VIII. TRADE AND PROJECT FINANCING - Brief Description of Banking System Switzerland is one of the world's most important banking centers. The banking network is highly developed, and Swiss banks are among the world leaders in specialized fields such as private banking and asset management. At the same time, most banks offer a comprehensive range of services. The Central Bank The Swiss National Bank, incorporated in 1905, has executive offices in Bern and Zurich and suboffices in eight other cities. More than one-half of its share capital is held by the cantons, the cantonal banks and other public bodies; remaining shares are owned by Swiss citizens. Although the federal government is not a shareholder, it has the statutory power to appoint 25 of the bank's 40 council members, including the president and vice-president, and the board of directors. Further, the federal government approves the bank's regulations, its annual report and financial statements. Supervision of the National Bank is the responsibility of the Bank Council, which appoints ten of its members to the Bank Executive Committee. The latter meets at least monthly and advises on the fixing of bank rates with the three-member board of directors. The most important duties of the National Bank include the determination and implementation of monetary and credit policy, the exclusive right to issue or withdraw bank notes and coins, and functioning as a clearing- house for interbank transfers. Swiss National Bank approval is required for capital exports by banks and bank-like finance companies, such as loans or new issues, in excess of SF 10 million and for longer than one year. The supervision of the banks and the banking system as such, however, is the duty of the Federal Banking Commission located in Bern. It is elected by the federal government, to whom it reports. The Banking Market The banking market covers eight categories of banks and finance companies, which are subject to Swiss National Bank reporting requirements: 1. Cantonal banks: There are 29 cantonal banks, with at least one for each canton. They are involved mainly in acceptance of savings deposits, the issue of mortgages or debentures to satisfy local commercial and private credit needs, and granting loans to public authorities. However, there are also some full commercial cantonal banks; in fact, the Zurich cantonal bank has more total assets than two "big banks" (see below). In most instances, the banks' liabilities are guaranteed by the canton. 2. Big banks: The five big banks (Union Bank of Switzerland, Swiss Bank Corporation, Credit Suisse, Swiss Volksbank, and Bank Leu) are universal banks engaged in all kinds of banking business -- acceptance of deposits, provision of credit facilities, mortgage loans, dealing in foreign exchange and precious metals, portfolio management, underwriting, etc. As members of the stock exchanges in Zurich, Geneva, and other cities, they deal in securities. The formation and management of investment trust and mutual funds is also a feature of the big banks' securities dealing and portfolio management business. Most of the big banks are represented in all major financial centers abroad. 3. Regional and savings banks: Originally founded as mortgage and savings banks, regional and savings banks are now beginning to expand their services. Although similar to cantonal banks by virtue of their local character, most regional and savings banks are corporations or cooperative societies. A number of mergers of regional banks and of acquisitions by big banks may indicate a tendency toward concentration among the regional and savings banks. 4. Loan associations: The Swiss Federation of Raiffeisenkassen and the Federation Vaudoise de Credit Mutuel are made up of legally independent cooperative societies, established in small communities all over the country. The main purpose of these banks, largely used by farmers and small business owners, is to utilize the resources of local communities, which are recirculated as credit at favorable interest rates. 5. Other banks: The domestically-owned banks in this category are mainly closely-held private corporations; they are engaged in all types of banking activity and are located primarily in Zurich, Geneva, Lugano, and Lausanne. The foreign-controlled "other banks" established as limited companies cover a wide variety of specialist areas. 6. Finance companies: Companies whose assets consist primarily of long-term loans to, and investments in, other companies are considered finance companies. If funds are publicly raised, such companies are treated as banks. If funds are raised through intra-group funding or bank loans, they need only comply with Articles 7 and 8 of the Swiss Banking Law, which require such companies to provide annual financial statements and statistical information to the National Bank and to seek permission before making significant foreign investments (over SF 10 million and for over one year). If financing is only through bond issues, no specific rules of the Banking Law apply. In recent years, finance companies have been established by foreign banks to maintain a presence on the Swiss market (for bond issues, foreign exchange and securities dealing, portfolio management) with a minimum of formal requirements. In January 1990 the Federal Banking Commission introduced a new definition for companies to be fully subject to the Banking Law. All entities financing themselves to a large degree from a number of unrelated persons or corporations or participate in public issues of securities or rights with a similar function and which publicly offer these securities on the primary market now qualify as banks. Bank-like finance companies active in these areas must comply with all Swiss Banking Law requirements. 