By Armando Mombelli
The banking secrecy era is over for the Swiss financial market, but even without this “competitive advantage”, Swiss banks are still managing to attract large flows of capital from other countries, explains asset management expert Pascal Gentinetta.
This last decade was a tough time for Swiss banks. Banking secrecy came under attack while investigations, court cases, scandals and huge fines tarnished their image. The international financial crisis also weakened the position of the banking sector. Between 2007 and 2017, the financial market’s contribution to wealth creation, and thus Gross Domestic Product, dropped by 17%, whereas Swiss GDP itself went up by 16%. Banks reduced their staffing levels after decades of growth, and they now employ only 3.5% of the working population in Switzerland.
Yet today, the Swiss banking market remains one of the most important internationally, especially for wealth management. Swiss banks administer over 27% of all managed wealth that crosses borders worldwide.
Since 2017, there has been a new flow of funds coming from abroad. Could this be the beginning of a new growth phase? We spoke to Pascal Gentinetta, managing director of the Association of Swiss Asset and Wealth Management Banks.
swissinfo.ch: Swiss banks operating internationally, especially in the field of wealth management, have experienced one of the most difficult periods in their history. How are they doing right now?
Pascal Gentinetta: We have been seeing – and we are still seeing – a period of unprecedented transformation. If we had known ten years ago about the financial crisis, the wave of regulation, that the Swiss franc was going to be so highly-valued, that the sector was going to have to operate in an environment of very low or even interest negative rates, and that banking secrecy for dealings with other countries would cease to exist, few people would have bet on Swiss banks’ ability to fight back and transform themselves.
Over the past decade, there has been a notable process of consolidation going on. Some banks have disappeared, others have been taken over, while many foreign banks have closed their branches in Switzerland. This has, however, allowed banks with strong roots in Switzerland and a clear strategy to get stronger. The managed wealth has in fact increased in volume, especially due to the expansion of this particular business abroad. This is reflected in the increase in nank staff abroad, but also in the drop in staff numbers in Switzerland. New standards requiring an increase in banks’ own reserves have made our banks more secure, although this has had some consequences for profitability and margins.
swissinfo.ch: Is the banking sector going to be able to turn the page?
P.G.: There has been some very significant restructuring, but we are still in a phase of ongoing transformation and major challenges, including digitalisation. The banking sector has become an industrial sector like any other, which has to adapt constantly to an environment that is in continual change. The advantage we had from banking secrecy is now a thing of the past.
swissinfo.ch: How do you explain the strong surge of capital coming in from other countries over the past few years, when there is no longer any banking secrecy and Switzerland has signed up to the automatic exchange of tax information?
P.G.: This trend shows that the success of our banks depends on a whole range of competitive factors. First of all, professionalism that is recognised internationally, based on a very good system of training. Then there is the stability of the Swiss legal system and the rule of law, which ensures the security and respect of existing rules for all those who entrust their wealth to us. That’s something you can assume in this country, but it’s not the case in some parts of the world where you have corruption or arbitrary confiscation of wealth.
swissinfo.ch: Does Switzerland still profit indirectly from the misfortunes of other countries?
P.G.: If we examine the data, the increase in wealth managed by Swiss banks mainly reflects the strong growth in the upcoming regions of the world. Take for example South-East Asia, beginning with China, where notable wealth creation has multiplied the number of wealthy individuals who may be potential customers for Swiss banking services. In recent years, funds managed by our banks in financial centres like Singapore have grown quite a bit. The same goes for the Middle East.
swissinfo.ch: Europe remains the biggest market for Swiss banks involved in wealth management. Yet it’s a market where Swiss financial institutions do not have full access.
P.G.: In Europe the wealth management sector is affected by considerable protectionism, if we take Italy as an example. This is one of the aspects that creates problems. In theory, in an open and transparent economy, wealth management services should be able to cross borders like any other commodity. However, Switzerland has not yet been able to get access to the European financial market. But I still remain hopeful.
swissinfo.ch: Why is free access to the European market so important? In wealth management, which traditionally crosses borders, the Swiss banks can serve European customers from Switzerland.
P.G.: With the strengthening of the Swiss franc, it has become clear that wealth management is a real export industry, which is faced with the same problems as any other export-dependent sector. Banking services are produced mainly in Switzerland, which generates corresponding production costs in Swiss francs – especially staff payroll, but also in infrastructure – whereas customers resident in European countries or even beyond Europe’s borders pay for our services in euros or in another currency such as dollars.
The increase in value of the Swiss franc, over the last decade, has pushed up the production costs of banking services in Switzerland compared with our competitors in other financial markets like Luxembourg. As a result, we can no longer afford to wait for customers to come to us in Switzerland like we used to. The banking services available from Switzerland require active, barrier-free access to other countries’ markets.
swissinfo.ch: The banking sector is hoping, then, to add access to the European market to the negotiations on a framework agreement with the EU.
P.G.: We support the conclusion of a framework agreement as a prerequisite for any discussions with the European Union as regards the financial services sector.
Without an institutional accord of that kind, it does not seem to us realistic to expect that European market to open up to Swiss banks. But I also believe that collaboration with the European Union in the banking sector will be in the interest of its member states.
swissinfo.ch: Progress in this direction is not likely as long as the Brexit crisis drags on.
P.G.: Without a doubt. Due to Brexit, relations between Bern and Brussels have shifted from pragmatism to a sort of dogmatism. Brussels does not seem to be in the mood to make concessions to the City in its very complex discussions with London. As a sort of knock-on effect, any progress with Switzerland will be measured in the light of negotiations with London.
It would be naïve to think we could get some advantage from Brexit, having another ally in talks with the European Union. We see now that is not the case. The Brexit vote has in fact toughened the solidarity of the EU member states in their relations with Britain and other “third countries” like Switzerland.
The Association of Swiss Asset and Wealth Management Banks represents 28 banking institutions working in this sector for individual and institutional customers. These member banks manage wealth worth a total of CHF1,150 billion and employ 18,000 staff members, of whom 11,000 are in Switzerland and 7,000 in other countries.