Gnomes still giants in banking world

Despite the financial crash and tougher regulation targeting tax havens, Swiss bankers believe quality service will keep their industry strong, writes Haig Simonian

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.