## Selected Economic Indicators, 2008–12 (_cr11115) ## Source details **Canonical URL:** [Selected Economic Indicators, 2008–12 (_cr11115)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11115.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11115.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11115.pdf.json) --- ### Context and overview - Output and employment are above pre-crisis levels and growth is robust; authorities face policy challenges arising from protracted low interest rates and abundant liquidity implemented during the financial crisis. - These conditions have led to increased risks in the domestic mortgage market. - Progress has been made in strengthening financial supervision and regulation, but comprehensive decisions on addressing systemic risks posed by large banks and revisions to the macro‑prudential framework are still in train. ### Recent economic developments - GDP and growth - Output fell by 1.9 percent in 2009 and grew by 2.6 percent in 2010. - GDP is projected to grow by 2.4 percent in 2011 and 1.8 percent in 2012. - The SNB expects growth to be approximately 2 percent in 2011. - The ministry of the economy (SECO) projects around 2 percent for both 2011 and 2012. - Demand composition - Recovery broad based; most sectors returned to pre-crisis levels except construction, insurance (little affected), and financial intermediation (has not fully rebounded). - Domestic demand underpinned by sound balance sheets, low interest rates, and a pick up in employment and immigration. - Exports and external sector - Real appreciation of the Swiss franc: about 10 percent appreciation in the real exchange rate since March 2010. - Exports of goods growth: 10 percent in real terms year-on-year in February 2011, down from a peak of about 15 percent over the summer of 2010. - Current account surplus: moved from 2.3 percent of GDP in 2008 to 14.2 percent of GDP in 2010. - Trade balance surplus remained well above 3 percent of GDP. - Labor market and slack - Unemployment decreased to 3.3 percent (high of 4.1 percent during the crisis; low of 2.5 percent at trough). - Number of jobs picked up by 1.2 percent over one year. - Capacity utilization: around long-run average in manufacturing; above that level in construction. - Inflation and wages - As of March, headline inflation is 1.0 percent year-on-year with core measures below 1.0 percent. - In 2010, nominal wages grew by 1 percent (½ percent in real terms). - Unit labor costs fell by 1.5 percent due to productivity pick-up. - Wage demands remain subdued according to latest surveys. ### Exchange rate appreciation, exports, and prices (Box 1) - Exchange rate and export performance - Real effective exchange rate back at its 1995 peak. - Export market shares in goods remain strong, particularly in advanced economies. - Switzerland has a structural deficit vis-à-vis the euro area; trade surplus in goods rose driven by non-euro area countries and emerging markets. - Estimated elasticities - Aggregate elasticity of goods exports to the nominal effective exchange rate is about 0.8 (Selected Issues Paper). - Bilateral estimates suggest little price elasticity of exports to the euro area (which account for 50 percent of exports). - Exports to fast growing emerging economies show higher elasticity to the NEER, with estimates varying between 0.7 and 1. - Pass-through to prices - Long-run exchange rate pass-through for core CPI is very low, between 2 and 4.7 percent. - Implication: appreciation of the SFr is unlikely to weigh down consumer prices significantly. ### Real estate and mortgage market risks (Box 2) - Drivers of demand and hotspots - Net immigration flows, low interest rates, and supportive real incomes underpin the real estate market. - Growth in residential real estate prices appears relatively subdued in international comparison but has accelerated recently; “hot spots” include Geneva, Zug, and Zurich. - Affordability and activity - Affordability indicators do not yet show overall significant signs of misalignment. - Ratio of owner occupied apartment prices relative to rental apartment prices rose sharply from early 1990s to 2000, then flattened. - Sector activity appears elevated even after accounting for population growth due to immigration—suggesting some excess demand beyond demographics. - Lending standards and survey evidence - SNB survey data indicate substantial “exceptions to lending standards.” - In 2009, banks with a total market share of about 25 percent reported exceptions to lending policy for more than 20 percent of new mortgage loans. - In 2009, banks with 27 percent market share assumed an interest rate of less than 5 percent and maintenance costs of less than 1 percent. - Market-share indicators (2009) - Interest rate >= 5%, maintenance >= 1%: 43% - Interest rate >= 5%, maintenance =<1%: 15% - Interest rate =< 5%, maintenance >=1%: 7% - Interest rate =<5%, maintenance =<1%: 27% - Other: 8% ### Outlook, potential output, and risks - Growth and inflation outlook - Staff: GDP to grow by 2.4 percent in 2011 and 1.8 percent in 2012. - SNB: growth approximately 2 percent in 2011. - SECO: around 2 percent for both 2011 and 2012. - Staff and authorities expect inflation to hover around 1 percent in 2011–12. - Methodological change regarding clothing and footwear surveys should add 0.2 to 0.3 pps to the headline rate in 2011 due to base effects. - Potential output - Staff estimates: potential output growth fell to 1.4 percent in 2009, returned to 1.8 percent in 2011. - Construction and financial intermediation contributed around 17 percent of Switzerland’s growth since 2003; these sectors may falter going forward. - Key risks - Main source of uncertainty: international developments, notably in the euro area. - Upside risks: stronger-than-envisaged growth in trading partners or reduction of euro area debt concerns. - Downside risks: persistent increase in oil prices or disrupted supply chains (Middle East, Japan), renewed tensions in the euro area (could put pressure on currency). ### Monetary and exchange rate policies; SNB interventions - Policy stance and operations - Since January 2009, target range for three‑month Libor left at 0.0–0.75 percent; SNB signaled intention to keep Libor at around 0.25 percent. - Between March 2009 and June 2010, SNB conducted foreign exchange interventions to prevent appreciation against the euro and later to prevent only “excessive” appreciation. - In 2010, faced with surge in capital inflows, SNB intervened heavily: - Between February and April 2010, foreign exchange reserves increased by SFr 59 billion (about 10 percent of GDP). - In May 2010, reserves increased by an additional SFr 88 billion (16 percent of GDP). - Operations were mainly in euro‑denominated financial assets and were not sterilized until spring 2010. - SNB started to mop up liquidity by net new issuance of SNB bills (about 20 percent of GDP between April and August 2010). - By mid-2010, SNB noted the threat of deflation had largely disappeared and interventions ended. - Monetary conditions and concerns - Despite appreciation, monetary conditions remain accommodative: - Growth of monetary aggregates: 8–9 percent. - Credit growth: 5 percent. - Markets price in a 50 bps increase in the policy rate by the end of the year. ### SNB interventions, balance sheet effects, and capital - Balance sheet and valuation impacts - SNB balance sheet reached 50 percent of GDP at end-2010. - Capital-to-asset ratio fell to 16 percent compared to 52 percent at end-2007. - SNB reported a loss of SFr 21 billion in 2010, reflecting a marked-to-market loss on the foreign exchange position. - Foreign currency losses of SFr 26 billion were partly offset by SFr 5 billion in gold valuation gains. - With SFr 2.5 billion in profit distributions to the Confederation and cantons, the “distribution reserve” account was reduced by SFr 25 billion, and now stands at SFr -5 billion. - Provisions to the currency reserves were reduced to SFr 0.7 billion from the originally planned SFr 4 billion. - SNB diversified foreign exchange reserves away from euro-denominated assets (which currently account for around 50 percent of reserves). - SNB will set up a task force to reassess its medium-term desired size of reserves; future distributions of gains would be set as part of a medium-term strategy, taking into account capital needs. - Policy guidance on normalization and capital - In absence of significant shocks, normalization of interest rate should begin in the near term. - Current near-zero policy rate is unsustainable as slack is disappearing; conditional inflation forecasts show current expansionary policy cannot be maintained without compromising price stability in the medium term. - SNB confident it can steer the LIBOR rate over time to the level required to maintain price stability using reverse repos and SNB bills. - Staff recommended prioritizing replenishing SNB capital over distributions of gains to cantons and Confederation. - Level of international reserves and capital should be commensurate with the size and international activities of the financial sector. - Future distributions of gains to the cantons and Confederation should be subject to the SNB’s ability to replenish its capital. ### Effects and limits of foreign exchange interventions (staff views) - Staff noted interventions mainly reduced the volatility of the euro/SFr exchange rate and smoothed excessive volatility. - SNB argued the 2010 interventions ensured price stability by preventing an excessive tightening of monetary conditions via a stronger Swiss franc when interest rates were at the zero bound. - Staff cautioned that future FX interventions should be limited to smoothing disorderly movements; 2010 illustrated the difficulty of leaning against the wind during significant capital inflows. - CGER-based analysis and other assessments suggest the currency is not misaligned and is broadly in line with medium-term macroeconomic fundamentals, though some approaches imply an overvaluation. ### Fiscal policy: background, projections, and reforms - Crisis fiscal measures: 0.4 percent of GDP at central government level, and an estimated 1.4 percent overall. - Central government balance: surplus of 0.5 percent of GDP in 2010, compared with 0.8 percent in 2007. - General government balance: surplus of 0.2 percent of GDP in 2010, compared with 1.9 percent in 2007. - General government debt-to-GDP ratio: 55 percent of GDP on a GFSM basis (down from 57 percent in 2007). - “Debt brake” rule has been regularly over-achieved, contributing to build-up of some SFr 15 billion (3 percent of GDP) since 2007 in the nominal compensation account. - Under the baseline scenario, small surpluses are expected to persist at the general government level over a medium-term horizon. - Confederation surplus will be negatively affected in the next few years by envisaged tax reforms and reduced future distributions of SNB gains; planned consolidation of 0.5 percent of GDP over three years will compensate. - Ageing-related expenditures are expected to rise by 5 percent of GDP by 2050. - Staff supported adherence to the debt brake rule, improved implementation, and emphasized need for parametric reform of the old-age insurance system. ### Financial sector policies and stability — banks - Crisis interventions and outcomes - SNB set up a bad-bank scheme (the “Stabilization Fund”) for UBS with $39 billion of assets; the government injected capital SFr 6 billion—before exiting in August 2009. - Authorities