7. Private banks: Private banks are generally organized as partnerships and bear the name of at least one partner with unlimited liability. Their main business includes portfolio management, underwriting, new issues, and stock exchange transactions. 8. Branches of foreign banks: A number of foreign-controlled banks, some of which are universal banks, operate as branches in Switzerland. The Important Role of Foreign Banks Foreign banks play a very prominent role in the Swiss banking sector. Foreign banks and bank-like finance companies comprise about 40 percent of total banking institutions in Switzerland, accounting for about 10 percent of total assets. The number of foreign institutions has grown steadily in recent years, with assets reaching SF 110 billion. The foreign banks' non-Swiss assets account for 70 percent of total assets. North American banks have a 15 percent share in the foreign bank population. Foreign banks in Switzerland have continued their restructuring process, with a clear trend toward concentration on services. More favorable market conditions and the growing significance of this off- balance-sheet business (above all asset management) has led to greater profitability with a simultaneous reduction of staff. A notable aspect of this development was the transfer of funds from fiduciary deposits to other forms of investment due to changes in interest rates. The many attractions of Switzerland as a place of business for foreign banks include: 1. Political and economic stability of the country 2. Legally protected banking secrecy 3. Presence in one of the world's more important financial centers 4. Foreign banking facility for domestic customers 5. Contact with Swiss companies with business interests in the country of the foreign bank 6. Portfolio management services 7. Facilities for raising finance at relatively low interest/tax rates for reinvestment abroad 8. Direct access to worldwide communication networks Specialized Financial Institutions In addition to the finance companies described above, specialized financial institutions exist for the clearing of funds and securities, as follows: 1. Postal check system: Run by the PTT, it is the main system used by individuals for settling local currency denominated obligations. Many companies maintain a postal check account, primarily to facilitate the collection of remittances from customers. 2. Local currency denominated interbank clearing: Handled by a computerized system (SIC -- Swiss Interbank Clearing) run under the auspices of the Swiss National Bank by Telekurs AG, a service company owned by all participating Swiss banks. 3. Swiss securities: In most instances, these are cleared by banks through SEGA (Schweiz. Effekten-Giro AG), another service company owned by participating Swiss banks. 4. Swiss Corporation for International Securities Settlements (Intersettle): Intersettle started operations in June 1989, offering banks and finance companies in Switzerland an electronic clearing system for securities traded in Switzerland and abroad. 5. Swiss Options and Financial Futures Exchange (SOFFEX): The first exchange operating without a trading floor, it is administered by SOFFEX AG, which is owned by the big banks and the three major stock exchanges. Specialized financial services are also offered by banks. For example, some large Swiss banks have subsidiaries engaged in leasing and factoring, bill discounting, installment purchase, and international trade finance. Certain private bank institutions also specialize in these particular fields of finance. 1993 Performance of the Banking System The Swiss banking center is in a process of structural adjustment. There was an accelerated decline in the number of banks and bank-like finance companies: 45 institutions closed or were taken over by other institutions, while five new businesses were established. Thus at the end of 1993, there were 529 banks and bank-like finance companies registered. Securities business and transactions with derivative products clearly left their mark on the balance sheets. A decline in interest rates led to greater shifts in investments, which in turn influenced stock market turnover. Securities holdings of reporting institutions grew substantially. At the end of 1993, securities lending and borrowing, a relatively new line of business, was for the first time included in the balance sheets in fairly considerable amounts. Since balances and liabilities from securities lending and borrowing do not have a monetary value in the sense of payment