Swiss chocolates, Swiss chocolates. Ferrero Rocher, are they Swiss? No.
Ah these ones, Lindor, yeah, he’ll love these.
Swiss banks used to be like Swiss chocolates, the envy of the industry.
They were the gold standard for private banking, but since the 1990s they’ve struggled.
This chart shows just how much things have changed.
In 1996, there were 403 banks in Switzerland.
By 2019, 157, well over a third, were gone.
So, what’s going on here? Have Swiss banks lost their shine?
Hi Geoff!
Hi Tom.
How are you? We’re set up over here.
I’ve brought you some Swiss chocolates because I know you haven’t been
to Switzerland for more than a year, and I wanted to bring a little bit of Switzerland to you.
But in return, you’ve got to talk to us about Swiss banks.
Squawk Box Europe anchor Geoff Cutmore has interviewed the CEO’s
of Switzerland’s two biggest banks for more than 20 years.
I wanted to use his experience and insight to learn how the industry has changed.
Swiss banking has changed incredibly
over recent decades, but in the last ten years, I think you can see that shift has accelerated.
The U.S. has been pivotal because of the financial and economic pressure that they’ve been able to
bring to bear on not only the Swiss government, but also the Swiss banks per se.
Back in 2010, the U.S. Government signed a new jobs bill,
which included a section called the Foreign Account Tax Compliance Act.
It required American citizens and businesses to reveal their foreign
assets, which would then be subject to taxes.
To make sure they actually did this,
foreign financial institutions had to share details of accounts held by Americans.
If they didn’t, they’d face a 30% tax on all payments originating from the U.S.
This was a problem for Swiss banks, which had a reputation for secrecy.
Before this, wealthy individuals from all over the world
could stash their money into Swiss bank accounts with total anonymity.
Traditionally, Switzerland used to be one of those places where
the banks kept your information very secret.
They didn’t share information with other governments,
and that was ultimately part of the Swiss banking model which made it incredibly successful.
Back in 1934, the Swiss government passed a banking secrecy act
that ultimately made it an offense for Swiss banks to reveal information about clients to foreign
governments, and that in a way sowed the seeds of massive growth in the Swiss banking system.
Some of that history as you know is very chequered.
The Nazis maybe hiding gold in Swiss bank vaults.
African dictators and despots that have syphoned off state funds.
That money has found its way into the Swiss banks.
The Swiss for their part would probably hold up their hands and say, “Look,
you know we can’t be responsible for where the money comes from.”
But that answer is not good enough anymore.
In 2007, a whistle-blower from Switzerland’s largest bank UBS exposed to U.S. authorities
the degree to which Swiss banks were helping American clients sidestep tax collectors.
It was a revelation that the authorities in the United States could not ignore,
and they brought it immediately to the door of UBS and to the other Swiss banks that had U.S.
citizens accounts that were clearly being used for nefarious purposes.
That resulted in years of litigation between the Swiss banks and the U.S.
authorities which ultimately resulted in billions of dollars' worth of fines being paid out.
85 Swiss banks paid more than $5.5 billion in penalties,
but Switzerland’s two biggest banks, paid the lion’s share.
UBS settled for $780 million in 2009, while Credit Suisse was fined a whopping $2.6 billion in 2014.
As regulators paid more attention to tax compliance, Switzerland’s share of global
asset management fell from around 9% in 2004 to slightly above 4% in 2009.
What’s more, is the Swiss government’s decision to exchange bank information with the U.S.
opened the door for EU member states to begin their own judicial investigations.
Those resulted in further large out-of-court settlements.
How did UBS and Credit Suisse manage these big pay-outs, and
what did it do to the direction of their business?
Ultimately, they just had to pay the fines, but the consequences obviously has been a significant
hit to earnings and the shareholders don’t like that and the management don’t like that.
So, where the banks have gone next is they’ve had to go out and try and find
new markets, new opportunities and as you look at the world at the moment,
there is one clear area where the opportunity set is growing.
