Remote Participants”. They benefit from the same infrastructure asSWX participants in Switzerland.

The core business of the SWX is to ensure proper functioning of thestock exchange. More than 5,000 securities are traded at the SWX:stocks, investment funds, exchange traded funds (EFT), bonds, euro-bonds and options. Since 25th June 2001, Swiss blue chips have beentraded on the virt-x trading platform. More than 170 foreign stocksare also listed on the SWX Swiss Exchange. These stocks, mostlyleading international companies from North America, Germany, theNetherlands and Japan, are traded in Swiss francs. Eurobondsdenominated in US dollars, euro and pound sterling have been trad-ed at the SWX since 1998, as well.

Admission to the SWX is governed by its listing regulations. TheSWX processes applications for the listing of securities and examinesthe listing prospectuses and announcements as well as compliancewith legal and regulatory requirements. There are four listing seg-ments: the traditional general segment, the segment for investmentcompanies, the SWX New Market and the SWX Local Caps.

Issuers as well as the stock exchange have to comply with a largenumber of provisions. This serves to protect investors and to ensurefair and transparent trading. Such provisions include the obligationfor issuers to publish information related to the securities and theissuer (e.g. capital events, repurchase). The SWX will request the FBCor the respective criminal investigations authority to investigate anycase of suspected insider trading, market manipulation or otherirregularities.

Swiss Value ChainThe SWX has been operating an automated trading system since1996. Through its close partnership with the SIS, the SWX is able to

provide a fully integrated value chain, the“Swiss Value Chain” for this trading system.Transactions and clearing are processed bySIS automatically and in real-time. Transac-tions are processed by simultaneous transferof money and securities in the SIS or SIC sys-

tem. Furthermore, SIS SegaInterSettle enables SWX trading transac-tions to be processed via other clearing organisations by forwardinglocked-in-trades generated at the SWX. SWX members are thus free tohold their securities also with clearing organisations other than SIS.

SWX provides a fully-integrated value chain – the so-called

“Swiss Value Chain”.

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SWX GroupThe SWX Group was established in 2001. It consists of the deriva-tives exchange EUREX, the trading platform for pan-European bluechips virt-x, the STOXX group of indexes and the data supplierEXFEED.

– EUREX is the result from the merger of SOFFEX (Swiss Options andFinancial Futures Exchange) and DTB (German Futures Exchange,Deutsche Terminbörse). Around 430 members from 16 Europeancountries and the USA use the derivatives exchange EUREX. EUREXnot only operates the electronic trading platform but also providesall participants with integrated clearing for all products. EUREX isthe global leader among derivative markets.

– virt-x was founded as a Swiss-British joint enterprise by SWX SwissExchange and Tradepoint Financial Networks plc. It is the first plat-form for electronic trading in all pan-European blue chip stocks.virt-x is headquartered in London and its operation is based on thetrading platform created by SWX Swiss Exchange. At the beginningof 2003, SWX Swiss Exchange took control of virt-x in a publicoffering.

– STOXX is a joint venture of SWX Swiss Exchange, Dow Jones & Com-pany and German Stock Exchange (Deutsche Börse). STOXX pro-vides a set of European indexes classified by business sectors. TheTotal Market Index was launched in the autumn of the year 2000and includes 1,200 stocks, thus covering 95 per cent of the Euro-pean stock exchange capitalisation.

– EXFEED transmits pan-European and Swiss financial markets data inreal-time. EXFEED was founded by SWX Swiss Exchange with head-quarters in Zurich. Since 1993, SWX Swiss Exchange has been dis-tributing its real-time data globally via SMF (Swiss Market Feed).

The Swiss National Bank7

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As an independent central bank, the SNB is responsible for the mon-etary and currency policy. The primary aim of the SNB‘s monetarypolicy is to enable the economy to fully exploit its production capac-ities, while maintaining medium-term price stability. The SNB thusmaterially shapes the settings for the development of the economy.

The Monetary Concept

Price stability is an essential prerequisite for growth and prosperity.Inflation and deflation have undesirable effects on the distribution

of money and equally disrupt the develop-ment of the economy. The SNB strives toensure price stability in the medium term andthereby to enable the economy to maximiseits production capacities.

Inflation forecasts play a key role in themonetary concept pursued by the SNB:

– An explicit definition of price stability. The SNB equates price stabili-ty with a rise in the national consumer price index of less than 2%per annum.