media, such holdings form part of the item precious metals. Credit business continued to weaken in 1993. Short-term borrowings fell markedly short of the previous year's figure, while the level of mortgages granted still rose slightly. Savings deposits grew significantly. Total bank assets increased by 6.1 percent in 1993, reaching SF 1,219 billion. Foreign activities were responsible for much of the growth, increasing by 9.7 percent while domestic business grew only 4.1 percent. Switzerland's biggest banks exhibited above-average growth, while regional banks' assets actually declined (in part due to the fewer number of institutions). Profits grew by an extraordinary 33 percent, amounting to SF 7.1 billion. Income from securities and permanent holdings was the chief factor in overall profit growth. Recent Developments in Banking Legislation During 1993, anticipated regulatory alterations to banking were reflected in a continuous stream of changes. While government regulation of consumer credits by new legislation as of April 1, 1994 does not have significant impact on banks, numerous bills significant to the financial sector are undergoing parliamentary debate or consultation procedure. With regard to bank supervision, revision of the Banking Act in accordance with European Union guidelines includes a new clause on official collaboration, while maintaining bank secrecy for customers as a fundamental principle. This mainly concerns better supervision with regard to home country control, and consolidated supervision at the international level. A new Stock Exchange Act, based on the self-regulation principle, is intended to replace existing cantonal legislation. Supervision will be carried out by the "Federal Banking and Stock Exchange Commission" -- the new name for the Federal Banking Commission. The heart of this new legislation is the regulation on public takeover bids, details of which are to be formulated by a private commission. The most important change incorporated in the revised Investment Trust Act concerns the integration of European Union trust fund guidelines and the inclusion of regulations on other investment forms, such as foreign trust funds. A clear separation between trust fund management and custodian bank is also stipulated. The main purpose of revision to the Legal Aid Act is to accelerate procedures in connection with legal assistance. Rapid and efficient international aid in criminal proceedings is in the interest of Switzerland as a financial center. Bank secrecy is not affected by this. With the Due Diligence Agreement, moreover, the banks have confirmed their readiness to cooperate. In February 1994, the Federal Council opened a consultation procedure on a draft Money Laundering Act. This would extend due diligence applied to bank clients and money laundering to all other parties involved in the financial sector. The banks would prefer a solution whereby the well-proven Due Diligence Agreement is preserved in its present form. - Foreign Exchange Controls Affecting Trading The Swiss franc is a freely convertible currency. With the exception of certain regulations applicable to banks and finance companies, there are no exchange controls in force. The National Bank has the authority to introduce measures concerning minimum reserve requirements, foreign currency position, foreign source funds and a calendar for public issues of bonds and shares, but these are intended for use only to counter exceptional circumstances such as massive speculation resulting in permanent over-valuation of the Swiss currency, causing problems for the Swiss export industry. Bank accounts may be maintained in local or foreign currencies either in or outside Switzerland without restriction. There is no distinction between resident and nonresident accounts. Repatriation of capital, loans, dividends, interest, royalties, service fees and branch office profits can be effected without limitation through any bank. Export proceeds may be disposed of freely. Leading and lagging of import and export payments is allowed; there are no limitations, nor is prior authorization required. Netting of trade-related payments and financial transactions is also allowed, without prior authorization. - What is General Financing Availability Financing availability in Switzerland is no different than that in any developed capitalistic economy, that is, all traditional means of local financing are fully available to businesses in Switzerland, including access to the stock exchange and issuing publicly quoted bonds and stock. Small- and medium-size businesses usually approach their banks for finance, and are offered a tailored package drawn from a wide range of financing products. The venture capital market is still relatively new in Switzerland, but banks offer venture capital, and there is an increasing number of venture capital companies. There are no restrictions on foreign investors' access to financing in Switzerland. Foreigners are free to invest in government securities and in debt instruments of Swiss-quoted companies. - How to Finance Exports/Methods of Payment As noted above, export financing is primarily conducted