Liyun Zhang
Field Trip Report
I.
Introduction
The Swiss financial center, with banking as the leading sector, is of major international
importance and among the global market leaders in many areas. The financial center
makes a substantial contribution to gross value added in Switzerland and hence to the
prosperity of the entire Swiss population. 6 institutions under the Swiss financial system
were visited during our program field trip this year. Among them are banks, academic
research center, and financial regulatory bodies. While learned much about these
establishments themselves via a series of customized lectures, we also obtained a bunch
of first-hand perceptions about the impact of the European debt crisis on its economical
branch, and were informed with diversified counter measures by the cordial speakers.
Before visiting, the dominant impression of Switzerland on me is a safe heaven, for the
reason that it holds a share of more than a quarter of the global cross-border wealth
management market. After vising, however, more facts, such as the international
competition with high-growth regions that Swiss financial center is facing, the increasing
fiscal pressure on the Swiss cross-border private banking sector and the eroding
profitability of private banking, are revealed. Also, proactive measures adopted by Swiss
financial institutions, policy makers, and supervisory authorities made me reflect the
concerted effort taken to thrive in the new economic and regulatory environment that is
evolving around them. I hold a positive attitude towards the Switzerland’s withstanding
challenges and maintaining its international competiveness as a top-tier financial center.
Even more importantly, I believe Hong Kong, as another weighty financial center on the
global platform, might be able to learn something valuable from what we newly bring back.
II.
Credit Suisse visit
Christine Schmid, the Director of Global Equity Research department of Credit Suisse,
gave us a speech about the current external economic and political environment of Swiss
banks, followed by general strategies to cope with adverse changes, like the increasing
number of financial regulations and provisions that put in place in response to European
sovereign debt crisis. She also mentioned some micro topics, from balance sheet
conditions, capital adequacy ratio to the market and credit risk, to express her opinion
onthe future direction of bank governance. In the end, she made a brief introduction of
Credit Suisse to us. What left me a deep impression throughout the lecture is her idea
about the investment on technological infrastructures. Banks were among the first to
introduce computers and data processing on a large scale in the 1970s, but have lost
ground in recent years. As banks focus on regaining earning power and complying with
regulatory requirements, IT investment has suffered.While Big Data analytic technology is
already used in some aspects of banking, the abundance of client data is often static,
segregated and processed only periodically, yielding backward-looking and not real-time
information. Ms. Schmid, therefore, believes banks now need to invest in sophisticated
Big Data analytic technology to capture trends, react to events as they happen, predict
Liyun Zhang
needs and reduce risks if they want to offer competitive financial services in the future.
Patrick Elmer, the Director of Philanthropy & Responsible Investments, addressed
another issue, the microfinance, which is also one of the predominant features of Credit
Suisse in the commercial banking industry. This topic is not new ever since Dr.
Muhammad Yunus and his Grammeen Bank.From philanthropic perspective, lending to
poor people at their affordable rate partly stemmed from the corporate social
responsibilities. Profit potential meanwhile is another practical consideration of bankers.
By providing their corporate clients with improved access to new growth markets located
in Asia, the Middle East and in Latin America, Swiss banks like Credit Suisse could
expand their local presence in these regions, so that resulting business opportunities can
be fully exploited. Many individuals and companies from these emerging powers may also
prefer to carry out some of their banking business in neutral territory-another chance for
Swiss banks. All these promising opportunities, however, is not without risks and extra
expenses. Mr. Elmer explained to us that each receiver of microloan was under careful
supervision so that a proper way to utilize the money could be ensured. Numerous visiting
on different people at different places brings the bank much cost, yet this is just one of the
sacrifices they have to make in order to preserve the microfinance business. Capital flow
between developedand emerging markets, as happens when banksset up funds and sell
securities backed on those microloans to international investors, is often exposed to huge
risks, ranging from economic to political factors. For the party which offers microcredit
service, the deal must be a balance of untapped profit and unprecedented risks.
III.
Swiss Financial Analysts Association visit
Dr. Giuseppe Benelli, the President of the Swiss Financial Analysts Association,
analyzed the recent financial crisis, summarized current economic risks, and explained its
implications for the financial markets. He started with the concept of asset management,
which is the core business or Swiss banks. Assets under management comprise all
invested assets held under a discretionary or advisory asset management mandate.
