Gnomes still giants in banking world

Think Switzer­land and moun­tains, choco­late and watch­es spring to mind. Mon­ey is not far behind. In spite of its mod­est size and num­bers, the coun­try is one of the world’s lead­ing finan­cial cen­tres. Gene­va hosts pri­vate bank­ing and, more recent­ly, trade finance. Zurich, the country’s biggest city and com­mer­cial cap­i­tal, has sur­passed Frank­furt, Paris and Milan to become con­ti­nen­tal Europe’s bank­ing pow­er­house.

Finan­cial ser­vices account for about 13 per cent of gross domes­tic prod­uct, far more than in most oth­er coun­tries. The sec­tor encom­pass­es a myr­i­ad play­ers. UBS and Cred­it Suisse, Switzerland’s two biggest banks, are among world lead­ers with glob­al invest­ment bank­ing and asset man­age­ment oper­a­tions.

With­in finance, pri­vate bank­ing and wealth man­age­ment are Switzerland’s forte. Despite ris­ing wealth and com­pe­ti­tion from Asia, the coun­try remains by far the world’s biggest repos­i­to­ry of off­shore assets, hav­ing served for decades as a haven for for­eign wealth, thanks to polit­i­cal and eco­nom­ic sta­bil­i­ty, and once water­tight con­fi­den­tial­i­ty.

As else­where, the finan­cial cri­sis hit Swiss insti­tu­tions. UBS turned briefly to the gov­ern­ment for a £4‑billion bailout. But unlike many oth­er finan­cial cen­tres, the coun­try suf­fered no big bank­rupt­cies or mas­sive state inter­ven­tions. Even the UBS res­cue was short by inter­na­tion­al stan­dards. And the Swiss Con­fed­er­a­tion turned a tidy prof­it.

But while not as severe as for some neigh­bours, the cri­sis pro­voked a sig­nif­i­cant rethink in bank­ing. Reassess­ment has been rein­forced by tougher rules on cap­i­tal, which, in the case of Switzer­land, have gone well beyond agreed inter­na­tion­al stan­dards, reflect­ing the size and impor­tance of UBS and Cred­it Suisse com­pared to their small domes­tic econ­o­my.

Those devel­op­ments have prompt­ed a “redis­cov­ery” of wealth man­age­ment by the two dom­i­nant banks as both UBS and Cred­it Suisse have pruned invest­ment bank­ing to rein­vest in tra­di­tion­al pri­vate bank­ing activ­i­ties, notably in Asia.

“Invest­ment bank­ing emerged as volatile and, in some cas­es, proved spec­tac­u­lar­ly loss-mak­ing. Against this back­ground, the tra­di­tion­al mer­its of wealth man­age­ment as a sta­ble, high-mar­gin and low-risk busi­ness looked more attrac­tive, even if shifts in the finan­cial mar­ket, tax enforce­ment and reg­u­la­to­ry envi­ron­ment have meant pri­vate bank­ing is now a sig­nif­i­cant­ly less-prof­itable and high­er-risk busi­ness than in the past,” says Tim Daw­son of Helvea, the Swiss bro­ker­age.

Switzer­land boasts some 300 pri­vate banks, but the busi­ness encom­pass­es far more if the thou­sands of finan­cial inter­me­di­aries with­out bank­ing licences are includ­ed

Switzer­land boasts some 300 pri­vate banks, but the busi­ness encom­pass­es far more if the thou­sands of finan­cial inter­me­di­aries with­out bank­ing licences are includ­ed. Gene­va and French-speak­ing Switzer­land tra­di­tion­al­ly catered to France, the Arab world and Africa; Zurich and Basel have looked more to Ger­many, north­ern Europe and South Amer­i­ca, and, lat­ter­ly, Rus­sia and East­ern Europe; while pri­vate banks and wealth man­agers in Lugano have focused on Italy.

After a long boom, the sec­tor has entered a test­ing tran­si­tion as bank secre­cy has been attacked. In par­tic­u­lar, a US onslaught on tax eva­sion has put many Swiss banks on the defen­sive after alle­ga­tions they helped rich Amer­i­cans to avoid tax­es. UBS reached a $780-mil­lion set­tle­ment with the US author­i­ties; oth­ers are still locked in com­plex nego­ti­a­tions.

