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.