– The use of a broad-based inflation forecast as a main indicator. Thisis a consensus forecast which takes into account individual indicatorssuch as exchange rate developments, money supply and the outputgap (i.e. the difference between actual and potential production) as

The SNB strives to ensureprice stability therebyenabling the economy tomaximise productioncapacities.

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well as the results of various macroeconomic models. The inflationforecast forms the basis of monetary policy decisions and is a vitalelement in communication with the public.

– A target range for the 3-month Libor as an operational target for theimplementation of monetary policy.

The SNB publishes an inflation forecast every June and December,and bases its assumptions on an unchanged 3-month Libor. Its fore-cast thus shows how the situation were to develop if the SNBremained inactive. If the forecast indicates, for instance, a steady riseof inflation above 2%, the SNB would see itself compelled to act.

Monetary Control

The SNB controls money market rates by directing the liquidity supplyof commercial banks. Current account deposits, i.e. non-interestbearing sight deposits at the SNB, represent an essential part of thecommercial banks’ liquidity. The supply and demand for currentaccount deposits is balanced in the money market (interbank market).The banks’ demand for current account deposits derives fromstatutory liquidity requirements as well as the need for funding non-cash payment transactions. The SNB controls the supply by buying orselling the banks’ assets for Swiss francs. Repo transactions are themost important tool for monetary policy.

The SNB bases the implementation of its monetary policy on theinterest rate levels in the money market, thereby using the 3-monthLibor (London Interbank Offered Rate) as benchmark. The SNB setsa target range of 10 basis points for the 3-month Libor. While theinflation forecast is indicative of the SNB’s long-term monetary policyobjectives, the interest rate range reflects the SNB’s intentions in theshort-term. The SNB reviews the interest rate range usually everyquarter and justifies any amendments. The SNB also communicatesat which level within the interest rate range it expects the 3-monthLibor to move.

Repurchase AgreementsRepurchase or repo agreements are the SNB’s principal monetaryinstrument. The SNB has been dealing in repurchase agreementssince April 1998. Following their introduction, repurchase agree-ments quickly became the SNB’s principal monetary instrument.Since mid-1999, repo transactions have been the sole instrument ofimplementing monetary policy.

In a repurchase agreement, the SNB purchases securities from bankswhich then repurchase them on a fixed date. During the term of theagreement, the SNB supplies its contracting party with Swiss francliquidity and retains the equivalent securities in its custody. Therepurchase agreement is basically a secured loan whereby the debtorpays interest to the creditor during the life of the agreement. Thesecurities pledged as collateral limit the counter-party risk in arepurchase agreement to the spread between the market value of thecollateral and the amount of the loan. This spread is assessed dailyon a mark-to-market basis and settled by a margin transfer.

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Repurchase agreements have a number of advantages versus currencyswaps: a settlement risk is always inherent in currency swaps, as theSNB credits the banks’ current accounts with the equivalent in Swissfrancs prior to receiving the delivery confirmation for the relevantforeign currency amount from its correspondent bank. Furthermore,there is a market risk throughout the life of the swap: in the event ofcounter-party default coinciding with an exchange rate deteriora-tion, the SNB has to sell the foreign currency amount at a loss. TheSNB may enter into currency swaps only with big banks whichengage in foreign exchange business. Small and medium-sized banksnow also have direct access to the SNB, as the minimum contractamount for repurchase agreements is CHF 1 million.

Other Duties of the SNB

Cash SupplyThe SNB has the statutory monopoly for issuing bank notes. Byappointment of the Federal Government, the SNB is also responsiblefor the provision of coins.

Non-Cash Payment TransactionsSwiss Interbank Clearing AG operates SIC electronic interbank clear-ing system by appointment of the SNB. SIC is classified as an RTGSor Real Time Gross Settlement system with a “queue” mechanism.In the system, payments are processed individually (gross) and settledvia participants’ current accounts at the SNB. More than 220 com-mercial banks currently settle their gross payments and part of theirbulk payments via SIC on a 24-hour basis.

Since October 1999, the SNB has been providing banks with interestfree intraday liquidity. This facility is immensely valuable at the set-tlement of payment transactions, as it enables banks to draw Swissfranc liquidity form the SNB for the day. The number of pending pay-ments in SIC has been significantly reduced since the introduction ofthis facility; nowadays most payments are settled before noon. Thegranting of intraday liquidity has no impact on monetary policy, asthe funds are returned to the SNB within the same business day.