increased deposit insurance coverage and announced tightening in capital and liquidity requirements. - In 2010, banks generally reported higher profitability, better asset quality, and stronger capital and liquidity buffers. - Large banks: capital quality and leverage - Tier 1 ratio of the big banks increased to over 17 percent in 2010. - Tangible common equity ratio of the big banks is 2.6 percent (un-weighted). - Ratio of equity to assets is 3.8 percent. - Hybrids and deferred tax assets account for about one third of Tier 1 capital on average for the two big banks. - Wholesale financing has climbed back to about 60 percent of total funding. - Cross-border exposures and vulnerabilities - Swiss banks’ foreign exposure represents 58 percent of total bank assets. - Claims to the U.S. represent about 133 percent of GDP; claims to the U.K. represent 40 percent of GDP; claims to Japan account for 16 percent of GDP. - Domestically-focused banks and mortgage risks - Domestically-focused banks are exposed to the domestic mortgage market; cantonal and cooperative banks have the bulk of their assets in Swiss mortgages. - Competitive pressures have led to falling interest margins and profitability for domestically-oriented banks. - Sensitivity of banks’ balance sheets to interest rate risk has increased as fixed-rate longer maturity mortgages are becoming more common and hedging practices by banks have not kept up. - Exceptions to lending standards have risen. - Policy recommendations for banks and supervisors - Big banks should continue to deleverage, enhance capital quality, build stronger liquidity buffers, and address high reliance on wholesale funding. - Pre-emptive measures are needed to address weaknesses in mortgage lending standards and associated risk management practices. - Macro-prudential measures should be envisaged unless system-wide self-regulation is sufficiently stepped up; possible measures include imposing maximum loan-to-value ratios, requiring more conservative affordability assessments, or imposing system-wide capital add-ons. - Micro-prudential measures, such as capital add-ons for banks with lax practices, are also recommended. ### Financial sector policies and stability — insurance and pension funds - Insurance sector profile and exposures - In 2009, domestic gross premiums amounted to US$57 billion, about $7,571 per capita. - Penetration rate (premiums/GDP) is 10 percent. - About 70 percent of global premiums (some SFr 127 out of 183 billion) are sourced from abroad. - Aggregate investment allocation (2009): Fixed-income securities (including loans) 55 percent; Equity 18 percent; Real estate (including mortgages) 14 percent; Alternative investments about 4 percent. - About 14 percent of insurance companies’ investments are in real estate, mostly in Switzerland. - Profitability, capital, and solvency - Major insurers’ ROE has improved from the trough in 2008 to over 7 percent recently. - Non-life combined ratio rose to 95 percent in 2010. - Solvency I ratios (2009 examples): Swiss Life 164 percent; Swiss Re 236 percent; Zurich Financial Services 195 percent. - SST (Swiss Solvency Test) came into full effect from the beginning of this year; all insurance companies must accrue risk-bearing capital required to cover their target capital. - Some insurers may find it challenging to meet the SST; pension fund underfunding remains widespread, especially for funds with a public guarantee. - Risks and recommendations - Concentration risk in real estate and weak risk management practices by some banks and insurance companies could lead to an abrupt correction once interest rate normalization commences and should be monitored closely. - Recommended measures to restore funding ratios: increase contributions, reduce mandatory pay-out ratios, and take a risk-based approach to funding requirements. - Continued close monitoring and effective management of risks associated with the real estate market is a priority. ### Supervision, stress testing, and macro-prudential framework - Supervision and stress testing - Semi-annual tests have been conducted with the two large banks since the beginning of 2009; the latest test available (June 2010) indicates that even under a severe global shock the two large banks would meet FINMA’s requirements. - FINMA plans to introduce regular stress tests for medium-size banks and will perform ad hoc stress tests in the second half of 2011 to evaluate the quantitative impact of a downturn in local housing markets. - FINMA has increased on-site inspections, hired more personnel, and strengthened effectiveness of external auditors and supervision of cross-border institutions. - Institutional gaps and recommendations - Under current legislation, neither the SNB, FINMA, nor the Federal Council has a general macro-prudential mandate or the authority to set macro-prudential instruments system-wide. - Staff recommendations: - Strengthen the macro-prudential framework by clarifying roles and responsibilities of the SNB and FINMA, revising legislation where necessary. - Define responsibilities at key stages of macro-prudential surveillance and ensure effective coordination. - Strengthen the SNB’s financial stability mandate and broader access to information; broaden FINMA’s mandate to include stability of the financial system and relevant tools. - Macro-prudential supervision must account for the large part of Swiss banking activities performed overseas. - Institutional follow-up: - A working group will be established under the aegis of the Federal Department of Finance to consider improvements to macro-prudential oversight; Parliament is expected to comment on the issue by mid-year. ### Too Big To Fail (TBTF) proposals and deposit insurance - TBTF proposals and features - Draft legislation sent to Parliament in late April broadly follows TBTF Commission recommendations. - Core measures focus on ensuring sufficient liquidity and capital buffers for TBTF banks partly in the form of contingent convertible capital (CoCo). - Banks can obtain rebates on the “progressive” buffer (above the required 13 percent, of which 10 percent has to be equity)—which currently amounts to close to 6 percent given banks’ balance sheets—by providing evidence of increased resolvability. - Staff stressed that the increase in capital buffers envisaged within the TBTF proposal is crucial and should be preserved; capital rebates should only be given if significant measures have been taken to reduce systemic risks. - Authorities emphasize the role of contingent capital (CoCos) as a robust instrument for bailing in bank creditors and for providing capital to finance a bridge bank through a low-trigger CoCo buffer. - Deposit insurance - A new law made permanent the higher ceiling for bank deposit protection introduced temporarily during the crisis: deposits are protected up to SFr 100,000. - The scheme is financed by the banking system up to a maximum of SFr 6 billion. - The new law extends FINMA’s powers to resolve failing banks, specifically through the creation of a bridge bank. ### External position and net foreign assets - Switzerland’s net foreign asset position reached 130 percent of GDP at the end of 2009. - Net FDI position was 63 percent of GDP at the end of 2009. - Net portfolio equity liabilities were estimated at 46 percent of GDP at the end of 2009. - Accounting treatment of reinvested earnings and capital gains inflates the current account; after an illustrative correction the required overall downward adjustment in the current account reaches about 4 percent of GDP. - After corrections, CGER-based estimates suggest the SFr is still broadly in equilibrium despite appreciation. ### Data, statistics, and surveillance - Data quality and gaps - Switzerland’s economic and financial statistics are adequate for surveillance purposes and Switzerland is in full observance of SDDS requirements. - Statistical gaps include lags in reliable general government finance statistics, pension statistics, and GDP by industry. - Planned improvements - The Federal Finance Administration will start to produce quarterly estimates in 2012 for the most important aggregates at all levels of government. - SNB will transform a supplementary survey on lending policies of about 20 banks into a permanent survey starting in the second quarter of 2011. - Work under way to revise the survey on trade in services; collection based on the new survey will start in 2012. - Selected reporting frequencies (as of April 11, 2011) - Exchange Rates: Latest Observation Apr 11; Frequency D and M. - International Reserve Assets and Reserve Liabilities: Latest Observation Mar 11; Frequency M. - Consumer Price Index: Latest Observation Mar 11; Frequency M. - GDP/GNP: Latest Observation Q4/10; Frequency Q. ### Executive Board and staff policy recommendations (summarized) - Monetary policy - Most Directors supported a prompt withdrawal of monetary stimulus, absent new shocks. - SNB should start tightening the policy rate in the near term in the absence of shocks. - Interventions in the foreign exchange market, if any, should be limited to reducing excessive exchange rate volatility. - Macro- and micro-prudential - Macro-prudential measures should be considered to address loosening lending standards in the mortgage market, unless system-wide self-regulation is sufficiently stepped up. - Micro-prudential supervision should be strengthened, including cross-border aspects and enforcement resources. - Fiscal policy - Neutral fiscal stance appropriate given prospective tightening of monetary policy. - Continued adherence to the “debt brake” rule. - Parametric reform of the old age insurance system to buttress fiscal sustainability. - Financial system reforms - Support for TBTF legislation that substantially increases capital buffers for the two large banks. - Strengthen macro-prudential framework and clarify roles and responsibilities of the SNB and FINMA; establish legal basis for system-wide policies. *Source: SWITZERLAND 2011 ARTICLE IV REPORT (Selected sections and boxes; content unit _cr11115).