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Interlaken, Switzerland (GenevaLunch) – Hans Rudolf-Merz, the new president of Switzerland, is calling on the Swiss financial system to “look into its past to focus on the future” and to return to traditional Swiss “virtues” which, according to Merz, make the Swiss economy strong.

As part of a speech given in Interlaken, the President says “value has been lost and confidence tarnished. That is not something to be taken lightly.”

Complete speech in English follows:

Speech by President Hans-Rudolf Merz

Cantonal councillors, ladies and gentlemen,

I would like to begin by wishing you all the very best for 2009. I hope you were able to enjoy the holidays with your families.

2008 proved to be a year of mixed emotions for Switzerland’s financial centre, but also for the country in general. A year ago, we had the best of both worlds. Our economy was in robust shape and enjoying strong growth, inflation was under control and unemployment was almost at an all-time low. Only UBS had to make large write-offs due to problems on the US mortgage market. And that seemed to be manageable and fairly distant on the other side of the Atlantic.

It was with astonishing speed that the financial crisis then spread over the course of the year. Ever more sectors became caught up in it and a Swiss icon found itself on the edge of the abyss. Confidence in the major banks eroded, fears of recession grew and the economic indicators deteriorated. It was against this backdrop that the Federal Council together with the SNB put together a package of measures last October to stabilize the Swiss financial system. The financial system contributes significantly to the good functioning of the economy and thus to employment and growth. The aim was therefore to protect these key economic functions. I think it is fair to say that we have so far been successful.

At the start of this new year we face some difficult challenges. We can already see clear consequences of the crisis across the labour market. The turbulent times are not yet over and we cannot rule out tougher times ahead. Switzerland has a small, open economy that is closely interlinked with international markets. So far, we have greatly benefited from this international dimension and from globalisation. Now though our economic prospects depend largely on developments abroad and unfortunately the outlook is fairly bleak.

One of the challenges that we will have to overcome in Switzerland is the repositioning of our financial centre. Value has been lost and confidence tarnished. That is not something to be taken lightly. The Swiss financial sector is of great importance to the economy. It generates more than 10% of Switzerland’s economic output and covers over 13% of the tax burden. Furthermore, over 5% of the country’s workforce is employed in the financial sector. That’s something we have to recognise. We also have to make sure that the country’s jobs are not overly impacted by the problems of the banking sector. We cannot afford for one to be played off against the other.

The package of measures put together by the Federal Council and approved by parliament in December already take into account lessons learned and implement improvements. The passing of the package showed that the authorities are capable of acting swiftly and thoroughly when necessary. That is decisive if a crisis is to be tackled effectively. The package of measures consists of short and long term stabilisation measures. The measures taken are also competition neutral. They are compatible with the relevant international initiatives. In particular the measures also include some designed to have longer term effects. These involve the areas of equity capital requirements, compensation and investor protection.

But that cannot be all. In addition to the authorities, the financial centre itself has to take further steps. With that in mind I would like to set out four assumptions:

1. The Swiss financial centre needs major internationally active banks

Overall our banking system is sound. It has so far been spared a run on the banks or all out collapse. Cantonal and regional banks, the Raiffeisen Group, private banks and asset managers remain solid. The large banks and UBS in particular have been drastically affected though. Credit Suisse has also made huge losses. This should not, however, lead us to draw the wrong conclusions.

Switzerland will still need globally active banks in the future. They have to assure international trade flows. That is important for an open economy. Banks that are only active domestically are not in a position to exercise this function. Major internationally active banks are extremely important for the Swiss economy – for SMEs, for our internationally active companies – and for the Swiss financial centre as a whole.

We have to put in place suitable conditions for the major banks so that their mistakes do not end up threatening our entire economy. A situation similar to that in Iceland must never be allowed to happen here. That is why we are working at international level to improve the stability of the financial markets. But the banks themselves must also play their part: They should once again nurture their Swiss roots and apply `Swissness’ as more than a mere marketing label. That brings us to assumption two.

2. The financial centre should return to proven Swiss values

A major cause of the current crisis can be found in the prevailing short-term, profit-oriented mentality, exacerbated by the relaxed approach to debt and imbalanced or even wasteful consumerism. With the help of cheap loans, companies and individuals were spending more than was wise. `Leverage’ was the new byword: With increasing levels of debt, the return on investment grew and with increasing returns, bonuses increased too. High profits and high bonuses were also produced in a short space of time like that in Switzerland. The downfall came as a result of ignoring the traditional values of the classic banker such as: know your customer, prudence when lending money, closely monitoring dossiers, respect for money and risk.

Our country and its people have long and quite successfully pursued qualities and virtues such as modesty, consistency, prudence, diligence, dedication to work and a sense for the common good. Our prosperity is in no small measure the result. But here too, we seem to have lost ground.

We have to consider the crisis as an opportunity and draw the appropriate lessons. While the consequences may be felt strongly by many people, in the long run the return to proven values will make us more resistant and competitive.

3. Confidence in the Swiss financial centre must be restored

A further challenge will be to restore the knocked confidence in the financial centre. Our financial sector still enjoys a strong reputation. Nevertheless the major banks in particular have suffered a severe loss in public confidence as a result of all the turbulence in the financial markets. It takes a long time to establish trust and confidence. It is not something that can simply be bought. It is also something that is far easier to lose than to gain.

The State has already made its contribution. With its package of measures, the government and the SNB have given a clear signal that in exceptional situations we will not abandon the financial sector, but support it quickly and effectively. We have laid firm foundations, but it is the strategy and business policy of the banks that will be decisive. It is down to them to demonstrate their seriousness and constancy in their dealings with their clients.

I am aware that building up long term business relations based on trust takes a great deal of time and effort. All the more so given that that trust was severely battered. The banks must demonstrate to their clients credibly that their efforts are intended for them and not simply to chase short term profits.

4. Power of innovation has to be improved

When the client is the focus of the banks’ attention, maybe not every product innovation will find its way into the investor’s portfolio. And that’s not necessarily a bad thing given that some of today’s toxic assets were – until recently – passed off as wonder products. A little more scepticism with regard to trends would probably be a good thing. But it should not lead to financial market innovations being ignored. Instead, the Swiss financial centre must offer innovative financial products and services, but also financial market infrastructure of a high quality. Only then can the demanding requirements of clientele from around the world be met. However, innovation also requires an evolution in terms of our banking secrecy. International pressure is unlikely to diminish. With regard to the taxation of savings income, we will have to find acceptable forms of cooperation in the field of administrative and legal assistance.

Individual actors in the financial centre and the authorities are capable of a high degree of innovation. On the part of the government, we place great value on developing competitive, in other words liberal, basic conditions. Competition forms the incentive for innovation. And even though something can occasionally go wrong, especially in the financial sector, it has served our country and the world well. That needs to be pointed out to all those who want to continue to take a hard line with the financial institutions.

There is increasing international influence on the regulatory process. In future we will therefore have to remain actively involved in the relevant institutions in order to firmly represent our views and interests in the international regulatory process.

Conclusion:

Dear cantonal councillors, ladies and gentlemen:

If we were to consider how the Swiss financial centre will look in 20 years’ time, then we should first look back to proven Swiss virtues. Thanks to a whole host of factors – its desire to assert itself, the good education of its people, its gift for innovation and hard work, as well as characteristics such as sense of community, love of freedom and sense of responsibility – our country has overcome many a crisis. We have always emerged stronger. That will be no different in future financial crises. Our financial centre will evolve, but its foundations will remain solid thanks to its shared values.

Source: Federal Department of Finance