Active asset management involves the alpha and beta management, but in the practical
world, it can be quiet costly to find alpha, especially under a semi-efficient or perfectly
efficient market. Valuation of risky securities and seeking for alpha, however, is not without
its meaning. I can’t agree more with his words, “Efficiency is not given by God, it’s a work
by thousands of analysts, a necessary condition for market efficiency.”Basedon his
research of the world economic data from 1964 to 2006, the speaker also concluded that
there is no correlation between economic growth and S&P 500 index, and the correlation
between hedge funds and bonds are quiet low. These findings supported the benefit of
diversification in portfolio management. When it came to the financial crisis in 2008, Dr.
Benelli pointed out that it was actually triggered by the real eastate crisis, which was
further referable to the subprime mortgages. And here comes a dilemma when deal with
the challenges of financial crisis and economic recession. To avoid recession, we need to
increase the liquidity in the market, but simultaneously such plan will boost the inflation
level, thus exacerbating the economy stroke by the financial crisis. Restricted credit policy
and apropos cooperation of monetary with fiscal policy might be two solutions for such
quandary. The lessons I learned from the first part of the address are the following:
Liyun Zhang
firstly,the increase return on equity (ROE) with leverage is not creating value (alpha) to the
shareholders; secondly, in illiquid markets, returns are not normally distributed; and lastly,
the internationalization of capital markets increases the correlation, while diversification in
asset management implies low correlation. Regarding the current economic situation, Dr.
Benelli thought that the world economy recovers faster than expected due to a positive but
differentiated growth. And despite the massive liquidity injections by central banks,
inflation is still low because liquidity for a long period was not brought into economy by
credit creation of commercial banks;strategic structural reforms are therefore needed. We
were in the end informed with new challenges, like more and more regulations,
devaluation of currencies sprung from the protectionism, and the instability of the euro
zone. The speaker also warmly gave his personal suggestions on the future investment,
that stock markets are undervalued; bond are overvalued after yield-curve decline and
alternative investments in the emerging markets will be a good choice.
IV.
UBS International Center of Economics in Society visit
Roman Studer, the Chief Operating Officer of UBS Center of Economics in Society,
introduced the UBS Center and the opportunities for master/ PhD students to us. The aim
of the UBS International Center of Economics in Society is to become a center for
world-class research in economics. It committed to investigate the interdependencies
between the economy and society and foster knowledge transfer. To achieve the goal, the
Center will recruit top international researches and nurture young academic talents. The
researches funded by the Center focuses on interdisciplinary and forward-looking issues
in the fields of economics and financial markets that require the most urgent attention in
today’s world. These research findings could be disseminated in publications as the
Center believes that greater innovation for current economic challenges can be made
possible by breaking through barriers between academia, society and both private and
public organizations, which requires mutual respect and academic freedom in research
and in the relevant publications. A lot of forums for economic dialog had also been opened
by the Center to better serve this purpose. In the Q&A link, Mr. Studer told us that a
master degree is preferred in today’s job market, whether a PhD degree is needed
depends on the job profile. He also noticed us that the university prefers students directly
from academia instead of returning from job market.
Maura Wyler-Zerboni, the Head of Studies of the Department of Economics, introduced
the University of Zurich and the Department of Economics. She mentioned that there is
one study branch about neuroecononomics, which was a quiet new academic field to
me.Neuroeconomics investigates the neural basis of economic and social decision
making, moral behavior, and reward learning. To achieve this effect, the faculty used
behavioral methods together with neuroimaging techniques (primarily fMRI) and studied
both group effects and individual differences in decision making. They had for example
found a variety of reward signals, including reward magnitude, probability and risk in
regions such as the striatum and prefrontal cortex. If we could understand better about the
neurological principles about decision making, we would march a large step toward the
comprehension of human psychology, and further some breakthrough in the field of
behavioral finance, which helps much to demystify the capricious financial world.
Liyun Zhang
V.