* ### 1. Selected Economic Indicators, 2008–12 _____________________________________________ 26 ### 1. Selected Economic Indicators, 2008–12 ### Context and overview - Output and employment are above pre-crisis levels and growth is robust; authorities face policy challenges arising from protracted low interest rates and abundant liquidity implemented during the financial crisis. - These conditions have led to increased risks in the domestic mortgage market. - Progress has been made in strengthening financial supervision and regulation, but comprehensive decisions on addressing systemic risks posed by large banks and revisions to the macro‑prudential framework are still in train. ### Recent economic developments - GDP and growth - Output fell by 1.9 percent in 2009 and grew by 2.6 percent in 2010. - GDP is projected to grow by 2.4 percent in 2011 and 1.8 percent in 2012. - The SNB expects growth to be approximately 2 percent in 2011. - The ministry of the economy (SECO) projects around 2 percent for both 2011 and 2012. - Demand composition - Recovery broad based; most sectors returned to pre-crisis levels except construction, insurance (little affected), and financial intermediation (has not fully rebounded). - Both domestic demand and exports supportive: domestic demand underpinned by sound balance sheets, low interest rates, and a pick up in employment and immigration. - Exports and external sector - Real appreciation of the Swiss franc: about 10 percent appreciation in the real exchange rate since March 2010. - Exports of goods growth: 10 percent in real terms year-on-year in February 2011, down from a peak of about 15 percent over the summer of 2010. - Current account surplus: moved from 2.3 percent of GDP in 2008 to 14.2 percent of GDP in 2010. - Trade balance surplus remained well above 3 percent of GDP. - Labor market and slack - Unemployment decreased to 3.3 percent (high of 4.1 percent during the crisis; low of 2.5 percent at trough). - Number of jobs picked up by 1.2 percent over one year. - Capacity utilization: around long-run average in manufacturing; above that level in construction. - Inflation and wages - As of March, headline inflation is 1.0 percent year-on-year with core measures below 1.0 percent. - In 2010, nominal wages grew by 1 percent (½ percent in real terms). - Unit labor costs fell by 1.5 percent due to productivity pick-up. - Wage demands remain subdued according to latest surveys. ### Exchange rate appreciation, exports, and prices (Box 1) - Exchange rate and export performance - Real effective exchange rate back at its 1995 peak. - Export market shares in goods remain strong, particularly in advanced economies. - Switzerland has a structural deficit vis-à-vis the euro area; trade surplus in goods rose driven by non-euro area countries and emerging markets. - Estimated elasticities - Aggregate elasticity of goods exports to the nominal effective exchange rate is about 0.8 (Selected Issues Paper). - Bilateral estimates suggest little price elasticity of exports to the euro area (which account for 50 percent of exports). - Exports to fast growing emerging economies show higher elasticity to the NEER, with estimates varying between 0.7 and 1. - Pass-through to prices - Literature generally finds low pass-through to consumer prices in developed countries, though import prices often show significant pass-through. - Estimates for Switzerland: long-run exchange rate pass-through for core CPI is very low, between 2 and 4.7 percent. - Implication: appreciation of the SFr is unlikely to weigh down consumer prices significantly. ### Real estate and mortgage market risks (Box 2) - Drivers of real estate demand - Net immigration flows, low interest rates, and supportive real incomes continue to underpin the Swiss real estate market. - Price dynamics and hotspots - Growth in residential real estate prices appears relatively subdued in international comparison but has accelerated recently. - “Hot spots” identified with larger price increases: notably Geneva, Zug, and Zurich. - Affordability and activity indicators - Affordability indicators do not yet show overall significant signs of misalignment. - Ratio of owner occupied apartment prices relative to rental apartment prices rose sharply from early 1990s to 2000, then flattened. - Level of activity in the sector appears elevated even after accounting for population growth due to immigration—suggesting some excess demand beyond demographics. - Lending standards and potential relaxation - SNB survey data indicate substantial “exceptions to lending standards.” - In 2009, banks with a total market share of about 25 percent reported exceptions to lending policy for more than 20 percent of new mortgage loans. - A sizable portion of banks failed to respond to the survey—exacerbating uncertainty. - Internal lending standards: long-term average rate on mortgage loans close to 5 percent (rates in the 1990s persistently above 5.5 percent). - In 2009, banks with 27 percent market share assumed an interest rate of less than 5 percent and maintenance costs of less than 1 percent—suggesting insufficiently conservative affordability criteria. - Indicators (as presented) - Swiss Housing Starts (apartments) per 100 inhabitants: shown rising (chart evidence in source). - Market share of banks by imputed interest and maintenance costs in 2009: 43% (Interest rate >= 5%, maintenance >= 1%), 15% (Interest rate >= 5%, maintenance =<1%), 7% (Interest rate =< 5%, maintenance >=1%), 27% (Interest rate =<5%, maintenance =<1%), 8% (other). ### Outlook, potential output, and risks - Growth outlook - Staff: GDP to grow by 2.4 percent in 2011 and 1.8 percent in 2012. - SNB: growth approximately 2 percent in 2011. - SECO: around 2 percent for both 2011 and 2012. - Inflation outlook - Staff and authorities expect inflation to hover around 1 percent in 2011–12. - Staff estimates point to limited exchange rate pass-through on inflation. - Methodological change regarding clothing and footwear surveys should add 0.2 to 0.3 pps to the headline rate in 2011 due to base effects. - Potential output - Staff estimates: potential output growth fell to 1.4 percent in 2009, returned to 1.8 percent in 2011. - Construction and financial intermediation contributed around 17 percent of Switzerland’s growth since 2003; these sectors may falter going forward. - Key risks - Main source of uncertainty: international developments, notably in the euro area. - Upside risks: stronger-than-envisaged growth in trading partners or reduction of euro area debt concerns. - Downside risks: persistent increase in oil prices or disrupted supply chains (Middle East, Japan), renewed tensions in the euro area (could put pressure on currency). ### Monetary and exchange rate policies - SNB policy stance and operations - Since January 2009, target range for three‑month Libor left at 0.0–0.75 percent; SNB signaled intention to keep Libor at around 0.25 percent. - Between March 2009 and June 2010, SNB conducted foreign exchange interventions: - 2009 interventions to prevent appreciation against the euro. - December 2009–June 2010 intention was to prevent only “excessive” appreciation. - In 2010, faced with surge in capital inflows, SNB intervened heavily: - Between February and April 2010, foreign exchange reserves increased by SFr 59 billion (about 10 percent of GDP). - In May 2010, reserves increased by an additional SFr 88 billion (16 percent of GDP) as the euro area sovereign debt crisis developed. - Operations were mainly in euro‑denominated financial assets and were not sterilized until spring 2010. - SNB started to mop up liquidity by net new issuance of SNB bills (about 20 percent of GDP between April and August 2010). - By mid-2010, SNB noted the threat of deflation had largely disappeared and interventions ended. - Overall appreciation of the Swiss franc: 10 percent in real effective terms since March 2010. - Monetary conditions and concerns - Despite appreciation, monetary conditions remain accommodative: - Growth of monetary aggregates: 8–9 percent. - Credit growth: 5 percent. - SNB has repeatedly pointed to the volume of mortgages—and lending standards—as a concern. - Markets price in a 50 bps increase in the policy rate by the end of the year. *Source: SWITZERLAND 2011 ARTICLE IV REPORT (Selected sections and boxes).* ### 14. The interventions resulted in a sharp ### _cr11115 - 14. The interventions resulted in a sharp ### SNB interventions and balance sheet effects - SNB balance sheet reached 50 percent of GDP at end-2010. - Capital-to-asset ratio fell to 16 percent compared to 52 percent at end-2007. - SNB reported a loss of SFr 21 billion in 2010, reflecting a marked-to-market loss on the foreign exchange position. - Foreign currency losses of SFr 26 billion were partly offset by SFr 5 billion in gold valuation gains. - With SFr 2.5 billion in profit distributions to the Confederation and cantons, the “distribution reserve” account was reduced by SFr 25 billion, and now stands at SFr -5 billion. - The bank nevertheless distributed dividends to the cantons and Confederation as usual. - Provisions to the currency reserves were reduced to SFr 0.7 billion from the originally planned SFr 4 billion. - To mitigate exchange rate risk, the SNB diversified foreign exchange reserves away from euro-denominated assets (which currently account for around 50 percent of reserves). - The SNB will set up a task force to reassess its medium-term desired size of reserves; future distributions of gains would be set as part of a medium-term strategy, taking into account capital needs. ### Monetary policy normalization and macro-financial considerations - In absence of significant shocks, normalization of interest rate should begin in the near term. - Current interest rate stance is unsustainable as slack is disappearing in the economy; conditional (no policy change) inflation forecasts show the current expansionary monetary policy cannot be maintained without compromising price stability in the medium term. - SNB is confident it can steer the LIBOR rate over time to the level required to maintain price stability using reverse repos and SNB bills. - Staff and authorities agreed exiting the prolonged period of near-zero interest rates will help reduce macro-financial concerns associated with weakening mortgage lending standards. - Concerns related to the real estate market should also be addressed by macro-prudential instruments. ### Effects and limits of foreign exchange interventions - Staff noted SNB interventions mainly reduced the volatility of the euro/SFr exchange rate and smoothed excessive volatility in the foreign exchange market. - The SNB argued the 2010 foreign exchange interventions ensured price stability: with the zero bound on interest rates, interventions prevented an excessive tightening of monetary conditions via a stronger Swiss franc and prevented deflation. - Staff cautioned that future foreign exchange interventions, if any, should be limited to smoothing disorderly movements; the 2010 experience illustrated the difficulty of leaning against the wind during significant capital inflows. - While staff saw no clear evidence of current misalignment, authorities felt the exchange rate was overvalued. A CGER-based analysis and other assessments suggest the currency is not misaligned and is broadly in line with medium-term macroeconomic fundamentals, though some approaches imply an overvaluation. ### SNB capital, reserves, and balance sheet management (policy discussion) - Staff questioned the 2010 distribution of non-existent gains and recommended prioritizing replenishing SNB capital over distributions of gains to cantons and Confederation. - The level of international reserves and capital should be commensurate with the size and international activities of the financial sector. - SNB viewed 2010 valuation losses as tolerable given past accumulated surpluses in the distribution reserve; the 2010 distribution was seen as consistent with past agreement as the position of the distribution reserves was still above a SFr -5bn threshold. - Future distributions will be set as part of a medium-term strategy accounting for capital needs. ### External position and net foreign assets - Switzerland’s net foreign asset position reached 130 percent of GDP at the end of 2009. - Net FDI position was 63 percent of GDP at the end of 2009. - Net portfolio equity liabilities were estimated at 46 percent of GDP at the end of 2009. - Accounting treatment of reinvested earnings and capital gains inflates the current account; assuming a 3 percent return on multinationals’ earnings and subtracting an estimated 3 percent net direct investment income, the required overall downward adjustment in the current account reaches about 4 percent of GDP. - After corrections, CGER-based estimates suggest the SFr is still broadly in equilibrium despite appreciation. ### Fiscal policy: background, projections, and reforms - Crisis fiscal measures: 0.4 percent of GDP at central government level, and an estimated 1.4 percent overall. - Central government balance: surplus of 0.5 percent of GDP in 2010, compared with 0.8 percent in 2007. - General government balance: surplus of 0.2 percent of GDP in 2010, compared with 1.9 percent in 2007. - General government debt-to-GDP ratio: 55 percent of GDP on a GFSM basis (down from 57 percent in 2007). - “Debt brake” rule has been regularly over-achieved, contributing to build-up of some SFr 15 billion (3 percent of GDP) since 2007 in the nominal compensation account. - Under the baseline scenario, small surpluses are expected to persist at the general government level over a medium-term horizon. - Confederation surplus will be negatively affected in the next few years by envisaged tax reforms and reduced future distributions of SNB gains; planned consolidation of 0.5 percent of GDP over three years will compensate. - Ageing-related expenditures are expected to rise by 5 percent of GDP by 2050. - Attempts to reform old-age insurance (increase female retirement age from 64 to 65) were defeated; a proposal to reduce pension fund conversion rates from 6.8 to 6.4 percent by 2016 was not accepted in a national referendum. - Unemployment insurance reforms: contribution rate increased from 2.0 to 2.2 per cent of annual salary (up to a limit of SFr 126,000); solidarity contribution of 1 per cent introduced for salaries between SFr 126,000 to 315,000; compensation more closely tied to contribution periods and waiting periods extended. - Staff supported adherence to the debt brake rule, improved implementation, and emphasized need for parametric reform of the old-age insurance system. - Authorities consider automatic remedial actions on benefits and contributions to disability and old-age pensions if funds fall below thresholds. ### Financial sector policies and stability - Large public interventions and rebound in international markets stabilized the financial sector. - SNB set up a bad-bank scheme (the “Stabilization Fund”) for UBS with $39 billion of assets; the government injected capital SFr 6 billion—before exiting in August 2009. - Authorities increased deposit insurance coverage and announced tightening in capital and liquidity requirements. - In 2010, banks generally reported higher profitability, better asset quality, and stronger capital and liquidity buffers. - Large banks remain highly leveraged, dependent on wholesale funding, and need to improve the quality of their capital. - Despite comfortable Tier 1 regulatory ratios, tangible common equity ratios place large Swiss banks at the bottom relative to peers, reflecting large recourse to lower quality capital. - Banks remain highly leveraged relative to peers, with business models based on heavy reliance on wholesale funding and comparatively large cross-border exposures; market assessment of banks’ credit risk has improved sharply since the height of the crisis but remains above pre-crisis levels. *International Monetary Fund — Switzerland: 2011 Article IV Report (selected excerpts).* ### 33. While less leveraged, domestically- ### _cr11115 - 33. While less leveraged, domestically- ### Mortgage market exposure and domestic banks - Domestically-focused banks are exposed to the domestic mortgage market; cantonal and cooperative banks have the bulk of their assets in Swiss mortgages. - Competitive pressures have led to falling interest margins and profitability for domestically-oriented banks. - Less favorable refinancing conditions as interest rates go up will weigh on bank interest margins. - Credit and interest rate risks are increasing in mortgage lending activities: - An environment of low interest rates, abundant liquidity, and strong competition has led to an increase in risk taking. - Evidence of declining lending standards in the mortgage market, including vis-à-vis less affluent households. - Sensitivity of banks’ balance sheets to interest rate risk has increased as fixed-rate longer maturity mortgages are becoming more common and hedging practices by banks have not kept up. - Exceptions to lending standards have risen. - Policy view: mortgage developments require pre-emptive measures, including macro-prudential instruments, unless self-regulation is sufficiently stepped up and applied to all institutions engaged in mortgage lending. - Possibly useful measures included imposing maximum loan-to-value ratios, requiring more conservative affordability assessments, or imposing system-wide capital add-ons based on mortgage lending evolutions. - Part of the solution lies in stepped-up micro-prudential measures, such as capital add-ons for banks with lax practices. ### Insurance sector and pension funds - The Swiss Solvency Test (SST) came into full effect from the beginning of this year; Switzerland is the first country to move towards risk-based insurance supervision. - All insurance companies must accrue risk-bearing capital required to cover their target capital; failure to meet the test has already triggered corrective measures in some companies. - Some insurers may find it challenging to meet the SST; some pension funds remain underfunded. - The current environment of low interest rates is particularly difficult for life insurers, given negative spreads between earnings and guaranteed payouts. - Non life insurers are less affected by low interest rates and benefit from positive results, but competition is increasing. - Reinsurance companies exhibit improved (and/or solid) recapitalization and solvency margins. - Preliminary claim estimates from Japan’s earthquake and tsunami indicate that the cost is manageable (nuclear contamination is not covered). - Pension fund performance has improved, but under funding remains widespread, especially for funds with a public guarantee. - Asset-side exposures: - About 14 percent of insurance companies’ investments are in real estate, mostly in Switzerland. - Should a “boom-bust” pattern develop, the insurance sector and domestically-oriented banks would be affected, potentially incurring investment losses and requiring recapitalization. - Bank funding could be impacted because bank financing is partially provided by insurance firms. - Insurers’ exposure to euro area countries where debt concerns have arisen appears limited. - Recommended measures to restore funding ratios: increase contributions, reduce mandatory pay-out ratios, and take a risk-based approach to funding requirements. ### Stress testing, supervision, and micro-prudential measures - Authorities have emphasized stress testing: - Semi-annual tests have been conducted with the two large banks since the beginning of 2009. - The latest test available (June 2010) indicates that even under a severe global shock the two large banks would meet FINMA’s requirements. - A new test is being conducted on the basis of end-2010 exposures. - FINMA is exchanging information about scenarios with the European Banking Association and considers its scenarios more severe. - FINMA plans to introduce regular stress tests for medium-size banks and will perform ad hoc stress tests in the second half of 2011 to evaluate the quantitative impact of a downturn in local housing markets. - FINMA has developed a new risk-based supervisory approach, increased on-site inspections, hired more personnel, and strengthened effectiveness of external auditors and supervision of cross-border institutions. - Areas for improvement: - FINMA’s enforcement resources have been shown to be below peers. - The independence of FINMA auditors should be improved by requiring their compensation to come directly from FINMA rather than the banks and by allowing FINMA to define auditors’ mandates. - Staff supported extending supervision to entities that could pose a significant risk to financial stability and strengthening supervision of cross-border institutions in collaboration with foreign supervisors. - FINMA and SNB actions on mortgage market: - SNB has warned publicly about loosened lending standards. - FINMA has asked the Bankers Association to tighten lending standards and has used moral suasion on some banks. - FINMA has taken action against banks with unsatisfactory risk-management practices. ### Macro-prudential framework and inter-agency cooperation - Steps taken to improve inter-agency cooperation: - In February 2010, the SNB and FINMA signed a bilateral Memorandum of Understanding (MoU). - A tripartite agreement (FINMA, SNB, and the Federal Department of Finance) on collaboration, information exchange, and crisis management was signed in early 2011. - Legal and institutional gaps: - Under current legislation, neither the SNB, FINMA, nor the Federal Council has a general macro-prudential mandate or the authority to set macro-prudential instruments (e.g., loan-to-value or affordability ratios, or banking-system-wide capital add-ons). - The SNB Act requires the SNB to contribute to financial stability in the context of its price stability objective but does not provide for system-wide macro-prudential tools; its policy instruments are limited to monetary policy conduct. - FINMA’s supervisory mandate as micro-prudential supervisor does not provide the power to set system-wide instruments, although it can impose capital add-ons institution by institution and rely on moral suasion. - Diverging institutional views: - The SNB would like formal decision-making powers regarding certain macro-prudential tools, independent access to information, and a requirement for other regulators to consult the SNB early in rule formulation. - FINMA considers the current setup adequate and warns that sharing macro-prudential responsibilities could create market uncertainty; it notes time-varying capital requirements and affordability ratios may suffice. - Staff recommendations: - Strengthen the macro-prudential framework by clarifying roles and responsibilities of the SNB and FINMA, revising legislation where necessary. - The framework should define responsibilities at key stages of macro-prudential surveillance (assessment of risks, warnings and policy recommendations, and regulatory and supervisory action) and ensure effective coordination. - Align mandates of the SNB and FINMA with responsibilities and instruments: - Strengthen the SNB’s financial stability mandate to include distinct objectives, functions and tools and broader access to information, including over individual financial institutions. - Broaden FINMA’s mandate to include the stability of the financial system and relevant tools. - Build on SNB and FINMA expertise: instruments calibrating cycle variation could be vested in the SNB, and prudential system-wide instruments could be given to FINMA, complementing envisaged powers under the TBTF proposals. - Macro-prudential supervision must account for the large part of Swiss banking activities performed overseas. - Institutional follow-up: - A working group will be established under the aegis of the Federal Department of Finance to consider improvements to macro-prudential oversight; its mandate is to be defined. - Parliament is expected to comment on the issue by mid-year. ### Too Big To Fail (TBTF) proposal - Measures already taken early in the crisis: - Expanded supervision of large banks. - Increased capital top-ups on Basel II requirements (200 percent in “good times” and 150 percent in “bad times”). - Added a FINMA-defined leverage ratio (minimum amount of tier 1 capital required for a given balance sheet size, excluding domestic loans