Swiss banks are either famous or infamous depending on your view. They seem to be either pillars of stability or havens for tax dodgers and bank clients desiring secrecy. The global financial crisis, aggressive foreign tax investigators, and a seemingly endless list of scandals are having a profound effect on the Swiss banking sector. So can it weather the storm? WRS’s Tony Ganzer investigates:
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The stone headquarters of Switzerland’s biggest banks UBS and Credit Suisse here at Zurich’s center don’t let on to what is happening to the organizations inside. The global financial crisis of 2008 led UBS to be bailed out, and policy makers to grasp to solve the problem of banks “too big to fail.” Increased pressure from the United States has forced banks to hand-over client data of alleged tax cheats, or be subjected to the long-arm of American justice. And equal attention from cash-hungry European neighbors has eroded Switzerland’s famed secrecy to a shadow of its former self. But what do these things mean for the Swiss bank of the future?
PETER KUNZ: “Quite honestly no one really knows, and it’s not easy to say Swiss banks will go in a certain direction. I am pretty sure even Swiss banks do not really know it.”
Peter Kunz is professor of business law at the University of Bern.
KUNZ: “Right now most of them try just to survive being it in Switzerland as such, or being it abroad. So we are in a time of change right now, but I would not bet anything on a certain direction.”
GANZER: What is the strength of Swiss banking, was it the banking secrecy or Switzerland’s stability, would you say?
KUNZ: “I would say the banking secrecy is undoubtedly one of the biggest assets Switzerland had. Of course no one really can say how many billions of dollars, or German Deutsche Marks, today euros, came to Switzerland for this protection aspect, but it was at least a big issue. On the other side, I am pretty sure that the political stability, we have peace in Switzerland, we have a strong currency, are also additional assets of our country. These assets, I think, must be strengthened for the future because the bank secrecy as we have known it for the last 40 years that’s done. Banking secrecy, bank secrecy for tax fraud and tax evasion reasons, that’s done.”
OSWALD GRÜBEL: “There is a big change, which has happened to Swiss banking, is transparency.”
Oswald Grübel is the former CEO of Credit Suisse, and UBS. He says it is not the financial crisis, or tax deals are putting the most pressure on Swiss banks.
GRÜBEL: “It’s transparency. We have created a transparency which I think the broad public cannot handle, actually. And we are frightened about the transparency. Because we hear, ‘Oh, we didn’t think [about] that!’ And transparency replaces secrecy and trust. And I think if you were to ask every banking client, ‘Do you actually want total transparency from your bank?’ he would say ‘no.’ Because total transparency means, then as well, one day, the client would be totally transparent. Clearly politicians would love that in democracies, because democratic politicians live from spending money to get reelected.”
GANZER: “There were moves 30 years ago to stem money laundering, for example, through Swiss banks, but the reputation has stuck, that especially outside of Switzerland people hear ‘Swiss bank’ and it’s a dirty word. Do you think it’s unfair?”
GRÜBEL: “I think it’s unfair, but that is some kind of legend building. You can watch old Hollywood films of 30 or 40 years, where the secret Swiss bank account was mentioned. So you get that kind of image. In a way it probably also has helped in times of stress to convince people that to bring their money to Switzerland, to a safe place, is a good thing. Which has proven to be correct.”
Switzerland is trying to clean up that image from Hollywood or anywhere else by devoting itself politically to a “Weissgeld Strategie,” or clean money strategy. Mario Tuor is spokesman for the State Secretariat for International Financial Matters, and he says a political shift came in 2009 when Switzerland adopted standards from the Organization for Economic Cooperation and Development, or OECD, on allowing data requests in tax matters.
MARIO TUOR (phone): “This was a change that we said, ‘we don’t want to have undeclared money in Switzerland, and we do not tolerate that the Swiss banking secrecy is abused or misused for hiding undeclared money.’ So we have to take some measures that makes clear that we are the best place for the wealth management of declared money.”
To this end, Switzerland has pushed for tax agreements with Germany, Austria and the UK, meant to offer a withholding tax on foreign clients of Swiss banks in exchange for maintaining client anonymity.
PASCAL SAINT-AMANS (phone): “I think Switzerland is not a tax haven, depending on what you call a tax haven, of course.”
