Swiss financial sector must sink or swim

Dark clouds hang over the Swiss banking sector Keystone

One year after succumbing to international pressure over tax evasion, the Swiss financial sector stands at a crossroads as it tries to pick a path out of the wreckage.

Plans to turn Switzerland into one of the top three global financial centres faded during the financial crisis, and the new priority is to stay afloat. But some observers believe opportunities for growth still exist.

On March 13, 2009, Swiss Finance Minister Hans-Rudolf Merz bowed to demands from the Organisation for Economic Co-operation and Development (OECD) to renegotiate tax treaties with a host of countries.

But attacks on Swiss banking secrecy have continued, and last month Merz was unable to offer clear answers to the problem. On top of that, a deal cut between Switzerland and the United States to hand over UBS client details has run into a legal challenge while France and Germany have obtained stolen bank data.

It is all a far cry from the 2007 Swiss Financial Sector Masterplan when the cream of the Swiss financial sector announced plans to elevate the industry into the same tier as New York and London.

On the defensive

A new strategy presented to parliament last December took a defensive tone, focusing on protecting banking secrecy, adopting stronger regulations against future turbulence, and measures to avoid being squeezed out of vital markets by national protectionism.

“The 2007 Masterplan must today be regarded as nonsense,” Beat Bernet, chairman of the Swiss Institute of Banking and Finance at St Gallen University, told swissinfo.ch. “It was from the beginning not much more than a list of rather unrealistic desires.”

In the cold reality of the post-crash era, banks must turn their backs on tax evaders’ assets and restructure in order to save costs, Bernet added. At the same time, the government must stand firm against any further demands to erode client confidentiality.

It is not certain how much undeclared money lies hidden in Swiss banks, but a recent survey by brokerage business Helvea estimated that it could include 80 per cent of SFr836 billion ($804 billion) in European Union assets.

Large banks are strengthening their onshore operations in selected countries. But smaller ones cannot afford to do this and some observers, including Bernet, predict a consolidation in the Swiss private banking sector.

Undeclared offshore wealth “dead”

Manuel Ammann, a fellow professor at the St Gallen Banking and Finance Institute, believes the business of managing undeclared wealth is “essentially dead”. But he thinks smaller banks could survive by moving into highly selective fields.

“These might include focusing on niche capabilities and know-how or adopting a specific approach to asset management, such as sustainable banking,” he told swissinfo.ch.

Another obstacle to overcome is the growing walls of protectionism that threaten to damage smaller countries such as Switzerland. The EU is currently debating measures that could restrict the cross-border activities of hedge funds and private equity firms in Switzerland.

The December 2009 financial strategy report implored the government to redouble its efforts to negotiate a way around such regulations that could disadvantage Switzerland. It also pinpointed regulations that it stated are hindering the global competitiveness of the insurance sector.

Clear thinking required

But there are still some grounds for optimism. Switzerland emerged from the financial crisis in relatively better shape than a lot of countries, only one bank – UBS – needed state aid and public debt has not risen enormously.

“Compared to foreign competition, the Swiss private banking market can clearly offer greater authority, stable political, legal and economic conditions and a good reputation,” said Bernet.

And some regulatory and political measures could work in Switzerland’s favour, such as Britain’s decision to increase the tax rates for top earners and big bonuses. Attracting more London hedge fund managers could depend on reforming Swiss regulations and abolishing uncompetitive taxes, such as stamp duty, on financial transactions, the 2009 report said.

But Bernet is unimpressed by such documents, and he is sceptical that Switzerland is going about things in the right way.

“A strategy must proceed from clearly defined goals. It must point out what future role the financial centre should play in the context of the national economy. And it must have a realistic international political and legal international basis,” he said.

“The current battleground demands strategic thinking, not reactive actions. Unfortunately we are seeing precious little concrete thinking and discussion.”

Matthew Allen, swissinfo.ch

Swiss financial centre

The contribution of the Swiss financial sector to gross domestic product (GDP) has risen from 7% in 1990 to 11% in 2008.

Between 1995 and 2005 the Swiss financial sector grew by an average of 5.5% per year.

According to the 2007 Swiss FinancialSector Masterplan, banks contributed some SFr48 billion to the economy and insurers SFr22 billion.

Taking into account indirect contributions from industries that interact with the financial sector and consumer spending by employees, the total wealth created was estimated at SFr70 billion in 2006.

The financial sector as a whole also contributed about SFr17 billion in taxes, although this figure will have decreased in the last two years.

Swiss banks manage around a tenth of all assets – a staggering SFr11.3 trillion – making it the third largest market for wealth management. Switzerland is the biggest centre for offshore asset management – SFr2.3 billion.