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IMF gives Swiss economy good marks

The IMF sees risks emerging in the mortgage market Keystone

Switzerland’s economic growth continues to be broadly based, according to the International Monetary Fund (IMF).

In its annual country report, published on Monday, the IMF said Swiss domestic demand was benefiting from low interest rates, increased employment and continuing immigration. However, further regulatory reforms were required, with the mortgage market singled out as an area of concern.

The IMF economists also recommended further clarification concerning the roles of the Swiss Financial Market Supervisory Authority (Finma) and the Swiss National Bank (SNB) concerning the prevention of financial instability.

“I believe Switzerland is going in the right direction,” Alexander Karrer, Deputy State Secretary for International Financial and Tax Matters, told

“That view seems to be confirmed by the IMF in its statement, which overall gives a very positive picture of the state of our economy and of the reforms underway.”

Despite the strength of the Swiss franc, exports have grown due to increased global demand. For the current year, the IMF anticipates Swiss economic growth of 2.4 per cent. For 2012, growth of 1.8 per cent is forecast due to a drop in exports.

“On the one hand the Swiss economy has been quite resilient going in and coming out of the financial crisis and the following recession,” he said.

“On the other hand the Swiss authorities are trying to draw the lessons from this crisis and improve in particular financial market regulation in order to increase shock absorbency capacity of the financial sector.”

“Good basis”

In October a government commission said Switzerland’s two main banks, UBS and Credit Suisse, had to put aside bigger “buffers” to cover their risks.

The government’s “too big to fail” commission – set up in the wake of the financial crisis and the government bail-out of UBS in 2008 – said the move would limit the risk that a bank failure would drag down the economy.

It said the two banks would hold at least ten per cent of risk-weighted assets, based on new global standards (Basel III), in form of common equity. In addition, the banks should hold another nine per cent, which could be contingent convertible (CoCo) bonds, taking the current total capital requirements to 19 per cent.

“We generally feel that a capital of 15-20 per cent is more prudent than capital below that,” Claire Waysand, head of the visiting IMF delegation, told

“But whatever buffer you have, it’s very important to have stringent supervision to ensure that you have a good understanding of risk taking and you can act if needed.”

She added that the Swiss proposals couldn’t be fully assessed until they were translated into law, “but we think they are a very good basis to reduce the risks”.

Further reforms needed

In addition, the IMF believed that the Swiss National Bank could start tightening monetary policy in the foreseeable future, provided there were no further shocks.

The organisation’s experts saw uncertainties mainly in geopolitical developments and possible continued tension in the euro zone.

They also thought the supervisory framework of the financial sector needed to be strengthened. In particular, the respective mandates of the SNB and Finma should be clarified further. The finance ministry said it would convene a working group for this.

“If we take a very specific example of what’s going on these days in Switzerland, there are risks emerging in the mortgage market,” Waysand said.

“I think this view is pretty consensual and the risks are being followed by the SNB and by Finma. When it comes to acting upon these risks at a system-wide level, we feel that it’s not quite clear what the responsibilities and instruments are.”

Currency interventions also wanted to know the IMF’s views on the SNB’s foreign exchange interventions last year that saw it post a consolidated loss of SFr19.17 billion ($20.9 billion).

Some Swiss media and politicians have accused the central bank of squandering the people’s money in the anti-inflation interventions, which failed to prevent the franc from surging to record highs against the euro and the dollar.
“Clearly when we look at what happened in 2010, the SNB had very large interventions, but these have to be seen in a context where there were very large inflows of capital into the country,” Waysand said.

“What’s more important for us is the forward-looking view. Here we think the SNB should limit its interventions to smoothing short-term disruptive movements.”

But should such moves never be repeated? “Each situation has to be understood in a particular context, and we feel 2010 was a very exceptional context.”

As for the hot issue of banking secrecy, Waysand said the IMF had held talks with the authorities and banks about the implications of ongoing tax issues with other governments and the European Union.

“It’s a bit too early to form a view of what will be the impact of all these discussions on the Swiss banking sector, but we feel that there will be a need for the sector to continue to adapt and that might have an impact particularly on the private banking industry.”

From March 18-28 an IMF delegation carried out the annual country report with Switzerland.

The regular evaluation of economic and financial position of its member states within the scope of the Article IV Consultation is a core element of the IMF’s economic policy monitoring function.

The regular consultation regarding Swiss economic policy is an obligation which comes from Switzerland’s membership of the IMF.

Each time, the IMF delegation meets with representatives from the government, Finma and the SNB, as well as with representatives of the private sector.

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SWI - a branch of Swiss Broadcasting Corporation SRG SSR

SWI - a branch of Swiss Broadcasting Corporation SRG SSR