Pascal Saint-Amans is the director for tax at the OECD.
SAINT-AMANS: “Switzerland has been, for decades, a strict bank secrecy state. Meaning that when you had a bank account in Switzerland, except for criminal activities, the secrecy was protected. It’s no longer the case, it’s been changed a few years ago. The Swiss government has passed tax treaties, as well as domestic changes in the legislation, to allow for exchange of information. So Switzerland was a strict bank secrecy state, it’s no longer the case.”
Saint-Amans says there has been much progress in Switzerland’s compliance with international standards navigating a legacy of secrecy. But there is still a tension outside of Switzerland, and even inside, caused by the fact the Swiss are maintaining secrecy at all.
JOHN CHRISTENSEN: “Swiss remain fairly committed to trying to protect their secrecy model by one route or another. So I think they haven’t yet deserved to lose the public impression around the world that Swiss banking secrecy remains a problem. And that public impression remains broadly correct. We’ve still got a long way to go.”
John Christensen is with the London-based activist group Tax Justice Network.
CHRISTENSEN: “The thing about transparency of course is that, transparency keeps improving until a point when you can see nothing at all, that’s the famous joke. But it’s a work in progress. I think it is fair to say we are seeing strengthening of transparency on bank account secrecy. That’s well and good, but what we’re not seeing is improvements of transparency in other areas, particularly off-shore companies, and off-shore trusts, and off-shore fiduciaries, and that’s the next big step. Because otherwise, simply tackling bank secrecy will lead to a trend towards much, much more complex secrecy structures involving off-shore trusts, and off-shore companies.”
Christensen balks at some claims made by analysts and pundits to point a finger away from Switzerland to other countries, saying they don’t have their house in order when it comes to tax havens. Some US states, for example, have incredibly easy processes to create shell corporations abroad. Christensen says instead of pointing fingers, though, he would like to see proactive measures.
CHRISTENSEN: “Oh there is no question about it, no doubt in my mind, that Delaware, Wyoming, Nevada, Florida, all of these are terrible problems. It is good to recognize it, and I think it’s important that these things are brought out into the public. But rather than say ‘look, we aren’t going to change and clean up our act, until they clean up their act.’ What I’d welcome is for Switzerland, the Swiss government to now say, ‘OK, we will commit ourselves to pushing for best practice globally.’ I’d feel much happier about Swiss commitment to international cooperation when Switzerland signs up to automatic information exchange on the European Union’s model.”
GANZER: “Is that the threshold for you then? Automatic data exchange? You’re not convinced by the Swiss government saying they have a ‘Weißgeld Strategie,’ a clean-money strategy now, going forward?”
CHRISTENSEN: “No, I’m not, I’m afraid I am not convinced at all by that. I think it’s yet another ploy to protect banking secrecy. Automatic information exchange is now the recognized global standard. It’s the standard the G-20 wants to push towards in order to prevent systemic tax evasion and illicit financial flows. Within the next 10 years it’s going to happen. The quicker Switzerland accepts it’s going to happen, stops trying to block it from happening, the quicker we’ll move forward.”
Switzerland is moving quicker and stronger in at least one realm of banking reform and that is the amount of capital, or easily liquid assets, a bank must hold. The so-called “Swiss Finish” to international banking rules will require banks to hold capital worth an unprecedented 19 percent of risk-weighted assets. Former UBS CEO Oswald Grübel says this is another big change for bankers.
GRÜBEL: “If you take higher risk you need more capital to do that. So that does not allow them to speculate as much as in the past anymore. Now if that is good, only the future will prove. I think it will lead to a very long time of no economic growth whatsoever.”
GANZER: “What do banks have to do to remain successful, competitive in the future?”
GRÜBEL: “I think, Swiss banks, first, are successful, certainly the big two in comparison with the other international banks, and they are not less, or also not much more successful, but they are successful. What Swiss banks still have, and some other global banks wish they had, is clearly their private banking business. But if you look at the biggest bank in private banking, UBS, they have only a fraction of the money really here in Switzerland of the private banking business.”