Creating Currency ReservesSNB assets consist essentially of gold and currency reserves as well asdomestic financial assets (domestic securities and money marketpaper). These assets form part of national assets and play a crucialrole in monetary and currency policy.

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Part of these assets are used directly in the execution of monetarypolicy: the SNB purchases assets in order to supply the economy withcentral bank liquidity. Unsecured currency reserves are mainly heldin key currencies. They enable the SNB to support the Swiss franc inthe event of a currency weakness in the market.

Monitoring of the System StabilityThe stability of the financial system is based primarily on the stabilityof the individual market participants and an effective supervision ofbanks. The latter is ensured by the Federal Banking Commission.The SNB structures the fundamental conditions for the financial centre.

International Co-OperationThe SNB co-operates at the international level with the Internation-al Monetary Fund (IMF), the Group of Ten (G-10) which consists ofthe ten leading industrial countries and Switzerland, as well as theBIS. The SNB also provides other central banks with technical assis-tance and training within the framework of international co-opera-tion schemes.

Advisor and Banker to the Federal GovernmentThe SNB advises the federal offices on questions of monetary andcurrency policy. In addition, the SNB offers banking services to thefederal government (e.g. by issuing government bonds).

SwissBanking –The Swiss Bankers Association

8

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Safeguarding Interests and Self-Regulation as Primary ObjectivesThe SBA was founded in 1912 in Basel. It is the umbrella organisa-tion of the Swiss financial centre, counting among its members prac-tically all banks, auditing firms and securities traders. The SBA:

– represents the interests of the banks in dealings with the authoritiesin Switzerland and abroad;

– promotes Switzerland’s image as a financial centre throughout theworld;

– fosters open dialogue with an analytical public in Switzerland andworld-wide;

– develops the system of self-regulation in consultation with regulatorybodies;

– supports the training of junior staff and established executives in thebanking industry;

– facilitates the exchange of information and knowledge betweenbanks and bank employees;

– co-ordinates joint projects undertaken by the Swiss banks.

Membership List Includes Auditors and Securities TradersBanks, auditing firms and securities traders are eligible for member-ship of the SBA. The Executive Committee of the Board of Directorsdecides on the admission of new members. The SBA has now 889member institutions (510 of which are rural credit cooperatives) and8,330 private individuals as members. Its office employs a staff of

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over 50. A total of 15 commissions deal with key issues affecting theindustry. Serving on these commissions alongside specialists fromthe SBA itself, are 180 leading representatives of the various cate-gories of banks.

General Assembly, Board of Directors and OfficeIn addition to the General Assembly, which convenes annually aspart of the Swiss Bankers Day, the SBA has the following corporatebodies and committees: the Board of Directors, the Executive Com-mittee of the Board of Directors, its Office, Commissions, ProjectGroups and Groups of Experts.

The Board of Directors is appointed by the General Assembly anddetermines the basic orientation of the Association’s activities. TheCommittee appointed by the Board of Directors formulates, interalia, the SBA’s position within the scope of consultative procedures.The Office takes care of the Association’s daily business and repre-sents the SBA in dealings with other associations and public institu-tions. Commissions deal with key issues affecting the industry. TheSBA’s main objective is to safeguard and promote an optimal envi-ronment for the Swiss financial services industry in Switzerland andabroad.

Categories of Banks9

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The Swiss banking sector includes all financial intermediaries thatare governed by the banking law. Pursuant to art. 2a of the bankingordinance, the definition of banks which are subject to registrationincludes all institutions that publicly solicit third-party money forthe purposes of safekeeping. Other criteria for the definition ofbanking activities are met by institutions that

1 refinance themselves substantially by non-group banks for the pur-pose of financing other non-group third parties, and

2 purchase or publicly offer securities in the primary market.

Institutions which are subject to the banking law are required tosubmit to the SNB at regular intervals a report on their balancesheet, income statement, equity and liquidity. The SNB generallylooks at the business activities of the parent company. This coversthe domestic head office plus the legally non-independent sub-sidiaries in Switzerland and abroad. The SNB bank statistics covered356 banks as at the end of 2002.

Categories of Banks as per SNB Banking Statistics

The Cantonal BanksAs from 1st October 1999 (amendment to the banking law) canton-al banks have been defined as banks with a statutory basis undercantonal law, with the canton holding a minimum of one-third of

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the bank’s capital and voting rights. The state guarantee no longerconstitutes an essential characteristic of a cantonal bank.