Some bankers fear the US ini­tia­tive will trig­ger sim­i­lar­ly uncom­pro­mis­ing crack­downs by Switzerland’s Euro­pean neigh­bours, seek­ing to boost rev­enues in tough times. Most bankers accept they are in an era of ever-greater trans­paren­cy, forc­ing them to adapt and, in some cas­es, turn away clients who can­not demon­strate the assets they want to deposit have been declared at home.

Such adjust­ments will be as uncom­fort­able for clients as for bankers, mean­ing the tran­si­tion will almost cer­tain­ly be accom­pa­nied by low­er mar­gins, because man­ag­ing declared mon­ey is less prof­itable, and by declin­ing funds under man­age­ment, as some clients seek less trans­par­ent alter­na­tives for their wealth. Jobs may also be shed as the sec­tor shrinks and stream­lines. A few small­er banks will close, while oth­ers may merge.

Despite such pains, most Swiss bankers are con­fi­dent they will emerge suc­cess­ful­ly thanks to tra­di­tion­al strengths in ser­vice, flex­i­bil­i­ty and asset preser­va­tion.

“The banks in Switzer­land have done a lot to tack­le the cur­rent chal­lenges. They com­ply with inter­na­tion­al stan­dards, ful­fil one of the strictest cap­i­tal­i­sa­tion regimes world­wide and con­tin­ue to oper­ate accord­ing to val­ues like sta­bil­i­ty, uni­ver­sal­i­ty, respon­si­bil­i­ty and excel­lence. I believe in our future suc­cess,” con­cludes Claude-Alain Marge­lisch, chief exec­u­tive of the Swiss Bankers Asso­ci­a­tion.

PRIVACY

CRACKING DOWN ON TAX EVASION

For decades, dis­cre­tion was the key­word for Switzerland’s pri­vate banks. The best def­i­n­i­tion was absolute secre­cy: com­plete anonymi­ty for cus­tomers through secret num­bered accounts, with not too many ques­tions asked.

That approach, which won Switzer­land inter­na­tion­al recog­ni­tion as a finan­cial haven, was enshrined in strin­gent laws mak­ing it a crime to divulge cus­tomer details.

The prac­tice served well, mak­ing the coun­try a byword for dis­cre­tion and cre­at­ing a flour­ish­ing bank­ing indus­try rang­ing from sin­gle-per­son bou­tiques to UBS and Cred­it Suisse, two of the biggest banks in the world, and strad­dling dozens of small­er and medi­um-sized play­ers on the way. Con­cen­trat­ed in Gene­va, home of Pictet and Lom­bard Odi­er, two of the old­est pri­vate banks, the busi­ness is as strong in Zurich and Basel, and in Lugano in Ital­ian-speak­ing Switzer­land.

Bankers like to high­light the ser­vice their water­tight secu­ri­ty ren­dered over the years, whether to vic­tims of Nazism or lat­er total­i­tar­i­an regimes, or to wealthy fam­i­lies from coun­tries not reli­ably sub­ject to the rule of law and des­per­ate to pro­tect their inter­ests.

In recent years, how­ev­er, secre­cy has faced a harsh­er spot­light as many coun­tries have cracked down on tax eva­sion. Switzer­land itself has pro­gres­sive­ly tight­ened its rules on mon­ey laun­der­ing and “know­ing your cus­tomer” to pre­vent abuse by despots and dic­ta­tors. But as the Unit­ed States and oth­ers have tried to impede eva­sion, the Swiss have found them­selves accused of oper­at­ing a tax haven.

Bern has react­ed with pro­pos­als to tax income on for­eign­ers’ accounts and remit the pro­ceeds to their home tax author­i­ties. Deals, which nev­er­the­less pre­serve clients’ anonymi­ty, have been struck with Britain and Aus­tria. How­ev­er, the inter­na­tion­al tide is mov­ing to ever-greater trans­paren­cy. The details and tim­ing remain open, but many Swiss bankers acknowl­edge out­stand­ing per­for­mance and ser­vice will even­tu­al­ly out­weigh secre­cy as their key sell­ing points.