Importance of the banks in Switzerland: momentum instead of stagnation

The BAK Economics study published today on the macroeconomic importance of the financial centre finds that over 218,000 employees generated value added of CHF 63 bn last year. Almost every tenth franc generated in Switzerland is directly attributable to the financial sector.

If the upstream stages in the value chain and the economic impetus from employees’ consumer spending are taken into account, the total value added amounts to even more: CHF 83 bn francs or 12.4% of the overall economy. These figures related to a total of 364,900 jobs in 2018. For every ten bank employees, the sector creates an additional seven jobs in other sectors through indirect effects.

Financial intermediation as an infrastructure

These impressive figures show that the financial sector makes a significant contribution to Switzerland's prosperity. It also performs a key function as an infrastructure. Without a strong domestic financial sector, the reliable supply of credit, payment transactions and risk transformation are not guaranteed and it is not possible for the economy to prosper.

The financial sector also plays an important role in the Swiss pension system. Retirement assets amounting to CHF 879 bn were managed in the Second Pillar. Third Pillar pension products accounted for an additional volume of CHF 123 bn.

Structural change continues

The study highlights that from a statistical perspective, the banks’ value added has stagnated in the past and that this will continue to be the case in the future. But this sobering news is only part of the picture. In the last decade, interest rate developments and the resulting margin pressure in particular have cost the banks a high single-digit billion euro figure. BAK Economics estimates that every tenth of a percent margin reduction corresponds to around one billion lost in value added. The Bankers Association has published a study that highlights the macroeconomic effects of negative interest rates (Link hier).

Apart from that, the stagnation is not due to a decline in the importance of the banking institutions, but to dynamic structural change. CHF 5 bn alone in value added are no longer included in the statistics due to the big banks’ outsourcing of certain areas of business to intra-group service companies, which for these purposes are no longer recorded as banks. In addition, there has been an increase in the procurement of external advance services, particularly in the area of IT, which replace the banks’ own value creation.

Positive momentum

In addition to these one-off effects, adjustments to business models and the greater strength of the sector as a result of digitalisation also play a role. Non-bank but banking-related companies are now generating more value added than any individual banking group. Business performance has increased in recent years, and financial services are making the largest contribution to the surplus in the Swiss services balance.

The outlook provided in the KOF Employment Indicator published at the beginning of November bodes particularly well for the near future. According to survey results for the banking sector (which is broadly defined), the assessment of the labour market situation for the coming months has not been similarly positive since 2001. This indicates that outsourcing strengthens the core business and does not compete with it, as often feared.

In order to reap the benefits of progress in the future, the authorities need to keep up their forward-looking spirit when it comes to the framework conditions for digital innovations. The banks today are well aware that in 2020, observing digital advancements from the sidelines will no longer be an option. The framework conditions must be improved for the perennial issues of taxes and market access. This is a necessary prerequisite in order to recapture the ground that has been lost to other countries.