Cantonal banks may be established either as public institutions orpublic limited companies. Eighteen of the 24 cantonal banks arepublic legal entities in their own right. Five cantonal banks aremixed stock companies: Banque Cantonale Vaudoise, Zuger Kan-tonalbank, Banque Cantonale du Jura, Banque Cantonale du Valaisand Banque Cantonale de Genève. The Cantonal Bank of Berne hasbeen a private stock company since 1998.

The number of cantonal banks was reduced from 29 in 1999 to 24 asat the end of 1997. The mergers between the two respective cantonalbanks of the cantons of Berne (1990), Geneva (1994) and Vaud(1996) contributed to this decline; at the end of 1994, the Solothurn-er Bank, a subsidiary of the former Swiss Bank Corporation,acquired the majority shareholding in the former Solothurner Kan-tonalbank; and Union Bank of Switzerland (today’s UBS AG) tookover the Appenzell-Ausserrhodische Kantonalbank in early 1996.

A cantonal bank’s total assets range from CHF 1bn to CHF 58 bn.The smaller cantonal banks concentrate on savings and mortgagebusiness, while the larger ones offer a wide range of services and arebasically no different from the average full-service bank.

The Big BanksFollowing the merger between Union Bank of Switzerland and SwissBank Corporation announced in November 1997 and implementedin June 1998, there are now only two big banks in Switzerland: UBSAG and Credit Suisse Group.

A strong international focus and business network is a characteristicshared by both big banks. The UBS Group employs around 40,000people outside Switzerland, approximately 28,000 of whom are inthe United States. This means that more than half of the Group’sstaff work outside Switzerland. The number is even higher for theCredit Suisse Group, with two-thirds of its staff, or 54,000 people,based abroad. The big banks also have a global network of branchesand subsidiaries with offices on five continents. Being universalbanks, the big banks maintain a tight network of around 600domestic branches.

The core business of the big banks comprises asset management andinvestment advisory services for private and institutional investors,investment banking (underwriting, mergers and acquisition, lever-aged finance, privatisation, equity and interest rate products includ-ing derivatives, foreign exchange) as well as private and corporatecustomer business. In addition the CS Group provides insuranceservices to private and institutional customers through its Win-terthur Group. As at the end of 2002, the big banks accounted for64% of the combined balance sheets totals of all banks, and 35% ofthe overall domestic loan business (mortgages and receivables fromcustomers).

Regional BanksThe regional banks operate in similar business areas to the smallcantonal bans, since they focus their activities on the savings andmortgage sectors. At the end of 2002, around half of amounts due to

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customers took the form of savings deposits and investments; mort-gage loans accounted for three-quarters of assets.

Most regional bans are members of the Swiss regional banks’ asso-ciation (RBA). At the end of 2002, RBA Holding counted among itsmembers 81 regional banks with a combined balance sheet total ofCHF 53 bn, and employing around 3,100 people. The members ofRBA undertake to co-operate closely under a structure comprisingvarious RBA Holding subsidiaries. RBA Holding took over the jointorganisations and systems (clearing centre, underwriting centre andinvestment centre). RBA Finanz ensures that its shareholding bankscomply with defined quality standards. RBA Service is in charge ofuniform information technology operations. RBA Zentralbank con-solidates business volumes and provides the joint funds required bythe RBA banks, in particular in the areas of interbank, trading andinsurance business.

Luzerner Regiobank, IRB Interregion Bank and Valiant Bank mergedin December 2002 to form jointly the Valiant Holding. In terms ofbalance sheet total, Valiant Holding thus figures among Switzer-land’s 15 largest banks. 32 small and medium-sized RBA banks witha combined balance sheet total of CHF 14 bn, have decided to co-operate more closely under the Clientis contract-based group ofaffiliated companies. Clientis is expected to start operations in 2004.

Raiffeisen BanksThe Schweizer Verband der Raiffeisenbanken, the Raiffeisen banks’association, has 493 independent members. These banks are mostlylocated in rural areas and structured as co-operatives. The co-oper-atives have around 1 million members who hold participation cer-tificates and are thus joint owners of the Raiffeisen banks. Thebanking activities of the individual institutions are restricted to localbanking business. Their core business consists of mortgage, agricul-tural and commercial lending to members. They also accept depositsfrom non-members. The group avails itself of external insuranceservices and investment funds (Helvetia Patria Insurance and BankVontobel) and has entered into a partnership with cosba privatebanking ag for the purpose of co-operation in the area of asset man-agement services.