That is in the emerging markets of Asia, particularly where there is a growing middle class
that has savings that need to be managed.
When you exclude China from the mix,
Swiss banks Credit Suisse, UBS and Julius Baer are among Asia’s five biggest wealth managers.
In Asia, Singapore and Hong Kong’s banking laws
have propelled their status as offshore financial centers.
According to the Financial Secrecy Index, they now fall right behind the Cayman Islands,
United States and of course, Switzerland.
Between 2009 and 2014, at the height of the tax compliance crackdown,
net new assets managed in Singapore grew by $40 billion and $285 billion in Hong Kong.
In the same period, Switzerland experienced an outflow of $135 billion.
The Swiss government would now say that
they are a lot more open. In fact, more open than they have been for decades.
FINMA the regulator would probably also say that the focus is now very much
on Switzerland operating a globally transparent information exchange.
But has Switzerland really cleaned up its act?
The Panama Papers leak in 2016 revealed that Switzerland’s two biggest banks were among
the top ten banks using offshore accounts to help their clients hide their wealth.
The problem is that I think a lot of critics would say that the Swiss have been very slow
in opening up their banking sector, that there is still too much secrecy,
that the process for getting that information is a little too slow and a little too onerous.
Toward the end of 2018, Switzerland began automatically sharing client data through a
tax transparency forum under the Organisation for Economic Co-operation and Development.
However, less than 12 months later, Swiss banking was embroiled in yet another scandal.
Credit Suisse‘s CEO was forced to resign following
allegations that the bank had spied on a former executive.
The issue for the markets at this point will be how credible are the results of the investigation?
Things didn’t get much better in 2021, following the collapse of U.S. hedge
fund Archegos Capital Management and U.K. finance firm Greensill Capital.
Credit Suisse had provided financial backing to Greensill as it began to struggle,
a miscalculation that could cost its clients up to $3 billion.
The Archegos collapse cost its lenders a collective $10 billion.
UBS says it lost $774 million from trades linked to Archegos, but Credit Suisse took the biggest hit.
It was forced to raise nearly $2 billion in fresh capital and cut bonuses after the failure.
Both Credit Suisse and UBS are hoping that new management will arrest these issues.
That money or the loss has to be borne by the shareholders ultimately, and I think
what you’ve seen in the share price performance has been a reflection of some of the markets
anger about what it perceives to be either mismanagement or a misunderstanding of risk.
So this is just about doing good, basic banking and unfortunately,
the experience of both of these cases suggested that there is still some improvement required.
Okay, so at this point you might be thinking that Swiss banking is finished. Fertig. Fini. Finito.
Well, unsurprisingly, Swiss bankers argue that Switzerland’s differences
still provide them advantages over their rivals.
What ticks the box still I think for Switzerland is
you’ve got a very stable political system. You’ve got Swiss neutrality.
Switzerland is not an EU member, so you somewhat escape that oversight from Brussels.
When you are perceived in Europe to be the ultimate safe haven destination for capital,
people are prepared to take the additional costs that come
with parking money in a Swiss Franc account.
Public perception is also positive. In a recent international poll on the reputation
and quality of Swiss banks, they were rated by most respondents as ‘good’ to ‘very good.’
That’s more positive than German, British and American financial centers.
So, has the decline in Swiss banking been overblown, or
have they lost their status as the premier banking financial institution? Which is it?
To be honest, it’s probably a bit of both here. Overblown, probably.
I don’t think that anybody looking at the state of the Swiss banking industry at the moment would say
that this is a sector that is in decline.
I think there’s still plenty of life
in the Swiss banks but what I will say is I think that as a result of many of the scandals
that we’ve witnessed over the last decade and because of what’s happened with interest rates,
the Swiss bankers are going to have to work a whole lot harder to justify holding your cash.
Probably shouldn’t give them too much brand presence, but they are Swiss chocolates.
And when you go to Switzerland will you bring me back some chocolates as well?
Really? Okay. That’s a deal.