Phases in Swiss banking’s development
From the first banking houses to a major international financial centre
The Swiss banking landscape has been radically transformed over the last 300 years. The first banking houses and private bankers were set up in the 18th century, followed in the early 19th by large numbers of local savings banks. These were intended as a way for poor people to put some money aside as a form of insurance, and were described by the historian Christoph Bernoulli in 1828 as a “new, distinct kind of non-profit undertaking”. Gradually, they evolved into a diverse industry made up of banks in various categories with different business models and regional focuses. A glance at the timeline (Fig. 1) shows how the structure and importance of the banking sector has changed up to the present day, in the context of social and economic trends. It concentrates on the five main domestic bank categories.
Figure 1
Phases in Swiss banking’s development
18TH CENTURY
EARLY 19TH CENTURY
1826–1907
1907–1945
1945–1973
1973 ONWARDS
18th century
Early period
The origins of Swiss banking can be traced back to the early 18th century. The first institution documented in the data collection is Malacrida & Co., a banking firm established in Bern in 1702 which subsequently failed in 1720 in the wake of the South Sea Bubble. Other early entries in the collection include companies that only turned into pure banks over the course of time. One example is the forwarding company Caspar Zyli, founded in 1741, which expanded its original business to include money transactions and was later run solely as a bank. A similar development occurred at the silk trading business set up in 1750 by the Schulthess family which, after several changes of name, has operated as Rahn & Bodmer since 1917. Rahn & Bodmer is believed to be the oldest still extant bank in the data collection.
early 19th century
Savings bank movement
The savings bank movement grew up in the early 19th century to offer large sections of the population secure access to saving for the first time. The years 1815 to 1830 saw a wave of new foundations, with around 100 such institutions coming into being. Initially, their main customers were people with low incomes (such as domestic servants, factory workers and day labourers), who were able to invest the portion of their income not needed to cover their immediate needs safely in a bank and earn interest in the process. The spread of savings banks differed markedly from region to region. At first, they sprang up mainly in urban areas, before quickly extending to more rural parts of the country from around 1815 as industrialisation advanced. Other factors influencing their expansion included the level of industrialisation and the prevailing religion in each region. Thus, they appeared first in Protestant areas where new factories were being built – along Lake Zurich and in the south-western part of Aargau, for example, where textiles were manufactured. This period saw a rapid increase in the number of banking institutions, as they proved a successful model for growing prosperity among the general population.
1826–1907
Free banking
In the second half of the 19th century, the number of banks in Switzerland grew strongly, reaching a historic high in 1884. Lending activity expanded during this time, and with it the emergence of the banks’ central role as financial intermediaries. Many cantonal savings banks were also set up between 1812 and 1850, which can be regarded as precursors of the later cantonal banks. The 1850s saw the establishment of institutions that later evolved into big banks. Until 1882, the Swiss banking market remained largely unregulated. The newly created cantonal banks were the only exception, being subject to certain rules on regulation and oversight based on cantonal laws. The term “free banking” is normally used to denote phases in which banks are able to issue their own banknotes. In Switzerland, this came to an end in 1907, when the Swiss National Bank (SNB) commenced operations and assumed a monopoly on banknote issuance.
1907–1945
War and consolidation
The launch of the SNB ushered in an era of consolidation, as the business model underpinning these regional “free” banks came under pressure from the central bank’s monopoly. Figure 1 shows the sharp reduction in the overall number of banks during this period. During the First World War (1914–1918), the Swiss franc increasingly served as a safe haven, strengthening Switzerland’s position as an important capital exporting country. The ensuing global economic crisis of the 1930s hit the big banks especially hard, mainly because of their extensive international business activities. Their cumulative total assets fell sharply, and many institutions suffered substantial losses. The Schweizerische Volksbank was rescued by the federal government in 1933, while Banque d’Escompte Suisse went bankrupt in 1934. The cantonal banks were less affected, thanks in part to their state guarantees, and increased their share of cumulative total assets even as that of the big banks declined markedly. Banking regulation in the US, Europe and Switzerland was tightened up considerably against the backdrop of the Great Depression and numerous bank crises. The Banking Act (BankA) of 1934 and the Banking Ordinance (BankO) of 1935 introduced comprehensive regulation of the Swiss banking sector at national level for the first time. The new Act also enshrined bank-client confidentiality in the law, making it a key factor in Switzerland’s positioning as an international wealth management location. Switzerland remained an important international financial centre during the Second World War (1939–1945). The gold market continued to operate, enabling financial and trading transactions to be conducted with a number of the warring parties. They included large-scale gold trading by the Swiss National Bank with Germany’s Reichsbank, which also involved gold from the reserves of countries that had been occupied and annexed. Switzerland’s commercial banks managed large volumes of foreign assets during the war, and settled international payments and securities trades. They also held the assets of people who had fled to escape Nazism. Some of these were identified as “dormant assets” after the conflict, because it was no longer possible to identify the legal owners or their heirs.
1945–1973
The Golden Age
The period after the Second World War is known as the Golden Age, with the 1950s and 1960s witnessing exceptionally high economic growth. Swiss banks’ cumulative total assets expanded rapidly during this time, thanks to Switzerland’s fast-growing economy, capital inflows from abroad and the internationalisation of the banking market. The Bretton Woods Agreement of 1944 and the setting up of the International Monetary Fund (IMF) as well as the International Bank for Reconstruction and Development (now the World Bank) heralded a new international economic and monetary order in the post-war years. The IMF was chiefly designed to promote the stability of the international monetary system and support the gradual removal of restrictions in international payments. International payment and capital transactions accelerated at the end of the 1950s. One key step in this process was the restoration of convertibility among the principal European currencies. This facilitated international trade and created more favourable conditions for cross-border financial transactions, which was also reflected in the growing share of banks’ balance sheets derived from foreign business. Swiss banking profited from this increasing internationalisation. From 1960 onwards, Switzerland established itself as one of the world’s leading financial centres, occupying third place after London and New York until the rise of Tokyo in the 1980s.
1973 onwards
Internationalisation of the financial markets
Following the breakdown of the fixed exchange rates that had formed part of the Bretton Woods Agreement, Switzerland moved to a flexible exchange rate regime in 1973. In the wake of this change, the internationalisation of the Swiss banking market accelerated. Those growing international links were also reflected in the market structure: Swiss big banks and private banks established more branches abroad, while numerous foreign banks set up in Switzerland. Today, the Swiss banking market comprises 225 banks in a range of categories, including 61 foreign banks. The decades-long contraction in the number of banks continues, with the downtrend in evidence both in Switzerland and internationally.