Are Swiss banks in trouble? | CNBC Explains

Swiss chocolates, Swiss chocolates. Ferrero Rocher, are they Swiss? No. Oh, these, Lindor, yes, you'll love them. 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 have had problems. This graph shows how much things have changed. In 1996 there were 403

banks

in Switzerland. In 2019, 157, more than a third, had disappeared. So what is going on here? Have Swiss banks lost their shine? Hi Geoff! Hello Tom. How are you? We are installed here. I brought you some Swiss chocolates because I know you haven't been to Switzerland in over a year and I wanted to bring you a little bit of Switzerland.

But, in exchange, we must talk about the Swiss banks. Squawk Box Europe host Geoff Cutmore has interviewed the CEOs of Switzerland's two largest banks for more than 20 years. He wanted to use his experience and knowledge to learn how the industry has changed. Swiss banking has changed incredibly over the last few decades, but in the last ten years I think you can see that the change has accelerated. The United States has been instrumental because of the financial and economic pressure they have been able to exert not only on the Swiss government, but also on Swiss banks per se.

In 2010, the U.S. government signed a new employment bill, which included a section called the Foreign Account Tax Compliance Act. It required American citizens and companies to disclose 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 Americans' accounts. If they did not do so, they would face a 30% tax on all payments originating in the United States. This was a problem for Swiss banks, which had a reputation for secrecy. Before this, wealthy people around the world could keep their money in Swiss bank accounts with complete anonymity.

Traditionally, Switzerland used to be one of those places where banks kept information secret. They didn't share information with other governments and that was ultimately part of the Swiss banking model that made it incredibly successful. In 1934, the Swiss government passed a bank secrecy law that ultimately made it a crime for Swiss banks to reveal customer information to foreign governments, and which went some way to sowing the seeds for massive growth in the Swiss banking system. . Some of that history, as you know, is very checkered. It is possible that the Nazis hid gold in Swiss bank vaults. African dictators and despots who have diverted state funds.

That money has reached Swiss banks. The Swiss, for their part, would probably raise their hands and say, "Look, you know we can't be responsible for where the money comes from." But that answer is no longer enough. In 2007, a whistleblower at Switzerland's largest bank, UBS, exposed to U.S. authorities the extent to which Swiss banks were helping American clients evade tax collectors. It was a revelation that the US authorities could not ignore, and they immediately took it to UBS and the other Swiss banks that held accounts of US citizens that were clearly being used for nefarious purposes.

This led to years of litigation between Swiss banks and US authorities, ultimately resulting in billions of dollars in fines. 85 Swiss banks paid more than $5.5 billion in fines, but Switzerland's two largest banks paid the lion's share. UBS settled for $780 million in 2009, while Credit Suisse was fined $2.6 billion in 2014. As regulators paid more attention to tax compliance, Switzerland's involvement in global asset management fell from around 9% in 2004 to slightly above 4% in 2009. What's more, the Swiss government's decision to exchange banking information with the United States opened the door for EU member states to begin their own judicial investigations. This led to significant new out-of-court settlements.

How did UBS and Credit Suisse handle these large payments and what effect did it have on the direction of their business? In the end, they only had to pay the fines, but the consequences have obviously been a significant hit to profits and shareholders and management don't like that. So the next step for the banks is that they had to go out and try to find new markets, new opportunities, and if we look at the world right now, there is a clear area where the opportunity set is growing. This is happening in emerging markets in Asia, particularly where there is a growing middle class that has savings that need to be managed.

If you take China out of the mix, Swiss banks Credit Suisse, UBS and Julius Baer are among Asia's five largest wealth managers. In Asia, Singapore and Hong Kong's banking laws have boosted their status as offshore financial centers. According to the Financial Secrecy Index, they are now just behind the Cayman Islands, the United States and, of course, Switzerland. Between 2009 and 2014, at the height of the crackdown on tax compliance, net new assets under management in Singapore grew by $40 billion and by $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 much more open.

In fact, they are more open than they have been in decades. FINMA, the regulator, would probably also say that the focus is now largely on Switzerland operating a globally transparent information exchange. But has Switzerland really improved its performance? The Panama Papers leak in 2016 revealed that Switzerland's two largest banks were among the top ten banks that used offshore accounts to help their clients hide their wealth. The problem is that I think many critics would say that the Swiss have taken too long to open up their banking sector, that there is still too much secrecy, that the process of obtaining that information is too slow and too onerous.

Towards the end of 2018, Switzerland began automatically sharing customer data through a tax transparency forum under the Organization for Economic Cooperation and Development. However, less than 12 months later, Swiss banking was embroiled in another scandal. The chief executive of Credit Suisse was forced to resign following allegations that the bank had spied on a former executive. The question for markets at this point will be how credible are the research results? Things didn't get much better in 2021, following the collapse of US hedge fund Archegos Capital Management and British financial firm Greensill Capital. Credit Suisse had provided financial backing to Greensill when it began to struggle, a miscalculation that could cost its clients up to $3 billion.

The collapse of Archegos cost its lenders a total of $10 billion. UBS says it lost $774 million on 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 hope new management will stop these problems. That money or loss ultimately has to be borne by shareholders, and I think what you've seen in the share price performance has been a reflection of the anger in some markets at what they perceive as mismanagement or a poor understanding of risk. . So it's just about doing good basic banking and, unfortunately, experience from both cases suggests that some improvements are still needed.

Okay, so at this point you might be thinking that Swiss banking is over. Fertig. Fine. Finite. Well, unsurprisingly, Swiss bankers argue that Switzerland's differences still give them advantages over their rivals. What I still think qualifies for Switzerland is that it has a very stable political system. You have Swiss neutrality. Switzerland is not a member of the EU, so you somehow escape that supervision from Brussels. When you are perceived in Europe as the ultimate safe haven destination for capital, people are willing to take on the additional costs that come with parking money in a Swiss franc account.

Public perception is also positive. In a recent international survey on the reputation and quality of Swiss banks, the majority of respondents rated them as "good" to "very good." That is more positive than the German, British and American financial centers. So has the decline of Swiss banking been exaggerated or has it lost its status as a leading banking and financial institution? Which is it? To be honest, there's probably a little bit of both here. Probably exaggerated. I don't think anyone looking at the state of the Swiss banking sector at the moment would say that it is a sector in decline.

I think there is still a lot of life in the Swiss banks, but what I will say is that I think that as a result of many of the scandals that we have seen over the last decade and because of what has happened with interest rates, the Swiss bankers are You'll have to work much harder to justify holding onto your cash. I probably shouldn't give them too much brand presence, but they are Swiss chocolates. And when you go to Switzerland, will you also bring me some chocolates? Actually? Well. That's a deal.