Game changes for foreign banks in Switzerland

Foreign banks located in Switzerland are considered Swiss banks, according to the Association of Foreign Banks in Switzerland Keystone

When German tax authorities purchased yet another CD containing client details of Germans with Swiss bank accounts, the spotlight was unusually on a foreign bank, the Zurich branch of Coutts.

Up to now, foreign banks have generally been better able to steer clear of tax avoidance headlines than their Swiss counterparts.

The exception is when CDs full of confidential customer data crop up for sale in Germany, as happened with Coutts, a subsidiary of the Royal Bank of Scotland, and HSBC in Geneva.

But even though foreign banks in Switzerland have benefited from a generally lower profile, their numbers are dwindling.

According to the Association of Foreign Banks in Switzerland, foreign banks located in the country are considered Swiss banks.

A main difference is that their principal shareholders are foreign. These banks are either subsidies of foreign shareholders – often banks – or Swiss branches of foreign banks.

Traditionally, it was not only the famous Swiss discretion that attracted these 140-odd banks to set down stakes in the confederation. According to financial centre experts, Switzerland’s efficient regulatory climate and excellent provision of services offered further incentives.

Experiences

While foreign banks do not make much of a splash in the Swiss media, in relative terms this inconspicuousness hardly seems justified.

In 2009, foreign banks accounted for 11.5 per cent of total assets held by all Swiss banks and 20 per cent of added value. Before the 2008 crisis, foreign banks held managed funds worth about SFr940 billion ($960 billion). Today that figure is lower, but still SFr860 billion.

Marion Pester of DZ Privatbank Switzerland told swissinfo.ch that foreign banks were perceived differently because of the large “heterogeneity of this group of banks” and “different home domiciles, different business models, different sizes and different interests”, among other reasons.

She added that having foreign banks in the Swiss financial sector was a plus. “In dealings with individual countries, the Swiss are able to benefit from the judgment and experiences of foreign banks in their home countries.”

Future trends

According to the Association of Foreign Banks in Switzerland, no new foreign banking licences were applied for last year or this year. When a foreign bank decides to leave Switzerland, it simply hands its licence back.

The fact that only a few of these licences are being taken over is a sign that they are not particularly attractive at the moment. One possibility is that the Swiss financial centre is losing an edge due to changes in how undeclared tax money is handled.

Not everyone agrees. Stephan Fuchs, a banking expert at Ernst & Young who is partly responsible for the Ernst & Young’s Bank Barometer, said banking secrecy had been much less relevant for foreign than domestic banks.

The predominantly foreign clients of Swiss-based foreign banks are more interested in corporate financing than private asset management, he said.

“More than 30 Japanese banks alone have withdrawn from the Swiss market in recent years due to their investment banking business not developing in the way they expected.”

Game-changer

Fuchs said that in Switzerland the areas of individual and asset management were to a large extent saturated.

“For this reason, I expect more banks to disappear in the coming decade. I’ll leave it open as to whether they will be predominantly foreign banks or also possibly Swiss domestic banks.”

Regardless, the fiscal and banking crisis and the tax changes concerning international asset management have changed the game for the Swiss financial centre.

“In other countries, Switzerland is still seen as an offshore banking centre,” said Fuchs. “To a large extent this is attributed to Swiss domestic banks.”

This is because an individual German seeking to evade taxes has up to now opted to put assets directly into a Swiss domestic bank rather than a German-dominated foreign bank.

“On the other hand, a German businessman with customers in many different countries would likely prefer to do business with a Swiss branch of his home bank in Germany.”

IT and back office services

That so many foreign banks choose to stay put in Switzerland no longer has much to do with tax exemptions, according to a foreign banker who preferred not to be named. The outstanding software and back office services available are the real draw, the banker said.

Even rival foreign banks will sometimes combine their IT and back office services, spinning them off from the banks themselves.

Another plus is that multiple employees abroad can be replaced by a single employee in Switzerland who provides back office services. In this case high Swiss salaries are not a deterrent to “insourcing”.

Fuchs confirms this trend. “The Swiss experience in universal banking is quite old. Back office employees in Switzerland have a wide-ranging education, because Swiss banks offer an extremely diverse palette of services. The bank apprenticeship system adds to further precision in services.”

As to Swiss banks following their foreign counterparts in outsourcing of IT and back office services, Fuchs observed that “the pressure on domestic banks is not large enough. Today most of the banks have enough money for their own, separate individual solutions and centres.”

Even though such activities do not bring competitive advantages, they are cost effective. Therefore, Fuchs believes they “are bound to come”.

Add together the Swiss work ethic, the precision of its services and vaunted Swiss reliability, and it is not inconceivable that Switzerland might become a hub for banks seeking to outsource their IT and back office services.

European banking laws

Previously, foreign banks based in Switzerland were left undisturbed to pursue business by their home governments.

Banking secrecy and taxes were not a theme. That is no longer the case.

Of the countries whose banks have a large presence in Switzerland, many have taken measures against the Swiss financial centre. The pressure on foreign banks from Berlin, Paris, Rome and others has greatly increased.

France: Exit tax (subsidiaries in Switzerland: Credit Agricole, Societe Generale, BNP and more)

Germany: Still uses stolen bank data (subsidiaries in Switzerland: Deutsche Bank, DZ Privatbank, Dresdner Bank was acquired by LGT, more).

Spain: Amnesty for tax evaders until November 2012, afterwards, a crackdown (subsidiaries in Switzerland: Santander, BBVA, more)

Italy: Strict border controls, prohibition of cash transactions totally more than €1,000 (SFr1,200), Switzerland remains on their blacklist (subsidiaries in Switzerland: Banca della Svizzera Italiana, PKB, Banca Popolare di Sondrio, more)

(Translated by Kathleen Peters)