of 5 percent). - Introduced remuneration guidelines to reduce excessive risk-taking. - Defined in June 2010 a new liquidity regime requiring the two largest banks to cover potential liquidity needs over a 30-day horizon in case of a widespread loss of confidence during severe market stress. - Draft legislation sent to Parliament in late April broadly follows TBTF Commission recommendations: - Core measures focus on ensuring sufficient liquidity and capital buffers for TBTF banks partly in the form of contingent convertible capital (CoCo). - Banks can obtain rebates on the “progressive” buffer (above the required 13 percent, of which 10 percent has to be equity)—which currently amounts to close to 6 percent given banks’ balance sheets—by providing evidence of increased resolvability. - Discussion and staff views: - Staff stressed that the increase in capital buffers envisaged within the TBTF proposal is crucial and should be preserved; capital rebates should only be given if significant measures have been taken to reduce systemic risks. - Improving resolvability of large cross-border banks would probably require an international agreement or an enhanced coordination framework. - The law should provide sufficient legal certainty to create incentives for banks to build up capital in the next few years. - Authorities will take into account international developments and Swiss characteristics; the rebate is conditional upon significant improvement in global resolvability. - Defining and guaranteeing international resolvability will be difficult given current cross-border legal frameworks and agreements. - Authorities emphasize the role of contingent capital (CoCos) as a robust instrument for bailing in bank creditors and for providing capital to finance a bridge bank through a low-trigger CoCo buffer. - Authorities acknowledge higher costs and lower profits but expect reduced risk levels; some banks have suggested CoCo trigger events might be destabilizing, while authorities see dilution of shareholders as an incentive to curb ex ante risky behavior. - Footnote: Credit Suisse revised down its medium-term return-on-equity target from 18 percent to 15 percent. ### Deposit insurance - A new law made permanent the higher ceiling for bank deposit protection introduced temporarily during the crisis: - Deposits are protected up to SFr 100,000. - The scheme is financed by the banking system up to a maximum of SFr 6 billion. - A proposal to further strengthen the system by creating a partial ex-ante funding mechanism and shortening repayment periods was withdrawn due to concerns over its costs. - The new law extends FINMA’s powers to resolve failing banks, specifically through the creation of a bridge bank. *Source: 2011 ARTICLE IV REPORT SWITZERLAND — INTERNATIONAL MONETARY FUND (content unit: _cr11115 - 33. While less leveraged, domestically-)* ### 60. Macroeconomic policies have supported ### Macroeconomic policies have supported a swift exit from the recession ### Macroeconomic assessment and policy stance - The authorities implemented accommodative monetary and fiscal policies and took quick and decisive action to help stabilize the financial sector. - Some policies have created new risks (e.g., in the mortgage market), which will need to be addressed as the recovery becomes firmly established. - With the recovery established, the authorities must: - Exit from expansionary monetary policy. - Proceed with key financial sector reforms to reduce the probability and costs of financial turmoil. - Achieve progress on reforms despite potential contention to safeguard financial stability. ### Monetary policy: SNB near-term and medium-term guidance - In the absence of shocks, the SNB should start tightening the policy rate in the near term. - Rationale: - Inflation expectations remain well anchored, but the current near-zero policy rate is unsustainable in the medium term. - Monetary policy normalization will help reduce macro-financial concerns, including loosening of lending standards in the mortgage market. - Mortgage lending concerns: - Should be addressed by macro-prudential instruments, because monetary tightening alone is not likely to suffice. ### Foreign exchange interventions - Interventions on the foreign exchange market, if any, should be limited to smoothing disorderly movements of the exchange rate. - Although the Swiss franc is on the high side in a historical perspective, robust trade performance and large current account surpluses suggest the currency is broadly aligned with medium-term macroeconomic fundamentals. ### SNB balance sheet and capital - In the medium term, the SNB should give priority to strengthening its capital. - Like many central banks, the SNB is exiting the crisis with an inflated balance sheet and a weakened capital position. - The level of international reserves and capital should be commensurate with the size and international activities of the financial sector. - Future distributions of gains to the cantons and Confederation should be subject to the SNB’s ability to replenish its capital. ### Fiscal policy and public finances - Given gradual monetary tightening, a neutral fiscal stance is appropriate. - Switzerland is exiting the crisis with comparatively strong fiscal balances due to limited fiscal stimulus measures and automatic stabilizers. - The fiscal stance is expected to remain broadly neutral—consistent with the debt brake rule. - Fiscal prudence is warranted because of: - Switzerland’s large financial sector. - Ageing pressures. - Continued adherence to the fiscal rule should contribute to a gradual decline in the debt to GDP ratio under the baseline scenario. - Support for implementation: - Improve the accuracy of budget planning on both revenue and expenditure sides. - Develop performance budgeting. - Medium-term fiscal challenge: - Measures should be taken to ensure sustainability of public finances, including a parametric reform of the old age insurance system. ### Banking sector: risks and supervision - Banking sector performance has improved, but vigilance is required. - Large banks remain more leveraged and dependent on wholesale funding than peers, and have large cross-border exposures. - Risks for smaller banks are concentrated in mortgage lending. - All banks must adapt to regulatory changes that will weigh on profitability. - Mortgage market risks and recommended measures: - The loosening of mortgage lending standards and increasing interest rate risk calls for pre-emptive measures. - Micro-prudential measures can address institution-specific concerns. - Macro-prudential measures should be envisaged unless system-wide self-regulation is sufficiently stepped up. - Possible macro-prudential measures include: - Imposing maximum loan-to-value ratios. - Requiring more conservative affordability assessments. - Imposing system-wide capital add-ons based on mortgage lending evolutions. - TBTF legislation: - Adoption of draft TBTF legislation is instrumental to reduce risks related to the two large banks. - Draft law under parliamentary consideration would, inter alia, substantially increase capital buffers held by the two large banks. - These buffers are key to reducing risks posed by systemic institutions; rebates, if any, should be applied prudently. ### Insurance sector and pension funds - Insurance sector risks should continue to be monitored and managed. - Some insurers may find it challenging to boost capital because of subdued profitability prospects and the need to strengthen reserves. - Insurers—particularly in the life insurance industry—have relatively high exposures to the Swiss real estate market and risks associated with mortgage lending; certain products warrant continued close monitoring. - Continued underfunding in pension funds, especially those with a public guarantee, should be addressed. ### Supervisory capacity and macro-prudential framework - Micro-prudential supervision: - Progress in stepping up micro-prudential supervision should continue, including proper supervision of cross-border institutions. - FINMA’s strategy to increase on-site inspections, hire more personnel, and strengthen the effectiveness of external auditors is appropriate. - Areas needing continued effort: - Strengthening the independence of regulatory auditors from banks and allowing FINMA to define their mandates. - Increasing resources for the enforcement function in line with international peers. - Supervising previously unsupervised entities if they pose a significant risk. - Macro-prudential framework: - The framework for using macro-prudential policies largely remains to be defined. - Roles and responsibilities of the SNB and FINMA should be clarified, where necessary by revising relevant legislation. - The legal basis for system-wide policies should be strengthened. - Authorities should utilize the expertise and resources of both FINMA and the SNB, recognizing there is no single international model. ### Procedural recommendation - It is recommended that the next Article IV consultation with Switzerland be held on the standard 12-month cycle. *Source: SWITZERLAND 2011 ARTICLE IV REPORT, INTERNATIONAL MONETARY FUND* ### 2010. Also, while asset quality of the big banks is ### _cr11115 - 2010. Also, while asset quality of the big banks is ### Bank profitability and asset quality - Asset quality of the big banks is the highest among peers. - Net interest margins of the big banks are one of the lowest, reflecting continued reliance on fees and commissions as well as trading income. - Profitability of domestically focused banks has moderated: - Cantonal banks, regional banks, Raiffeisen group, and private banks were hit much less hard than big banks and continued to earn profits during the crisis. - Profitability of banks with a domestic focus was either flat or on a decline in 2010, partly driven by falling interest margins. - The ROAA of cantonal, regional, and private banks is generally higher than the large banks, while their ROAE is much lower, reflecting lower leverage. ### Capital quality and leverage - Regulatory capital ratios of the big banks have strengthened: - The Tier 1 ratio of the big banks increased to over 17 percent in 2010, the highest among peers. - Quality of capital is low and leverage remains high: - Tangible common equity ratio of the big banks is 2.6 percent (un-weighted), much lower than peers, reflecting large recourse to hybrids and deferred tax assets. - Ratio of equity to assets is 3.8 percent, lower than some peers, suggesting still high leverage. - Hybrids and deferred tax assets account for about one third of Tier 1 capital on average for the two big banks, leaving a much smaller portion qualifying as core Tier 1 under Basel III. - Average equity to assets ratio of non-big banks is about 8 percent, more than double that of the big banks. - Regional banks have the lowest Tier 1 ratio (11 percent) among all Swiss banks while private banks have the highest Tier 1 ratio (19 percent). ### Credit risk and market indicators - Large banks’ credit risk—as indicated by CDS spreads—has receded from its peaks but remains above pre-crisis levels. - The CDS spreads of UBS have converged to those of Credit Suisse, indicating a comparative risk reduction, but both remain higher than pre-crisis levels. ### Liquidity and funding - More stringent liquidity requirements in place since June 2010 require the two big banks to cover potential liability needs over a 30-day horizon in case of a widespread confidence loss during a period