Regulatory handcuffs will ‘kill 30% of Swiss banks’

Regulations can be lethal for banks, finds UBS CEO Sergio Ermotti. NZZ SIFF

Up to 30% of Swiss banks will be smothered to death under the weight of increasingly draconian regulations within the next five years, UBS bank’s chief executive Sergio Ermotti has warned at a financial industry conference in Bern.

Every year, regulations drain the Swiss economy of 10% of its gross domestic product (GDP) – or CHF60 billion ($61.5 billion) – Ermotti said. Since the 2008 financial crisis, the financial industry has borne the brunt of new regulations, both in Switzerland and in other countries.

“Switzerland can no longer afford this if it wants to remain competitive,” he told delegates at the Swiss International Finance Forum, hosted by the Neue Zürcher Zeitung newspaper on Tuesday.

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Ermotti criticised academics and “so-called experts” who continue to call on banks to set aside more capital to cover potential losses. “Such erroneous principles give no thought to the actual practices of banking or the consequences,” he said. “The ongoing discussion on increasing regulations undermines banking. I hope that those people who keep agitating for increased regulation also bear the consequences of their activity.”

The UBS chief also called on politicians to stop relying on the central bank to bail Switzerland out of its economic problems, but to get on with the job of enacting economic reforms. “Monetary policy alone cannot unleash the forces of growth,” he said.

He added that Britain’s recent vote to leave the European Union had increased the “virus of uncertainty” that is “poison” for banks. The EU should take notice of Brexit and “look to the United States or Switzerland to develop into a more federalist system”.

Fintech situation

The conference also heard demands for a loosening of regulation for financial technology (fintech) companies. Such start-ups provide complementary digital financial services, without the scale or operational systems of traditional banks.

The Swiss Financial Market Supervisory Authority (FINMA) has already made moves to ease the regulatory burden on fintechs. It has made it possible for clients to open accounts digitally and create a “sandbox” to test their products. This typically allows fintechs to test their products on small groups of friends and relatives without regulatory intervention.

But FINMA director Mark Branson told the conference that the regulator alone cannot open up the way for the growing fintech scene in Switzerland. He called on legislators to amend banking and consumer laws to ease the current restrictions on the new brand of financial services.

“Regulation that is based on 1936 banking law is related to the analogue world, which by definition discriminates against digital providers,” he said. “The financial revolution is evolving so rapidly that we can’t get bogged down striving for a 100% perfect legislative solution. We are advocating swift action that we can fine tune later.”

Patrick Odier, chairman of the Swiss Bankers Association, argued for a new model of regulating the rapidly expanding fintech industry, which is expected to attract $46 billion in investments by 2020. While it is possible to open up some accounts digitally, others – such as applying for credit cards – still require physical paperwork.

“When I ask fintech start-ups what they don’t like about Switzerland, they all complain that it is cumbersome to open up accounts,” he said. “This should be totally digital and not require a piece of paper to sign to meet some obscure legislative act.”

Odier believes that Brexit might favour the Swiss fintech scene by encouraging many Swiss start-ups to set up shop in Switzerland rather than head for London, which currently leads the European field in the new financial technology scene.