through commercial sources. Payment terms are arranged with the bank or financing institution. - Types of Available Export Financing and Insurance The Swiss government makes no special provisions for export financing. Again, financing is freely available through commercial sources. Insurance is also usually obtained through commercial sources. The Swiss government does administer the Federal Export Risk Guarantee (ERG) program to assume some of the risks in connection with foreign trade over which neither the exporter nor the foreign buyer has any control, and for which no other insurance coverage is available. The guarantee is granted to companies resident in Switzerland for exports of Swiss goods (except weapons and ammunition), Swiss construction and engineering projects, and Swiss licensing agreements. Local content requirements are flexible. ERG coverage does not include nonpayment of private debtors, damages due to complaints about defective goods delivered or services rendered, or losses incurred due to revaluation of the Swiss franc. Risk coverage generally ranges from 50 to 95 percent, depending upon the size of the contract. - Project Financing Available, including Lending from Multilateral Institutions and Types of Projects Supported Generally speaking, there is no special financing available for projects in Switzerland. The federal government may grant long-term loans at preferential interest rates for infrastructure projects in designated regions threatened with economic decline (primarily remote, mountainous regions). The cantonal and communal governments offer a wider variety of incentives, including financing, for investment projects in their respective areas. Most cantons maintain economic development agencies, some even with offices or representatives abroad, for the purpose of dealing with projects and investments. For further information, contact the cantonal chambers of commerce listed in Appendix C of this document. - List of Banks with Correspondent U.S. Banking Arrangements The Swiss banks listed in Appendix C have correspondent relationships with U.S. banks, as do most other large Swiss banks. More importantly, the following U.S. banks have offices or representatives in Switzerland and are quite interested in trade and project financing. American Express Bank (Switzerland) SA Carlo Cammelli, General Manager 16, rue de Contamines Tel: (41-22) 702 08 08 P.O. Box 351 Fax: (41-22) 789 22 23 CH-1211 Geneva 12, Switzerland Bank of America NT & SA Marcel Claes, VP & Country Manager Giesshuebelstrasse 45 Tel: (41-1) 455 33 11 CH-8027 Zurich, Switzerland Fax: (41-1) 455 34 24 Bank Morgan Stanley AG Joseph O'Connor Jr., Managing Director Bahnhofstrasse 92 Tel: (41-1) 220 91 11 P.O. Box 6740 Fax: (41-1) 211 98 00 CH-8023 Zurich, Switzerland Bankers Trust AG L. Jack Staley, General Manager Dreikoenigstrasse 6 Tel: (41-1) 202 81 11 P.O. Box 5181 Fax: (41-1) 202 99 54 CH-8022 Zurich, Switzerland The Chase Manhattan Bank, N.A. Josiane Fleming, Vice President Genferstrasse 24 Tel: (41-1) 206 61 11 P.O. Box 162 Fax: (41-1) 206 62 89 CH-8027 Zurich, Switzerland The Chase Manhattan Private Bank (Switzerland) Georges Vergnion, Chairman 63, rue du Rhone Tel: (41-22) 787 91 11 P.O. Box 257 Fax: (41-22) 736 24 30 CH-1204 Geneva, Switzerland Chemical Bank Zurich Representative Office Bettina Steffen, Representative P.O. Box 1031 Tel: (41-1) 202 29 91 CG-8039 Zurich, Switzerland Fax: (41-1) 202 09 53 Citibank, N.A. Robert D. Botjer, Managing Director Haus zur Enge, Seestrasse 25 Tel: (41-1) 205 71 11 P.O. Box 244 Fax: (41-1) 205 71 55 CH-8022 Zurich, Switzerland Citibank (Switzerland) Hubertus Rukavina, Country Corporate Bahnhofstrasse 63 Officer/Executive Vice President P.O. Box 244 Tel: (41-1) 205 71 71 CH-8021 Zurich, Switzerland Fax: (41-1) 205 77 33 Goldman, Sachs & Co. Bank John G. Hewitt, General Manager Muensterhof 4 Tel: (41-1) 224 10 00 CH-8001 Zurich, Switzerland Fax: (41-1) 224 10 10 Lehman Brothers Bank (Switzerland) Michael Fornara, General Manager 13, route de Florissant Tel: (41-22) 789 07 89 P.O. Box 376 Fax: (41-22) 789 07 40 CH-1211 Geneva 12, Switzerland Merrill Lynch Bank (Suisse) S.A. Alfred B. Berger, Chairman 7, rue Munier-Romilly Tel: (41-22) 703 17 17 P.O. Box 84 Fax: (41-22) 703 17 27 CH-1211 Geneva 3, Switzerland Merrill Lynch International Inc. (Zurich) Bruno J. Widmer, Managing Director Muehlebachstrasse 25 Tel: (41-1) 261 66 77 CH- 8024 Zurich, Switzerland Fax: (41-1) 252 83 66 Morgan Guaranty Trust Company of NY Dr. Karl Preisig, Managing Director & Stockerstrasse 38 General Manager P.O. Box 4672 Tel: (41-1) 206 81 11 CH-8022 Zurich, Switzerland Fax: (41-1) 206 85 80 J. P. Morgan (Suisse) S.A. Paul B. Finn, Managing Director & 3, place des Bergues General Manager P.O. Box 1864 Tel: (41-22) 731 58 00 CH-1211 Geneva 1, Switzerland Fax: (41-22) 732 26 55 Republic National Bank of New York (Suisse) Kenneth F. Cooper, General Manager 2, Place du Lac Tel: (41-22) 705 52 91 P.O. Box 823 CH-1211 Geneva 3, Switzerland Salomon (International) Finance AG Peter Rae, Managing Director Grafenauweg 6 Tel: (41-42) 26 27 11 P.O. Box 4753 Fax: (41-42) 21 08 28 CH-6304 Zug, Switzerland