UBS visit
Frank Wulm, the Executive Director of Group Governmental Affairs of UBS, introduced
the organization and post-crisis strategies of this big Swiss bank, and conveyed his idea
about the importance of and current challenges for the Swiss financial center. The
structure of UBS comprises of UBS Wealth Managementfor HNWI, Retail &Corporate,
Wealth Management Americas, Global Asset Management, Investment Bank, and
Corporate Center. Their strategy was centered on the Wealth Management and Wealth
Management Americas businesses and leading universal bank in Switzerland, supported
by the Global Asset Management Business and the Investment Banking.In sum, UBS
would focus more on where they excel, and capitalize more on the compelling
growthprospects in the business. As customers cared more about bank stability, capital
sufficiency and the transparency of bank operations, and regulations in increasing number
were issued after the crisis, UBS was also considering further reducing risks and
accelerating group-wide efficiency program to lower the cost. Compared with corporations
from other industries, identities of banks are less clear, i.e., they are not easily associated
with daily life. To address this problem, UBS built its identity as excellence, sustainable
performance and client focus. One way to fortify this kind of identity is through the
implementation of various corporate social responsibilities, including legal& regulatory
responsibilities, ethical responsibilities, workplace responsibilities, and societal
responsibilities. The speaker also observed a series of changes in the banking industry,
for example, the shift from EU and the US to APAC and other emerging markets, the shift
towards wealth preservation and safer investment opportunities, the shift towards more
complex and capital intensive business models, and the shift towards more industrialized
service models. All these trends brought new opportunities for the Swiss financial center,
like the economic growth and wealth creation in emerging markets, and the growth in
commodity trading, which would offer Swiss banks numerous resources for wealth
management business. On the other hand, one should also recognize the weakness for
the financial center, and the primary concern is the lack of voice on the EU platform, which
left it under much political pressure.
VI.
Swiss Bankers Association visit
Mr. Heinrich Siegmann from Financial Markets International of Swiss Bankers
Association provided us with some facts and figures on Swiss banks and their role in the
Swiss economy. He then moved on to discuss some of the political, regulatory and
business challenges to the Swiss financial center, including the general regulation, Basel
III, Euro crisis, TBTF, tax compliance, and RMB internationalization. SBA is an umbrella
organization for all Swiss banks, founded in 1912. It is also a trade and self-regulatory
organization. The primary mission of SBA is to represent the interests of the banks in
dealing with the authorities, and meanwhile support the training of up-and-coming talent
and managers. Some basic facts of Swiss financial sectors were illustrated with graphs:
partners in the financial sector can be divided apart as clients, politicians, interest groups
and regulation or supervision groups, which interrelated with each other and circled the
Swiss financial Center. Another pie chart displays that more than half of the total assets of
Liyun Zhang
all banks in Swiss in 2011 were owned by UBS and Credit Suisse, the two Big Banks of
Switzerland. The importance of the financial sector expresses in many ways. Authoritative
statistics in 2011 showed that the productivity per employee in the financial sector is
almost twice as high as the Swiss average. And the financial sector covers 5.7% of all jobs
in Switzerland, while contributing to 12-15% of all tax revenues (federal, cantonal,
municipal). Based on a study of BCG group about the growth opportunities for Swiss
banking sector, the growth areas lay in the expansion in emerging markets like Asia and
South America, in further developments of asset management and commodity trade
finance, and in benefiting from synergies of infrastructure investments. Regarding the
success factor for the banking factor, either dominant in the past or extending to the future,
the speaker concluded as follows: firstly, the high concentration of talent, very high
professionalism and competence in all aspects of the finance industry, centuries-old
tradition of Swiss Banking; secondly, high political, economic, legal stability in Switzerland,
first-class infrastructure, strong currency; thirdly, protection of privacy; and lastly,
multilingualism and intercultural competence. Notwithstanding, a series of political and
regulatory challenges must also be recognized. G20, FSB, Basel Committee and some
other supervisory institutions revamp some of the previous regulations. OCED Art.26
standard about double taxation treaty is on track. Euro crisis and more difficult market
access put Swiss banks under much pressure. It’s worth noticing that specific
requirements on capital level, liquidity level, leverage ratio, organization and risk
distribution are made for TBTF. For example, the limit on single counterparty credit is 25%
of CET1 at maximum. The next focus of the speech was on currency. As is known to all,
Swiss Franc is quiet a strong and stable currency, and reasons for this are straightforward
from macroeconomic statistics. Compared to Euro area, Switzerland keeps a positive
record in budget balance from 2010 to 2012. Also, it has lower level of public debt in total
GDP, lower and even negative level of inflation, whereas the employment and GDP
growth rate is relatively higher than Euro area. High level of capital ratios in the banks of
Swiss banking system also contributed to the robustness of its currency. Similar to Swiss
Franc, RMB is also a sound currency. The internationalization process of RMB draws
much of their attention and Switzerland is considering to be the next RMB hub by
conducting CNH business.