Swiss banks, especially the big two—UBS and Credit Suisse—but also private bank Julius Bär saw the turning tide, says Rainer Skierka, a banking analyst with private Bank Sarasin in Zurich. He says looking at wealth creation in the last years, Old Europe is stagnant, and Asia and South America are growing. And Swiss banks were among the first to get to those markets. Even if regulatory changes mean taking less risk.
SKIERKA (phone): “Well, what would you like more to achieve at 15-20% return on equity at higher risk, or 10-12% with low risk and much more quality and solvency behind you. I think that is the way to go from the capital position point of view. The business model has never been based, and will never be based, on hiding tax evasion money in your own coffers. It’s more on quality, on the advantages of the Swiss finance place, the competency of the people, the staff. There are a lot of positive factors which simply will strengthen the place.”
But even if the Swiss financial sector is strengthened, it appears banks look poised to shrink their size, at least in the short term. A recent study from the BAK Basel economic institute, commissioned by the Swiss Bankers Association, showed the financial sector was set to shrink to just 5.7 percent of Swiss GDP by 2015, compared to 6.1 percent last year. It won’t reach 6.1 again until 2020. For law professor Peter Kunz, Swiss banks need to keep their heads down to remain successful.
KUNZ: “We have to be quite honest, most of the time whenever there is a scandal going on, a Swiss bank is involved. In particular the big banks. So UBS and Credit Suisse are, in my view, a problem for the reputation of Swiss banking. And that’s very unfortunate because they are quite important to Switzerland. So I think, first of all we must avoid any scandals. I think we also have to increase the compliance activities in Switzerland. The compliance activities are pretty good, already, but probably the standards must be heightened. Of course this will bring the costs skyrocketing high, but be that as it may, we must avoid any scandals.”
Kunz says Switzerland is often underestimated, or mislabeled in its vigilance in legal bank business because of its problems with other countries over taxes, but it was never a dirty money haven. It has long had strict rules on money laundering.
And at least on paper, proposed tax deals with other countries are aimed at showing Switzerland of reality is not the Switzerland of legend. John Christensen at the Tax Justice Network says the move to legal, above board business should be no problem for banks. If they can’t be profitable while staying legal, he says they should get out of the business.
CHRISTENSEN: “I think early movers might be the big winners here, because savers are now looking for banks that are not only ethically sound, but also banks that are more efficient in the way in which they allocate investment. So I think the banks that move quickly to not only strengthen their ethical reputation, but also their practices more generally, and their ability to invest profitably, they might be the banks that will shape the markets of the future.”
But these structural changes in how Swiss banks operate also equate to breaking a covenant with clients. Former UBS CEO Grübel says years ago clients were promised banking secrecy was safe forever, but that is no longer the case.
GRÜBEL: “Is Switzerland still the haven for money in difficult times, or in times of uncertainty? That, I think, we will find out here in the next big crisis, if people still trust Switzerland to be safer than any other country. Or do other countries emerge that have a better image in that regard?”
When the CEO of Switzerland’s biggest bank calls tax disputes with the United States and other nations “an economic war” people take notice. UBS CEO Sergio Ermotti said that last month, as Switzerland faces a still contentious relationship with its neighbors and the U.S. hunting for untaxed assets hidden in the alpine confederation. The U.S. is the world’s only super-power, and has not shied from using its economic and diplomatic might to seek and reclaim back taxes, and punish banks who helped hide the money. But in any war, even an economic one, there are casualties. And the changes Swiss banks have made in response to the U.S. have made things for some Americans in Switzerland much more difficult.
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Katherine moved to Switzerland from Ohio in 2008 to be an Au Pair. The US was in the middle of its financial crisis and she figured “why not?” First order of business in Zurich was to get a bank account.
“I had gone to I think it was UBS the first time, and they had said that they didn’t offer any bank accounts to Americans who had less than $250,000,” she said. “My boyfriend, at the time, and I just laughed at that, like, ‘she has to have a bank account. She’s going to be living here.’”
Katherine was ultimately granted a young person’s account at UBS. Now, years later, the graphic designer and her husband are having account troubles again, trying to get a mortgage.
“We got so far along in the mortgage process that people were telling us it was a good time to buy, and then it was only literally right before we were going to sign the contract that we were finding out, ‘Wait a minute, she’s American, this is a red flag, this is a problem.’” …