Swiss Banking Facing Extinction?

Peter Guy

Peter Guy

The demise of Ticino-based BSI bank, has reverberated in Asia, where one commentator claims the scandal surrounding the private bank’s dealings with Malaysian 1MDB sounds the death knell for Swiss private banking.

«Have regulations finally killed the secretive Swiss banking industry?» headlined the South China Morning Post in a commentary by Peter Guy, a well-known financial journalist in Asia who made a name for himself with regulatory expertise.

And it is regulation, Guy argues in his column, that will suffocate Swiss private banking: apart from UBS and Credit Suisse, the banks that can still afford the cost of offshore business, will eventually be shut down either by having their licenses revoked or by the increasingly stifling burden of compliance spending, he argues.

Swiss banking has been pronounced dead many times over by both domestic protagonists and international commentators, most recently when Switzerland abandoned banking secrecy under massive international pressure.

Swiss Banking Declared Dead Before

Often such pronouncements have been accompanied by self-interest, such as when the Abu Dhabi’s finance center chief, Ahmed Ali al-Sayegh, claimed the Swiss banking model is «dead.» Singapore – which unlike Switzerland hadn’t run afoul in the past 15 years – was private banking’s future, he argued.

Ali al-Sayegh is now forced to revise his views, at least on Singapore’s impeccable track record: the BSI case, in which the bank effectively had its license yanked by Singapore’s MAS and by Switzerland’s Finma, has laid bare serious supervisory shortcomings in the city-state in dealing with money-laundering and with related know-your-client rules.

Singapore Shortcomings

That is precisely why the BSI case has rattled and unnerved Singapore’s banking sector: it is the first time in the finance center’s history that know-your-customer violations have any criminal ramifications. A dramatically higher budget for banks to comply with regulation has already been identified as at the forefront of the numerous further consequences of the case.

Guy, the SCMP commentator and regulatory specialist, goes so far as to say that BSI marks the end of Swiss banking, a demise that began when London's «Big Bang» in 1985 usurped Zurich as a global banking center. The introduction of Fatca was a «weapon of mass destruction» against the private client business. Swiss banks including UBS and Credit Suisse paid billions in penalties to U.S. authorities to extricate themselves from prosecution over their illicit offshore dealings.

So the end of Swiss banking is apparently nigh, according to Guy. With a doomsday prediction like this, it would be prudent to examine where the criticism comes from and what it targets. To be sure, Swiss banks and bankers are in a dominant position in Asian private banking – in Guy’s view of the BSI scandal and its aftershocks, they aren’t necessarily operating out of a position of strength.

Jason Bourne and James Bond

Swiss finance and private banking in particular are especially vulnerable because, seen internationally, it has prospered by exploiting undeclared and untaxed funds held offshore, allowing Switzerland to build up a dominant position globally. Swiss banks are under particular scrutiny, and every misstep in banking is quickly associated with Switzerland. The alpine nation is unlikely to ever shed its association with numbered accounts in James Bond or Jason Bourne films, but it would be dramatically premature to declare its banking industry entirely dead.

If Guy’s conclusion is flawed, his argumentation is solid. By saying that only UBS and Credit Suisse can muster the necessary scale and financial firepower to survive in international private banking with its continuously rising regulatory costs, he hits at the heart of fears among smaller Swiss private banks.

Twain: Death Exaggerated

And Guy mirrors reality when he predicts that sooner or later smaller firms will face the painful decision to throw in the towel or sell off their offshore operations. He also identifies how international pressure has chipped away at Swiss banks’ competitive advantages, which Guy says are now limited to a strong domestic currency and the comparably affordable lending terms they can offer as a result.

However, it requires a leap of faith to extrapolate the demise of Swiss banking from these factors, and it conveniently ignores the fact that Switzerland’s banks have been savvy at adapting to dramatic changes in their operating environment, and to regulatory tightening in particular.

Peter Guy’s comments on Swiss banking represent a warning, but not an obituary. Or as Mark Twain put it, «reports of my death have been greatly exaggerated.»

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