The Schweizer Verband der Raiffeisenbanken in St. Gallen (withoffices in Lausanne and Bellinzona) informs and supports its mem-bers in the areas of marketing, information technology, personneland legal services. It also operates the central auditing unit whichprovides the individual banks with auditing services, as required bySBL. The joint central bank based in St. Gallen provides clearing andcash management services to the members of the association.

Private BankersThe 15 private bankers are among the oldest institutions in Switzer-land. Most of them were founded in the 18th century. Private bankers primarily engage in asset management and banking services relatedthereto (underwriting and fiduciary business, securities trading). Private bankers are structured as individual companies, joint com-panies or limited partnerships and their owners have unlimited pri-

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vate liability in respect of their own personal assets. Since they donot solicit deposits from third parties, private bankers do not haveto publish annual financial statements. However, they are subject toall other provisions of SBL, in particular requirements in respect ofequity capital.

Other BanksThis category of banks subsumes a variety of institutions: stockexchange and securities banks, institutions specialising in asset man-agement, as well as institutions engaging in personal loans instal-ment contracts and consumer credits. 122 foreign-controlled banksalso form part of this group. They engage mainly in asset manage-ment for private customers (private banking). Most foreign banks inSwitzerland are branches or subsidiaries of banks based in the EUand EEA (97). Other European countries and Israel operate 11 banksin Switzerland, and the USA and Canada 21.

Non-Bank Financial Intermediaries

In addition to banks and their joint organisations and systems, theSwiss financial centre also accommodates non-bank financial inter-mediaries. Financial companies subject to specific federal supervisioninclude in particular managers of Swiss investment funds (Invest-ment Fund Law), life insurance companies (Insurance SupervisionLaw) and securities traders (Stock Exchange Law). There are also anumber of other finance companies subject only to the Anti-MoneyLaundering Act. These include all such entities that accept assetsfrom third parties on a professional basis for safe custody or assistin the investment and transfer of assets (e.g. asset managers, brokers,exchange offices, lawyers, credit card companies).

In particular, there are a great many, important independent assetmanagers. Their interests are safeguarded by the Swiss Associationof Asset Managers (SAAM). The assets managed by SAAM membersare estimated to account for ca. 8% of the entire Swiss asset man-agement market. Independent asset managers work closely with oneor several banks which operate accounts and custody accounts fortheir customers.

PostFinance is another financial intermediary. As one of the SwissPost Office’s business areas, it is part of an independent federal insti-tution. The Swiss Post Office offers selected financial services viaPostFinance (e.g. investment funds and insurance), partly in co-operation with external partners. In addition to its traditional prod-ucts (payments, investments and pension plans), PostFinance hasbeen striving for some time to build up financing services. In thisvein, PostFinance has been co-operating with UBS AG since May2003 in providing mortgages to finance home ownership for the cus-tomers’ personal use.

Selection of Basic and Advanced Literature

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Abegg, Philipp, et al. Schweizerisches Bankenrecht. Ein Lehr- und Handbuch für Bankfachleute; published by SBVg, Compendio BildungsmedienZürich, 2002.

Baltensperger, Ernst. Banken und Finanzintermediäre, S. 269–304 in: Handbuch derVolkswirtschaftslehre, Bd. 1. Springer. 1996.

Bank for International Settlements. Incentive structures in institutional asset management and their implications for financial markets. Report submitted by aWorking Group established by the Committee on the Global Financial System. Basel, March 2003.

Bisignano, Joseph. Towards an Understanding of the Changing Structure of FinancialIntermediation. An evolutionary Theory of Institutional survival.SUERF Studies No. 4. Amsterdam 1998.

Boemle, Max, et al. Geld-, Bank- und Finanzmarkt-Lexikon der Schweiz. Verlag SKV, Zürich 2002.

Committee on Payment and Settlement Systems (CPSS). Core Principles for Systemically Important Payment Systems.Basel, January 2001.

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Danthine, Jean-Pierre et al. The Future of European Banking. Centre of Economic Policy Research.London, 1999.

Den Otter, Mathäus. Investmentfonds. Grundlagen, Risiken, Chancen. Zürich. NZZ, 1999.

Dietzi, Hanspeter, Latour, Sandra. Schweizerisches Börsenrecht. Ein Grundriss mit ausgewählten Ausführungsbestimmungen. Helbing & Lichtenhahn, Basel 2002.

