A Comparison of the Geneva and the Zurich Financial Centre. Market Structure, Competition and Profitability


Term Paper, 2016

39 Pages


Excerpt

List of Content

List of Figures

List of Tables

List of Appendices

1 Introduction

2 Background and History
2.1 Geneva Financial Centre
2.2 Zürich Financial Centre

3 Market Structure
3.1 Geneva
3.1.1 Number of Financial Institutions
3.1.2 Products and Services
3.2 Zurich
3.2.1 Number of Financial Institutions
3.2.2 Financial Cluster in Banking and Insurances Sector
3.3 Market Entry and Exist

4 Competition

5 Profitability
5.1 Financial Institutions for Analysis
5.2 Key-Performance-Indicators
5.3 Regression Analysis
5.3.1 Cost-Income Ratio
5.4 Interest Net Income/Average Assets
5.4.1 Income from Commissions and Services
5.4.2 Total Customer Deposit Growth Rate vs. Net New Credit (loans)

6 Outlook

References

Appendix

List of Figures

Figure 1: Number of financial institutions

Figure 4: Number of branches (Cantons Zurich, Zug, Schwyz, 2013)

Figure 7: Financial Sector Switzerland: growth contribution of the Switzerland’s financial centres

Figure 8: Comparison on selected data Zurich financial centre and Geneva financial centre

Figure 9: Amounts due in domestic savings and deposit income

Figure 10: HHI for domestic mortgage loans

Figure 11: Cost to Income Ratio for Zurich, Geneva, and all Switzerland 2010-2014

Figure 12: Interest Net Income/Average Assets for Zurich, Geneva, and all Switzerland 2010-2014

Figure 13: Comparison of C-I relationship to Interest Net Income for all three regions

Figure 14: Income from Commissions and Services

Figure 15: Comparing Total Customer Deposit Growth vs. Net New Loans

List of Tables

Table 1: Number of insurers in Switzerland by years

Table 2: (Bankscope, 2015)

List of Appendices

Table I. 1:Calculation Herfindahl Index

Table I. 2: Calculation Herfindahl-Index for mortgages

1 Introduction

Switzerland is one of the most recognised country for financial services and consists of four main financial centres; Basel, Geneva, Lugano and Zurich. Banking sector can be classified as one of the main contributors in Switzerland’s financial sector.

The following paper addresses two main financial centres in Switzerland as ranked seventh and 13th, respectively by The Global Financial Centres Index: Zurich and Geneva1 According to the last GFI report: “The top financial centres of the world are very well developed, sophisticated and cosmopolitan cities in their own right. Successful people are attracted to successful cities and it is perhaps no surprise that these centres are ranked so high by financial services professionals.”[1]

Both financial centres profit from Switzerland’s environment which provides legal stability, and high living-standards and as a result, both financial clusters play an important role in the global business of finance.

The paper “Geneva Financial Centre and Zurich Financial Centre – A comparison: Market structure, competition and profitability” aims to analyse the current situation as well to provide an outlook for the future. Due to the limited time as well the limited scope, this paper focuses only on the banking sector, mainly analysing twelve major financial institutions with a strong national presence..

Section 2 covers the background and history of both financial centre, Geneva and Zurich.

Section 3 provides a short overview of the market structure of the financial sector as a whole in each financial centre, describing the number of market participants as well as the offered products and services.

Section 4 contains information regarding the competition in both financial clusters in Switzerland and measures competition using the Herfindahl-Hirschman Index (HHI) on two selected examples.

Section 5 provides an empirical analysis of the profitability of both financial centre using carefully selected key-performance-indicators (KPI).

Lastly, the paper provides an overview as well as an outlook into the future.

2 Background and History

2.1 Geneva Financial Centre

In the heart of Europe is where Geneva Financial Centre has established its roots which date back several hundred years back.

Geneva became an important trade hub due to its central location between the crossroads of major trade routes from Italy to France and from the Mediterranean to Flanders.