of market stress. - In response, the two big banks have increased the share of liquid assets and reduced the share of short-term borrowing. - Wholesale financing has climbed back to about 60 percent of total funding after a decline in 2009, the highest among peers. ### Cross-border exposures and vulnerabilities - Swiss banks’ foreign exposure represents 58 percent of total bank assets, the highest among advanced economies. - The two countries to which Swiss banks are most exposed are: - U.S. with claims representing about 133 percent of GDP. - U.K. with claims representing 40 percent of GDP. - Claims to Japan account for 16 percent of GDP. - Swiss banks’ exposure to euro area countries where debt issues have arisen is limited. - Swiss banks remain vulnerable to cross-border spillovers despite retrenchment from cross-border lending. ### Conclusions and outlook for profitability - Profitability is likely to be muted going forward: - As favorable refinancing conditions subside and more stringent capital and liquidity requirements take hold, profitability will decline. - A possible fall in tax sensitive wealth management flows over the medium term would also weigh on profits. - Domestically-focused banks face: - Declines in net interest margins. - Possible weakness in mortgage lending in the context of looser standards. - Increased vulnerability to interest rate hikes. - Private banks’ profits are likely to be negatively affected by: - Strength of the Swiss franc. - Regulatory uncertainty about banking secrecy and tax environments. - These developments may pressure the private banking sector to consolidate. ### Policy recommendations for banks and supervisors - Big banks should: - Continue to deleverage. - Enhance capital quality. - Build stronger liquidity buffers. - Address high reliance on wholesale funding to reduce vulnerability to funding shocks. - Consider the “too big to fail” proposal to help address structural issues. - Pre-emptive measures are needed to address weaknesses in mortgage lending standards and associated risk management practices: - Falling interest margins and increasing competition have led to looser mortgage lending standards. - Exceptions to lending policies have been increasing (as shown in the latest SNB Financial Stability Report). - With interest rates at historically low levels and a rising share of fixed-rate, long-duration mortgages, interest rate risk of banks has risen. - If tightened self-regulation is not sufficient to curb risky behavior, macro-prudential measures will have to be implemented. ### Wealth management and changes in the tax environment - Importance of wealth management: - Wealth management is a main pillar of Switzerland’s financial center franchise. - Assets under management are well over US$5 trillion, or 10 times Swiss GDP. - Around 60 percent of assets under management is from foreign institutional or private investors. - Two thirds of banks offer whole or significant components of the value chain of wealth management. - According to the Boston Consulting Group, Swiss banks have a market share of nearly one third or 28 percent in cross-border (offshore) private banking. - International cooperation in tax matters: - Switzerland is a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes and is part of its Steering Group and Peer Review Group. - Evaluation of phase one for Switzerland should be completed by mid-2011. - Switzerland announced in March, 2009 it would include Article 26 of the OECD Model Tax Convention in its DTAs; as of December 2010, some 31 DTAs have been negotiated, with 12 approved by the Swiss Parliament. - The ordinance on executing “administrative assistance” within DTAs was approved by the Federal Council in September 2010 and regulates administrative requests, procedures for the release of information, appeal processes, and the ban on administrative assistance in the case of stolen bank data. - E.U. and bilateral arrangements: - The E.U. directive on savings taxation applies to interest income paid to residents across E.U. member states using a “coexistence model” with automatic exchange of information or taxation at source. - The bilateral agreement between the E.U. and Switzerland introduced a withholding tax on savings income of E.U. residents paid through a Swiss intermediary; the retention tax started at 15 percent and is set to move to 35 percent as of July 2011. - In 2009 some SFr 534 million was retained, with SFr 401 transferred to E.U. member states. - The E.U. is working to close gaps in the directive by including additional financial instruments and applying it to legal entities. - In October 2010, both the United Kingdom and Germany entered into preliminary bilateral tax agreements with Switzerland to implement a withholding tax with final character and a regularization tax on undeclared accounts. - U.S. cooperation and FATCA: - With delivery of administrative assistance, the U.S. ceased legal action against UBS. - By August 2010, the Federal Tax Administration had examined approximately 4,450 UBS client accounts under the agreement with the United States. - More than 4,000 cases have been supplied to the United States to date; further information on additional accounts covered by the agreement and treaty request will be delivered to the IRS during 2011 subject to appeal outcomes. - The U.S. Foreign Account Tax Compliance Act (FATCA) introduces a 30 percent withholding tax on payments by foreign financial institutions to U.S. persons and U.S.-controlled foreign entities unless reporting requirements to the IRS are met; the definition of FFIs is broad and includes banks, insurance firms, securities traders, hedge funds, and private equity investments. - Impact on Swiss banking: - Swiss wealth management institutions are adapting to new international requirements on tax transparency; FINMA has stressed that cross-border risks oblige banks to establish principal compliance measures and build a fully compliant off-shore banking model. - Estimates of potential withdrawals and undeclared assets are wide-ranging and uncertain: - UBS estimated between SFr 15 and 40 billion could be withdrawn. - Credit Suisse projected a range of SFr 20 to 30 billion. - Some observers estimated “undeclared money” between SFr 300 billion to 1 trillion. - Much of these funds may remain in Switzerland for confidentiality and stability reasons; current effects of policy changes are masked by ongoing inflows related to safe-haven attributes. ### Swiss insurance sector: financial and risk profile (high-level findings) - Switzerland is a leading insurance center with highly developed markets: - In 2009, domestic gross premiums amounted to US$57 billion, about $7,571 per capita, the highest density in the world. - Penetration rate (premiums/GDP) is 10 percent, twice the EU-15 average. - Market concentration: - As of end-2009, there were 258 private insurance and reinsurance companies operating in Switzerland: 21 Swiss life insurers, 4 foreign life insurers, 79 Swiss non-life insurers, 46 foreign non-life insurers, 40 health insurers, and 68 reinsurers. - Market share of foreign insurers in the Swiss domestic market is about three percent. - The 10 largest insurers account for about 83 percent of gross premiums written. - The top five life insurers represent about 77 percent of the Swiss life insurance market. - The top five non-life insurers take 67 percent of the Swiss non-life insurance market. - The top three reinsurers maintain about 79 percent of the Swiss reinsurance market. *Prepared by Yingbin Xiao; excerpted from 2011 ARTICLE IV REPORT SWITZERLAND, INTERNATIONAL MONETARY FUND* ### 3. Swiss insurers rely heavily on ### _cr11115 - 3. Swiss insurers rely heavily on ### Market exposure and structure - About 70 percent of their global premiums (some SFr 127 out of 183 billion) are sourced from abroad. - Life, non-life, and reinsurance foreign exposure: - About 40 percent of direct life premiums resulted from Swiss business. - Over 65 percent of non-life business was written abroad. - About 94 percent of reinsurance premiums came from foreign business. - Employment: As of the beginning of 2010, Swiss insurers employed about 0.12 million staff, with 60 percent posted abroad. - Market dynamics: - Domestic market saturation drives heavy reliance on international markets. - Non-life generates about 80 percent of the net income of the Swiss insurance industry. ### Profitability analysis and outlook - Recent performance: - Profitability has improved steadily since 2009. - Major insurers’ ROE has improved from the trough in 2008 to over 7 percent recently. - The profitability of Swiss insurers was hit less hard during the crisis and the rebound is steadier than U.S. and other advanced European insurers. - Non-life sector: - Operating profitability is eroding despite growth in the sector. - Main insurers’ average combined ratio (sum of expense ratio and loss ratio) rose to 95 percent in 2010. - Swiss non-life insurers are more profitable than other advanced European insurers and on par with U.S. competitors. - Life sector: - Low interest rate environment is a major challenge for life insurers. - BVG guaranteed crediting rate for group life policies was lowered to 2 percent in 2009 and kept at that level in 2010. - Spreads between guaranteed crediting rates and government bond yields narrowed or even turned negative in 2010, making it challenging to earn guaranteed rates and potentially encouraging excessive risk-taking. - Forward pressures on profitability: - For non-life: segmentation, saturation, intense competition could soften rates and reduce premium income; exposure to catastrophic events. - For life: limited premium growth in traditional life products; challenges covering relatively high guaranteed interest rates in a low interest rate environment. - Investment results could improve but will not reach pre-crisis levels; moderate investment income could only partially offset weak underwriting results. - More stringent capital requirements could weigh on profitability in the near term; volatile capital markets could cause uncertainty about future investment income. ### Capital analysis and solvency - Capital rebuilding since 2009: - Insurers materially de-risked balance sheets, divesting or hedging risky assets. - Recovery of stock and corporate bond markets and a sharp rise in government bond values in 2010 helped strengthen the industry’s capital base. - Major Swiss insurers have replenished capital and boosted the share of shareholders’ equity to levels at or even exceeding pre-crisis positions; companies are increasingly returning capital through dividends and/or stock buyback programs. - Solvency I ratios (2009 examples): - Swiss Life: 164 percent. - Swiss Re: 236 percent. - Zurich Financial Services: 195 percent. - Average advanced European Solvency I ratios: life 300 percent, non-life 360 percent, composite 260 percent, reinsurance 290 percent. - Solvency I ratios of major Swiss insurers continued to improve in 2010. - Credit risk and ratings: - CDS spreads of Swiss Life and Swiss Re fell dramatically from 2009 peaks but remain above pre-crisis levels. - Current credit ratings (S&P): Swiss Life BBB+, Swiss Re A+, Zurich Financial Services AA-. - Current credit ratings (Moody’s): Swiss Re and Zurich Financial Services A1. - Swiss Solvency Test (SST): - Full implementation of the SST would boost the sector’s economic solvency and enhance resilience to adverse shocks. - Subdued profitability limits internal capital