Are Swiss banks in trouble? | CNBC Explains - YouTube

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.