Beginning the financing movement was Bishop Adhémar Fabi who lent money, based on an interest rate.. During this time in 1387, it was a unique privilege to lend money at interest, which no other Christian nation had.

Historically, the GFC has its roots since the fourteenth and fifteenth centuries. At that time Geneva was one of the main centres of European trade capital where traders eventually turned into bankers. By the seventeenth century, Geneva had become a global trading place with growing importance as the trading network was growing. The free-thinking spirit of Calvinism had further developed banking and trade. By this time, bankers built commercial networks and financed the largest trading companies such as Dutch East India Company, the Royal Bank of England, Royal Manufacture of Mirros (the first European manufacturing company) and more. Bankers were highly recognized and were appointed with duties such as advicing ministers and Kings.

One main step for Geneva’s further growth as a financial centre was the opening of Switzerland’s first stock exchange in 1857, a quarter before the stock market in Zürich and Basel opened. At that time, the stock exchange belonged to the most important in Europe and was the fifth largest stock exchange, after Amsterdam, Copenhagen, London and Paris. Geneva bankers also contributed to the industrialisation period by financing railway and manufacturing companies in Switzerland, Europe, and United states. By issuing government bonds, the bankers were also involved in the commercial development of Switzerland. Many banks were established and private banks started to focus on wealth management. Furthermore, it became attractive for foreign banks to open a branch in Geneva. By this time, Geneva had developed as a wealth management and trade centre for commodities.

Since then, GFC has been the umbrella association of the financial sector.[2]

Main contributors for this development as global and competitive banking and financial centre was the political neutrality, legal stability, the attractive living standards, clients privacy, guaranteed preservation of business confidentially, as well the strict anti-money laundering legislative.

2.2 Zürich Financial Centre

Established and operating since 1856 with the beginnings of Bank Leu & Co. in 1755, and Schweizerische Kreditanstalt (now Credit Suisse), Zurich Financial Centre has been a key regional financial centre in Switzerland and rated among top two in the European financial market. The fast growth may be credited to industrialization, location, existing bank establishments, and mostly the need to finance the construction of railway lines which in-turn created a need to additional capital. The central location of Zurich attracted names such as Eidgenössische Bank (EIBA), which moved its headquarters from Berne to Zurich in 1892. Bank in Winterthur evolved into Schweizerische Bankgesellschaft (SBG) in 1912 with its headquarters also in Zurich. By 1908, EIBA, SBG, Bank Leu and Schweizerische Kreditanstalt accounted for 50% of the balance-sheet total of the seven largest Swiss Banks thus marking strong beginnings for the continuously growing Zurich Financial Centre.

The need to finance railway construction created an increasing requirement for additional capital upon establishment of the Swiss Federal State in 1848. Alfred Escher can be credited for the founding of Schweizerische Kreditanstalt (Credit Suisse), and in establishing Swiss Re and Zurich Insurance.

The location, once again, played a key role upon construction of the stock exchange. By 1905, the decision to have a second Swiss National Bank (SNB) office only further solidified the city’s upcoming role in the financial services industry in the global market. At this time, the financial centre was now comprising a group of major banks, a central bank, capital market, and a range of capital export activities.

It was the post-war redevelopment that brought the spotlight back to Zurich thus demanding yet another performance of the financial centre. The Swiss banks, now divided into several categories, cantonal banks, major banks, regional and savings banks, Raiffeisen banks, private banks, and other banks were only part of the booming financial centre along with 126 foreign banks. By 2008, 332 banks have remained in Switzerland following numerous mergers and acquisitions, of which, one third are located in Zurich. The major banks which comprise the financial centre now are: Credit Suisse, and UBS (formerly SBG).