generation; prior less prudent reserving and reserve releases may increase under-reserving risk and the need to strengthen reserves. - SST came into full effect from the beginning of this year, rendering Switzerland the first country to move towards risk-based insurance supervision. - All insurance companies must accrue risk-bearing capital required to cover their target capital. - While a higher proportion of companies failed the test in 2009 compared to 2008, corrective measures were taken and 2010 results showed some improvement. ### Investment profile and risks - Aggregate investment allocation (industry-wide, 2009): - Fixed-income securities (including loans): 55 percent of total invested assets. - Equity: 18 percent. - Real estate (including mortgages): 14 percent. - Alternative investments: about 4 percent. - Exposure to U.S. subprime securities: very low. - Sectoral differences: - Life sector: highest exposure to fixed income and real estate. - Reinsurance sector: highest exposure to equity. - Real estate and mortgage exposure: - Swiss insurers, especially life insurers, are more heavily invested in real estate than the European average (European insurers’ average share about four percent). - Property portfolios largely consist of properties in Switzerland and tend to be residential, helping contain risk to date. - Since 2009, rapid increase in residential real estate prices and mortgage volume, historically low mortgage rates, and some loosening of lending standards have shown signs of risk build-up. - Concentration risk in real estate and weak risk management practices by some banks and insurance companies could lead to an abrupt correction once interest rate normalization commences and should be monitored closely. - Exposure to European peripheral sovereign and corporate debt: - Over half of the Swiss insurance industry’s sovereign and corporate bond holdings are in Switzerland, the U.S., and U.K. - Only two percent held in euro area countries where debt concerns have arisen — exposure seems manageable. ### Conclusions and policy implications - Overall assessment: - Despite recovery, challenges and risks remain for profitability, capital, and investments. - Profitability likely to be subdued because of weak underwriting results and moderate investment results. - Full implementation of the SST is an important step to enhance sector resilience; some companies may find it challenging to boost capital given subdued profitability prospects and the need to strengthen reserves. - Interest rate dynamics: - The impact of interest rates depends on both direction and speed. - A sustained low rate or an abrupt increase of interest rates would negatively affect the insurance sector. - The benefit of a progressive increase of interest rates would outweigh the cost. - Monitoring priorities: - Continued close monitoring and effective management of risks associated with the real estate market. - Watch for underwriting performance, investment income trends, reserve adequacy, and capital requirement adjustments under SST. *2011 Article IV Report — Switzerland, International Monetary Fund* ### 9. If banks exceed the minimum and ### _cr11115 - 9. If banks exceed the minimum and ### Capital rebates and resolvability measures - If banks exceed the minimum and implement organizational measures to reduce national and international systemic risks, they may take advantage of capital rebates. - Supplemental capital reduces the risk of insolvency, and if necessary, helps to facilitate orderly restructuring or resolutions. - The proposals envisage capital rebates from the third progressive capital component. - The third progressive capital component: - theoretically covers capital needed to capitalize a bridge bank and ensure viability of the residual going concern for at least 1 year; - also covers risks to continuation of essential functions. - The rebate recognizes that organizational efforts (e.g., simpler structures, alignment of assets and staff) beyond emergency plans can reduce risks. ### Emergency plan requirements and legal considerations - The “emergency plan” must specifically demonstrate how the continuation of systemically important functions will take place, taking into account: - complexity, - legal obstacles, - timing, - required resources. - The plan must be structured to avoid possible complications from “unequal treatment” of creditors and other challenges that may occur under Swiss bankruptcy law. ### Fund relations — membership and financial position (Appendix I) - Membership Status: Joined 5/29/92; Switzerland has accepted the obligations of Article VIII, Sections 2, 3 and 4, and maintains a system free of restrictions on the making of payments and transfers for current international transactions. - General Resources Account (SDR Million; Percent): - Quota 3,458.50 100.00 - Fund holdings of currency 2,540.76 73.46 - Reserve position in Fund 917.79 26.54 - SDR Department (SDR Million; Percent): - Net cumulative allocation 3,288.04 100.00 - Holdings 3,252.27 98.91 - Outstanding Purchases and Loans: None - Financial Arrangements: None - Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - Forthcoming 2011 2012 2013 2014 2015 - Principal - Charges/Interest - 0.160.190.190.190.19 - Total - 0.160.190.190.190.19 ### Exchange rate arrangement and sanctions reporting - Exchange rate arrangement: - The exchange rate of the Swiss franc is determined by supply and demand in the foreign exchange market and is currently classified as a free floating regime. - The Swiss National Bank reserves the right to intervene in the foreign exchange market. - All settlements are made at free market rates. - Switzerland maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions, except for restrictions in place for security reasons notified to the Fund pursuant to Decision No. 144-(52/51). - On March 2, 2011 Switzerland notified the IMF of exchange restrictions imposed against certain countries, individuals, and entities, in accordance with relevant UN Security Council resolutions and EU regulations. - Restrictions in place (as listed in the source) include targeted measures with respect to: - individuals and entities associated with the former government of Liberia and Iraq; - individuals and entities associated with Osama bin Laden, the Taliban, and the Al-Qaida network; - specific individuals and entities in Côte d’Ivoire, the Democratic Republic of the Congo (DRC), and Sudan; - entities involved in DPRK WMD-related programs; - bans related to Lebanon, Iran (including restrictions on uranium-related and "Trigger List" items and technology related to ballistic missiles), Eritrea, and Somalia. - The lists of individuals and entities against which financial sanctions are in force are based on decisions by UN Security Council sanctions committees and are amended regularly. - In accordance with EU regulations, restrictions are in place with respect to individuals associated with the former Republic of Yugoslavia, Zimbabwe, Myanmar, Guinea, and Belarus; lists of targeted individuals are identical to those in corresponding EU regulations. ### Statistical issues, gaps, and planned improvements (Appendix II) - Overall assessment: - Switzerland’s economic and financial statistics are adequate for surveillance purposes. - Switzerland generally publishes timely economic statistics and posts most data and documentation on the internet. - In June 1996, Switzerland subscribed to the Fund’s Special Data Dissemination Standard (SDDS); metadata are posted on the Dissemination Standards Bulletin Board. - Switzerland is in full observance of SDDS requirements and is availing itself of flexibility options on dissemination of production index data (for periodicity and timeliness) and of wages and earnings data (for periodicity). - Statistical gaps and deficiencies (mainly reflecting lack of resources and limited authority of the Federal Statistical Office (BfS) to request information): - reliable general government finance statistics appear with considerable lags, mainly due to delays in compiling fiscal accounts at the level of cantons and communes; - pension statistics are published with a long lag; - GDP by industry appears with a considerable lag. - Steps taken or intended to address deficiencies: - In 2009, the SNB for the first time complemented its publication on the financial wealth of private households with an estimation of assets held in real estate. - SNB revised its loan survey with effect from the reference date of 31 March 2009, providing a more detailed breakdown by industry for the services sector. - At the beginning of 2010, the SNB started to publish results from its monthly survey on the cost of borrowing. - In 2010, the SNB introduced a survey on the quality of banks’ credit portfolios, based on probability of default and expected loss. - In the second quarter of 2011 the SNB will start to collect—in the context of its surveys on payment transactions—data on customer payments. - The SNB has been collecting qualitative data on the lending policies of about 20 banks since the first quarter of 2008; this supplementary survey will be transformed into a permanent survey starting in the second quarter of 2011. - Work is under way to completely revise the survey on trade in services; collection of data based on the new survey will start in 2012, providing a detailed country breakdown among other things. - Annual national accounts were upgraded in 2003 to the European System of Accounts 1995 (ESA95); with the release of the Q4 2004 data, SECO revised its quarterly national account estimates. - SECO started publishing a quarterly production account in March 2006. - In October 2008, SECO added income approach estimates (at current prices only) to its quarterly national accounts. - In 2004, a cooperation agreement in the fields of statistics was concluded with the EU for harmonization with EU standards; the treaty entered into force in 2007 and was updated in 2010 to include BOP data and additional provisions for compatibility with EU statistics. - The Federal Finance Administration finished revamping fiscal statistics with adoption of the Government Finance Statistics Manual 2001, reform of cantonal and communal accounting standards (HRM2), and introduction of full accrual budgeting and accounting at the federal level (NAM) along lines of IPSAS. - Figures according to the new accounting standards have been produced for the federal government (NAM) 2008 and for some cantons (HRM2). *Prepared By Staff Representatives for the 2011 Consultation with Switzerland (In consultation with other Departments).