VII.
Bank for International Settlements visit
Two representatives from the Bank for International Settlements, KaushikJayaram, the
Head of Administration, and BlaiseGadenecz, the Economist of Monetary and Economist
Department, presented the brief history, the governance of BIS as a bank and its target to
us. The mission statement of BIS, as Mr. Jayaram addressed in the very first beginning, is
excellence in service to central banks and financial authorities. BIS acts not only as a
forum for discussion and cooperation among central banks and the financial community,
but also a bank to central banks and international organizations by servicing in their
pursuit of monetary and financial stability. Established in 1930, BIS is the world’s oldest
international financial institution. In the first place, it was founded to deal with the issue of
the reparation payments imposed on Germany following the First World War. The role
changed after the Second World War to the implementation and defense of the Bretton
Liyun Zhang
Woods system. Then in the 1970s and 1980s, the focus was on managing cross-border
capital flows and regulatory supervision of internationally active banks. Recently, it pays
much of attention to the issue of financial stability in the wake of economic integration and
globalization. BIS remains the principal center for international central bank cooperation.
Since 1930, central bank cooperation at the BIS has taken place through the regular
meetings in Basel of central bank Governors and experts from central banks and other
agencies. In support of this cooperation, the Bank has developed its own research in
financial and monetary economics and makes an important contribution to the collection,
compilation and dissemination of economics and financial statistics as well as analytical
reports. There are 60 central banks holding shares and votes in BIS now. Some 130
central banks, plus a number of international institutions, currently make active use of BIS
banking services. As its customers are central banks and international organizations, BIS
does not accept deposits from, or provide financial services to, private individuals or
corporate entities. Central banks could invest part of their reserves at the BIS, and the BIS
reinvested the funds in high-quality securities and bank deposits. BIS also earns interests
by investing its own capital, but the Global Foreign Exchange Reserves occupies the
majority, approximately 95%, of the total reserves. The major part of the foreign reserves
is a basket of Asian currencies. The underlying reason for this particular constitution, as
Mr. Gadanecz pointed out, might be the high economic growth and strong risk aversion
influenced by the East Asia Crisis in 1998. With respect to the monetary and financial
stability promotion, speakers said BIS has set up the Financial Stability Board with the
initiatives of implementing the G20 Recommendations for Strengthening Financial
Stability. Other efforts include the maintenance of robust networks between central banks,
and the dissemination of ideas and statistics. I find their storage of statistics on the official
website really useful and was also much intrigued by the topics of governors disclosed to
us, like the optimality of the financial system. The question is how big and how global
should the financial system be? Remember that excessive money put in financial market
instead of real economy will ultimately create bubble.
VIII.
Reflection and Suggestion
Many investors cast a positive overview on the future of Hong Kong, underscoring the
rising of the Asian trading center and the influence of China as an emerging market. Mr.
Frank Wulm, the Executive Director of Group Governmental Affairs of UBS, also extoled
the developed legal and social infrastructure of Hong Kong during the cocktail talk.
Macroeconomic uncertainty as well as concerns related to regulation, however, still
contributes to inhibiting Hong Kong financial industry from funding much-needed growth;
its financial industry has yet to be fully liberalized. And Hong Kong has a relatively
underdeveloped bond market, even though Mr. Heinrich Siegmann from Financial
Markets International of Swiss Bankers Associationemphasized in his speech that Hong
Kong started early in CNH bonds trading and early bird gets the worm. The role of the
offshore hub interplays with the internationalization process of RMB, or essentially the
future currency policy of central government in mainland China. Unlike Switzerland, which
is more dependent on cross-border business, Hong Kong focuses more on domestic
business.And this overall strategy involves can be risky in that opportunities from other
Liyun Zhang
emerging markets in Asia are omitted. While ameliorating its relationship with mainland
China, it would be necessary to diversify and expand the exposure of Hong Kong financial
market, especially to those of southeast and northeast Asia. Moreover, learning from the
lessons of Switzerland, maintaining political autonomy is crucial to resist vicious pressure
and keep the vibrancy as well as the sustainability of regional economy, otherwise the
suffering from external regulations or bilateral agreements would add up to huge cost that
no financial centers willing to bear.