Eidg. Departement für auswärtige Angelegenheiten, Eidg. Finanzdepartement. Finanzplatz Schweiz. Übersicht über wichtige Themenbereiche undEintwicklungen im Finanzbereich. Juni 2003.

Eidg. Finanzdepartement. Geldwäscherei in der Schweiz. Oktober 2002.

European Central Bank. Blue Book. Payment and Securities Settlement Systems in the Euro-pean Union. June 2001.

European Central Bank. Possible Effects of EMU on the EU Banking System in the Mediumand Long Term. February 1999

European Central Bank. The Effects of Technology on the EU Banking System. July 1999.

Group of Ten. Consolidation in the Financial Sector. IMF, Washington; OECD,Paris; BIS, Basel. January 2001

Hellwig, Martin. Die volkswirtschaftliche Bedeutung des Finanzsystems, S. 3–37 in: Obst, Georg; Hintner, Otto: Geld-, Bank- und Börsenwesen.Handbuch des Finanzsystems. 40., überarb. Aufl. Schäffer-Poeschel. 2000.

Hirszowics, Christine. Schweizerische Bankenpolitik. 5. voll. überarbeitete Aufl. Bern 2003.

Klein, Fristz; Palazzo, Guido. Kulturgeschichte des Geldflusses. Die Entwicklung desZahlungsverkehrs mit Fokus Schweiz. Verlag SKV, Zürich 2003.

Lambelet, Jean-Christian; Mihailow Alexander. Le poids des places financières suisse, genevoise et lémanique. Institut Créa, Décembre 2001.

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Lannoo, Karel. Challenges to the Structure of Financial Supervision in the EU.CEPS Working Party Report. Brussels, July 2000.

Lannoo, Karel. EU Securities Market Regulation. Adapting to the Needs of a SingleCapital Market. Report of a CEPS Task Force. Brussels, March 2001.

Llewellyn, David. The Economic Rationale for Banking Regulation. Financial ServicesAuthority. Occasional Paper. London. April 1999.

Lumpkin, Stephen. Trends and Developments in Securitisation. In: OECD. Financial Market Trends No. 74. Paris, October 1999.

Nobel, Peter. Schweizerisches Finanzmarktrecht. Einführung und Überblick. Bern. Stämpfli, 1997.

Pan-European Asset Management. Achievements and Regulatory Impedements. CEPS Task Force Report No. 44, April 2003.

Schweizerische Bankiervereinigung. Swiss Banking – ein Programm für die Zukunft. Februar 2003.

Thévenoz, Luc, Urs Zulauf (Hrsg.). Bank- und Finanzmarktrecht 2003. BF 2003. Regulierung und Selbstregulierung der Banken, Börsen,Effektenhändler, Anlagefonds und Finanzmärkte in der Schweiz.Zürich. Schulthess, 2003.

White, William. The Coming Transformation of Continental European Banking?BIS Working Paper No. 54., June 1998.

Winzeler Christoph. Banken- und Börsenaufsichtsrecht. Aspekte des öffentlichen Bank-und Kapitalmarktrechts in der Schweiz. Helbing & Lichtenhahn, Basel 2000.

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Internet Addresses

Association of Swiss Asset Managerswww.vsv-asg.ch(the content of this website is not available in English)

BIZwww.bis.org

Cantonal Bankswww.kantonalbanken.ch(the content of this website is not available in English)

EBKwww.ebk.admin.ch

EUREXwww.eurexchange.com

EXFEEDwww.exfeed.com

FATFwww1.oecd.org/fatf/index.htm

Financial Market Regulationwww.finweb.admin.ch

List of Central Bankswww.bis.org/cbanks.htm

List of Supervisory Authoritieswww.iosco.org/lists/display_members.cfm?memid=1

Money Laundering Control Authoritywww.gwg.admin.ch

Place Financière Genèvewww.geneva-finance.ch(the content of this website is not available in English)

SBAwww.swissbanking.org

SISwww.group.sisclear.com

SNBwww.snb.ch

STOXXwww.stoxx.ch

SWXwww.swx.ch

Telekurs-Gruppewww.telekurs.com

virt-xwww.virt-x.com

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Swiss Bankers AssociationAeschenplatz 7PO Box 41824002 BaselSwitzerland 41 61 295 93 9341 61 272 53 82office@sba.chwww.swissbanking.org

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