The globally renowned asset management sector can be credited for the rise of Zurich Financial Centre along with bank-client confidentiality and the fact that Switzerland was not directly affected by the current events at the time such as war, lows in the market. The financial market in Switzerland constituted of stable banking systems, general favorable conditions, political and economic stability, legal certainly, the highly skilled workforce, attractive tax conditions all being supported by a stable currency that has always been convertible. All of these factors contributed largely towards the success of the financial centre.

Below is a brief highlight of major events that defined the current state of Zurich Financial Centre:

1755-1928: Beginning with the founding of Bank Leu & Co. in 1755, followed by establishment of Credit Suisse by Alfred Escher in 1856, major events such as Swiss Federal State being established, introduction of the standard currency-franc, and the decision to construct a railway in order to keep Zurich and neighboring cantons connected with rest of Europe to prevent cultural and economic isolation, the Zurich Financial Centre had strong roots being established during this pioneering era.

1929-1939: With WWI coming to an end and the great depression beginning in 1929, this period of approximately ten years shaped the financial centre with the German Bank Crisis occurring in 1931 and The Swiss Federal Banking Act being enforced in 1934 by Swiss Federal Banking Commission (now FINMA) which protected clients’ deposits was only the beginning of the increasing attractiveness of Zurich Financial Centre globally.

1940-1979: This era saw stable market conditions during the later years coupled with highly competent workforce. The savings ratio was high, national budget was balanced, the franc was stable, and inflation was low. These ideal conditions attracted foreign banks to set up shop in Switzerland, mainly Zurich.

1980s: A paradigm shift occurred during the 80s with banks expanding their products and services to include global investment banking which was capable of a high return. Highly risky activities such as capital transactions, advisory services, mergers and acquisitions, stock exchange trading on behalf of the clients was in the forefront and being practiced widely by banks.

1990s-Present Day: The real estate crisis and the inefficiencies of a few regional banks resulted in the acquisitions of banks such as Bank & Leu and Schweizerische Volksbank by Credit Suisse, along with the acquisition of Winterthur Insurance in 1997 launching itself into the insurance industry. Furthermore, the merger of SBV and SBG into UBS marked a new era for the two big banks. In 2005, Bilateral II agreements were signed with EU to establish taxation of interest income and further combat fraud. A major event, the U.S. sub-prime crisis lead to the end of powerful US investment banks which has an effect on the Zurich Financial Centre as the globally-operating banks are forced to shore up their equity capitals by the means of private investment or obtain state support and reduce their balance sheet. Most importantly, the parliament approves the “too big to fail” modification which allows banks untul 2018 to build a higher level of equity capital in order to comply with stricter liquidity rules, have a broader risk profile, and organize in such a way that should the banks fail to perform, the national economy would not be under threat due to insolvency.

Currently, the financial centre is in a phase of change with regards to new regulations in light of the recent economic, financial, and cultural events. Associations such as Canton of Zurich, Swiss Bankers Association, and Zurich Banking Association are continually working to create conditions in which the banking centre can flourish. In particular, the Swiss Bankers Association amended its financial centre strategy in 2013 to focus on two main objectives: legal certainty, and sustainable growth, with the following strategies:

1. Solving problems of the past: Until 2009, the Swiss Financial Centre declared its commitment to complying with international taxation standards. The goal now is to acquire and manage only tax-compliant assets. Therefore, there is ongoing support to transition to international withholding tax agreements, and voluntary disclosure programs.
2. Actively participating in international bodies and adopting international standards: Automatic Exchange of Information is the new standard which is being introduced into the activities of the financial centres.
3. Rapid implementation of the current international standards: necessary changes to be enforced in order for Switzerland to pass the peer review of the OECD Global Forum.
4. Market access in the EU: EU being the most important market for the Swiss Banks, there needs to be an action-plan devised which is a near-term solution which protects the Swiss financial markets during the revisision of the EU Markets in Financial Instruments Directive (MiFID II). In the long term, general agreement on trade services needs to be reached along with the EU equivalence of the Swiss regulation to create a level playing field.
5. Competitive framework conditions: Conditions in the areas of taxation, supervision and regulation are necessary in order to continue to preserve and create jobs, and value-added in Switzerland.