* ### 2009. Figures according to GFSM2001 have ### _cr11115 - 2009. Figures according to GFSM2001 have ### Data reporting, fiscal statistics, and accounting - Figures according to GFSM2001 have been reported beginning in 2009. - A ROSC mission on fiscal transparency took place during January 16–29, 2009. - To counter lags in compilation of general government finance statistics: - The Federal Finance Administration will start to produce quarterly estimates in 2012 for the most important aggregates at all levels of government (Confederation, Cantons, Communes, Social Security). - Efforts are ongoing to implement harmonized accounting standards across all levels of government. ### Balance of payments and international investment position - Quarterly balance of payments and international investment position data are compiled by the SNB and meet international standards. - Monetary gold transactions relating to sales of gold reserves not required for monetary policy purposes have not been correctly reflected in the balance of payments. - For legal reasons, until the distribution of the proceeds of gold sales between the SNB and the Federal Department of Finance was concluded in February 2005, the proceeds of the gold sales not needed for monetary purposes were considered as part of the official reserves in the balance of payments. - After that date, they appear in the position “other assets of the SNB” in the balance of payments. ### Financial Soundness Indicators (FSIs) and investment surveys - Switzerland has continued to provide data on Financial Soundness Indicators (FSIs). - Switzerland participated in the 2009 Coordinated Direct Investment Survey. - The data and metadata for both initiatives have been posted on the IMF website. ### AML/CFT developments - The FATF Plenary decided in October 2009 that Switzerland had made significant progress in addressing the deficiencies identified in its 2005 mutual evaluation report. - On that basis, FATF decided to remove Switzerland from the “regular follow-up” process. - Switzerland will report further improvements to its AML System in October 2011 within the context of its biennial update. ### Common surveillance indicators (As of April 11, 2011) — key datapoints and reporting frequencies - Exchange Rates: Date of Latest Observation Apr 11; Date Received Apr 11; Frequency of Data D and M; Frequency of Reporting M and M; Frequency of Publication D and M. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation Mar 11; Date Received Apr 11; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Reserve/Base Money: Mar 11; Apr 11; M; M; M. - Broad Money: Mar 11; Apr 11; M; M; M. - Central Bank Balance Sheet: Mar 11; Apr 11; M; M; M. - Consolidated Balance Sheet of the Banking System: Mar 11; Apr 11; M; M; M. - Interest Rates: Mar 11; Apr 11; D and M; M and M; D and M. - Consumer Price Index: Mar 11; Apr 11; M; M; M. - Revenue, Expenditure, Balance and Composition of Financing – General Government: Latest Observation 2009; Date Received Apr 11; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: Latest Observation Feb 11; Date Received Mar 11; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Stocks of Central Government and Central Government-Guaranteed Debt: Q4/10; Mar 11; Q; Q; Q. - External Current Account Balance: Q4/10; Apr 11; Q; Q; Q. - Net International Investment Position: Q4/10; Apr 11; Q; Q; Q. - Exports and Imports of Goods and Services: Feb 11; Apr 11; M; M; M. - GDP/GNP: Q4/10; Mar 11; Q; Q; Q. - Gross External Debt: 2010; Mar 11; Q; Q; Q. (Note: Frequency codes — Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); and Not Available (NA).) ### Executive Summary — Economic performance and outlook - Recent performance: - Output fell by 1.9 percent in 2009 and grew by 2.6 percent in 2010. - Domestic demand underpinned by sound balance sheets, low interest rates, rebound in employment and immigration. - Exports increased more strongly than expected despite a 10-percent appreciation in the real effective exchange rate. - Trade and current account surpluses continued to expand. - Capacity utilization, particularly in construction, is now above its long-term average. - Unemployment rate has gradually declined. - Inflationary pressures remain muted despite the surge in oil prices and declining slack. - House prices accelerated but no evidence of widespread misalignment so far. - Monetary policy: - SNB implemented expansionary policy with the 3-month Libor target range at zero to 0.75 percent since March 2009. - From March 2009 until mid-2010, SNB pursued foreign exchange interventions to limit upward pressure on the Swiss franc. - Fiscal policy: - Fiscal policy provided limited stimulus during the crisis due to small automatic stabilizers, a moderate package of policy measures, and conservative application of the debt brake fiscal rule. - Overall fiscal balances were little affected by the downturn. - Financial sector: - Global market recovery and favorable financing conditions, together with financial sector measures, improved banks’ profitability, capital, and liquidity in 2010. - Evidence of increased risk taking in mortgage lending amid persistently low interest rates and high competition among banks. ### Projections and staff recommendations - Growth projections: - Growth is projected to slow to 2.4 percent in 2011 and to 1.8 percent in 2012. - Inflation projections: - Headline and core inflation should remain muted at around 1 percent in 2011–12. - Policy recommendations from Executive Board: - Most Directors supported a prompt withdrawal of monetary stimulus, absent new shocks. - Interventions on the foreign exchange market should be limited to reducing excessive exchange rate volatility. - Macro-prudential measures should be considered to address loosening lending standards in the mortgage market, unless system-wide self-regulation is sufficiently stepped up. - Neutral fiscal stance appropriate given prospective tightening of monetary policy. - Continued adherence to the “debt brake” rule. - Encouraged parametric reform of the old age insurance system to buttress fiscal sustainability. - Support for “too big to fail” legislation and further progress in micro-prudential supervision, including cross-border aspects. - Strengthen macro-prudential framework, clarifying roles and responsibilities of the SNB and FINMA, and establish legal basis for system-wide policies. ### Executive Director / Authorities’ views and policy positions - Outlook and risks: - Authorities expect GDP growth of 2.1 percent in 2011 and 1.9 percent in 2012 (government projection cited by authorities). - Authorities note the strong appreciation of the Swiss franc; consider the franc overvalued based on IMF’s equilibrium real effective exchange rate approach. - Authorities argue macro-balance and external sustainability CGER approaches are less relevant for Switzerland due to structural influences on current account figures. - Monetary policy stance: - Authorities share view that monetary policy normalization is needed in the near term to preserve long-term price stability. - Conditional on unchanged policy rate, CPI inflation is forecast to stay below 1 percent during 2011, exceed 1 percent in 2012, and surpass 2 percent by end-2013. - Normalization also seen as needed to reduce macro-financial concerns; may need macroprudential instruments in addition. - SNB interventions and reserves: - SNB intervened during the crisis given zero lower bound on interest rates; stopped interventions and began mopping up liquidity in mid-2010. - Strong appreciation in H2 2010 led to a substantial valuation loss on foreign exchange reserves; profits were nonetheless distributed because of past accumulated surpluses and budget planning needs of Confederation and cantons. - SNB continues to build up capital and diversify foreign exchange reserves to mitigate exchange rate risks. - Financial stability and policy measures: - Authorities agree on need to strengthen large banks’ capital base and prevent real estate overheating. - Systemically important banks envisaged to build up capital well above international standards in the next few years. - Measures already taken include: (i) data collection to improve monitoring, (ii) initiative to revise Swiss Bankers Association’s self-regulation for mortgage lending, and (iii) intensification of microprudential supervision. - FINMA could require capital add-ons. - Too-big-to-fail (TBTF) legislation: - Authorities welcome staff’s view that proposed TBTF legislation is instrumental in reducing systemic risk. - Proposal aims to increase resilience of systemically important banks and create incentives to reduce systemic impact and improve resolvability. - Macroprudential framework development: - Authorities acknowledge limited international experience and best-practice guidance. - Federal Department of Finance set up a high-level working group to: - assess organization of macroprudential surveillance in Switzerland and need for additional instruments; and - evaluate need to adapt legal framework to ensure SNB can fulfill financial stability tasks, including crisis prevention. - The working group will submit its report in the fall 2011. ### Selected economic indicators (annual and period entries as presented) - Real economy: - Real GDP (percentage changes): 2007 3.6 2008 1.9 2009 -1.9 2010 2.6 2011 2.4 - Real total domestic demand (percentage changes): 2007 1.4 2008 0.2 2009 0.7 2010 0.6 2011 3.1 - CPI (year average): 2007 0.7 2008 2.4 2009 -0.5 2010 0.7 2011 0.9 - Unemployment rate (in percent of labor force): 2007 2.8 2008 2.5 2009 3.6 2010 3.6 2011 3.4 - Gross national saving (percent of GDP): 2007 30.9 2008 23.4 2009 31.2 2010 33.3 2011 34.0 - Gross national investment (percent of GDP): 2007 22.0 2008 21.1 2009 19.7 2010 19.0 2011 20.8 - Public finances (percent of GDP): - Federal government balance: 2007 0.8 2008 1.0 2009 0.5 2010 0.5 2011 -0.1 - General government balance (including Confederation, cantons, communes, and social security): 2007 1.8 2008 2.0 2009 0.8 2010 0.2 2011 0.3 - Gross public debt: 2007 57.2 2008 54.8 2009 54.9 2010 55.0 2011 52.7 - Balance of payments: - Trade balance (in percent of GDP): 2007 1.8 2008 2.8 2009 3.1 2010 3.3 2011 3.0 - Current account (in percent of GDP): 2007 8.9 2008 2.3 2009 11.5 2010 14.2 2011 13.2 - Official reserves (end of year, US$ billion) excluding gold: 2007 74.6 2008 68.8 2009 135.8 2010 265... - Money and interest rates: - Domestic credit (annual average): 2007 -0.2 2008 4.9 2009 8.0 2010 8.2... - M3 (annual average): 2007 1.7 2008 4.9 2009 2.6 2010 2.2... - Three-month Libor rate (in percent): 2007 2.8 2008 0.7 2009 0.3 2010 0.2... - Government bond yield (in percent): 2007 2.8 2008 2.7 2009 1.8 2010 1.3... - Exchange rate: - Exchange rate regime: Free float - Present rate (April 20, 2011): SwF 0.89 per US$1 - Nominal effective exchange rate (2005=100): 2007 96.1 2008 101.4 2009 105.9 2010 113.1... - Real effective exchange rate (2005=100) based on consumer prices: 2007 93.6 2008 97.9 2009 101.6 2010 107.5... ### Fiscal developments and outlook (authorities’ statements) - 2010 fiscal outcome: - General government surplus of 0.2 percent of GDP in 2010 versus a budgeted deficit of 1.5 percent. - Swing from deficit to surplus most notable at the federal level. - Debt brake and budgeting: - Requirements of the Swiss debt brake rule have been regularly surpassed over the last six years. - Debt brake helped move federal debt to a more sustainable path and significantly reduced interest payments. - Authorities will revise tax receipt estimation methods, in particular for the withholding tax, upward to better reflect recent trends. - Medium-term and social security: - Medium-term Confederation budgets expected to deteriorate somewhat due to structural tax reforms; sub-national balances improving. - Social-security accounts recorded an increase in the deficit of roughly 1 percent of GDP between 2008 and 2010; expected to improve and reach balance by 2012, partly due to reform of unemployment insurance. - Debt levels: - Debt levels expected to continue their decline despite a small uptick in 2010. - Many cantons and municipalities have adopted debt brakes or other fiscal rules, supporting the basis for debt consolidation. *International Monetary Fund — 2011 Article IV Consultation materials as provided in the source content.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11115.pdf_