Fitch Ratings says in a special report that the Swiss banking system is in a relatively good position to operate in a more challenging market, despite the sizeable write-downs affecting UBS AG (UBS; rated 'AA-' (AA minus)/Outlook Negative) and, to a lesser extent, Credit Suisse Group (CSG; rated 'AA-' (AA minus)/Outlook Stable). The sector continues to benefit from generally sound asset quality, solid capitalisation, healthy revenue generation and a comprehensive regulatory framework.

"While the two internationally active big banks' operations are negatively affected by current market disruptions, domestically-oriented banks like public-sector cantonal banks, as well as regional and cooperative banks should continue to perform well in line with the still benign outlook for the Swiss economy," says Christian Kuendig, Associate Director in Fitch Financial Institutions team.

Fitch also notes that the level of private banks' and other wealth managers' profit seen in 2007 and 2006 could come under pressure, reflecting falling asset values. "However, Swiss wealth managers have since the last market trough between 2001 and 2003 reduced the share of more volatile performance fees although other, transaction-based fees are likely to be impacted," adds Mr Kuendig. Swiss banks have a leading position in the fragmented sector of international wealth management, with a market share of around 28% of all internationally invested private assets under management (AuM) and around 9% of total invested global wealth (based on end-2005 figures published by the Swiss Bankers Association).

Performance and revenue composition of Swiss banks are markedly different among banking groups, with the two big banks and private banks relying more on AuM-based commission and trading income while domestically-focused banking groups generate the majority of their revenues on the back of a relatively thin but stable net interest margin. The asset quality of most Swiss banks is sound and benefits from the stable credit standings of Swiss corporates and a low bankruptcy rate. In addition, Swiss banks remain among the best-capitalised European banks.

In a separate report, Fitch says Swiss banking regulation has since the early 1990s adapted well to various challenges, notably the increasing internationalisation of the country's big banks and wealth managers, the introduction of Basel II, IFRS and corporate governance standards and the Europe-wide trend towards a single regulator. Although not a member of the European Union, Switzerland's implementation of Basel II requirements follow closely EU legislation with the aim of avoiding duplications for the country's numerous internationally active banks. Uniquely, the Swiss banking regulator, the Swiss Federal Banking Commission (SFBC), relies heavily on banks' external auditors. However, the SFBC has recently introduced risk-based supervision and monitors more closely developments at the country's big banks and other banks perceived to be more complex or higher risk. Following the lead of other European countries, Switzerland has decided to establish a single regulator for the whole financial sector (the Eidgenoessische Finanzmarktaufsicht; FINMA), which will become operational in 2009.