3 Market Structure

3.1 Geneva

3.1.1 Number of Financial Institutions

The number of the financial institutions in Geneva, according to Geneva Financial Center (2015a), although 18 financial institutions were collapsed or have merged with other banks since 2012, nowadays Geneva has 6’675 enterprises operated in the financial sector. Specifically, Canton Geneva encompasses:

- 119 banks (e.g. Cantonal bank, Swiss National bank, big banks, private bankers, Raiffeisen banks, foreign banks, commercial and investment banks, foreign-controlled banks);

Among 119 banks in Canton Geneva, foreign banks have occupied 64.46%, commercial and investments banks has occupied 19%.

The major Swiss banks are comprised of Geneva Cantonal Bank, Swiss National Bank, Raiffeisen banks, Credit Suisse, and UBS.

- 870 independent asset managers (independent Financial Advisors), e.g. Blackrock SA, Addvision Partners SA, Geremant SA.

- 3’282 financial intermediates. Most of these intermediates are authorized by FINMA, e.g. Capital Trust S.A, Aedes, Amber Weath SA.

- 613 insurance companies, e.g. SWICA, Aon Insurance, Concordia, Clements International.

- 1’275 fiduciaries, e.g. Amedia Fiduciary, ILS (Switzerland) Sàrl, Comservice SA, CFS Management.

Figure 1 shows graphically the distribution of the financial market participants. A contrast is evident between the highest value financial intermediaries (53%) and the lowest value banks (2%). Main financial intermediaries are not regulated and operate under the concept of shadow banking. This clearly illustrates the high position of the financial centre Geneva in wealth management, especially in private banking.

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Number of financial institutions[3]

3.1.2 Products and Services

Based on the “Economic Survey Result 2015-2016” (Geneva Financial Center, 2015b), Geneva financial markets could be divided into five segments; Private Asset Management, Institutional Management, Credits and Deposits, Commodity Trade Finance, and other operations.

- The total percentage of Geneva Financial Institutions include private asset management (62%), institutional asset management (10.2%), credit and deposits (15%), commodity trade finance (3.6%), and other operations (9%).
- For the banking sector, the percentages of the total market consist of private asset management (35%), institutional asset management (9.7%), credit and deposits (38.8%), commodity trade finance (7.8%), and other operations (8.8%).

Known as Center of Wealth Management and Trade, Geneva Since the Second World War, Geneva has attracted many Swiss banks, foreign banks, financial services firms since the second World War making the city a world capital of wealth management (Geneva Financial Center, 2015d).

[...]


[1] The Global Financial Centres Index 18, published by Z/Yen Group, September 2015.

[2] Geneva Financial Center: A global and competitive financial center.

[3] Own illustration based on report Geneva Financial Center, 2015.

Excerpt out of 39 pages

Details

Title
A Comparison of the Geneva and the Zurich Financial Centre. Market Structure, Competition and Profitability
College
Lucerne University of Applied Sciences and Arts  (Banking & Finance)
Authors
Year
2016
Pages
39
Catalog Number
V315808
ISBN (eBook)
9783668243637
ISBN (Book)
9783668243644
File size
1132 KB
Language
English
Tags
Financial Centre Geneva, Financial Centre Zurich Finanzzentrum Zürich, Finanzplatz Zürich, Finanzplatz Genf, Finanzplatz Schweiz, Finanzsektor Schweiz, Banking Schweiz, Finanzzentrum Zürich, Finanzzentrum Genf
Quote paper
Marie-Madeleine Meck (Author)Alisha Dhiri (Author), 2016, A Comparison of the Geneva and the Zurich Financial Centre. Market Structure, Competition and Profitability, Munich, GRIN Verlag, https://www.grin.com/document/315808

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