Private banks feel the pinch

The flow of money has slowed for Switzerland's private banks Keystone

The boom appears to be over for private banking in Switzerland, with establishments scaling back or stopping recruitment after a period of heady growth. The belt-tightening can partly be blamed on the state of the world economy, but to what extent can it be attributed to the loss of a core market - the foreign tax evader?

In the three years to the end of 2000, staff numbers at Swiss private banks grew by 49 per cent. But now a climate of caution reigns.

While UBP is so far the only establishment to actually reduce its workforce, some banks, such as Julius Bär in Zurich, have announced a jobs freeze, while others have reduced the number of new employees they are taking on.

One of the biggest institutions, Lombard, Odier & Cie is increasing its staffing levels by between six and eight per cent this year, compared to 20 per cent in 2000.

“The situation remains tense,” says François Gilliéron of the Geneva Financial Centre Foundation. “But a certain slowdown is not necessarily a bad thing, as long as it’s well managed.”

“The banks have been growing very rapidly over the past four or five years, and it couldn’t go on forever,” agrees Michel Dérobert, secretary-general of the Swiss Private Bankers Association.

Less asset management

Swiss banks may hold around a third of the world’s $25 trillion in offshore wealth, but they are not immune to the slackening effects of the global economy. Profits in the sector are expected to be well down on recent years.

The downturn in the American economy and the bursting of the dotcom bubble has “certainly forced banks to expect fewer new clients wanting their assets managed,” Gilliéron believes, although the clients of Swiss private banks are generally older and more conservative than the millionaires associated with the new economy.

Some analysts believe another factor has prompted Swiss private banks to adopt a more cautious approach: fewer tax evaders, it seems, are depositing their wealth in Swiss bank accounts.

In the past, Swiss private banks became fabulously successful by accepting deposits, with no questions asked, from foreigners, and many foreign banks set up shop in Switzerland to take advantage of this lucrative market: of the 75 private banks active in Geneva, 49 of them are foreign owned.

The rules were tightened up in 1977 with the introduction of the due diligence conde of conduct, but private banking has remained a very lucrative business. “The taxman is, by definition, not his client’s taxman,” Dérobert says.

Banking secrecy not enough

But banking secrecy and a favourable fiscal system are no longer enough to attract clients. Tax dodging is no longer as easy, or as attractive, as it once was, and the quality of local private banking services has also improved.

Added to that is the fact that Switzerland, under pressure from the European Union to help in its fight against tax evasion, has offered to introduce a withholding tax on the savings of EU citizens, and places like Geneva, Zurich and Lugano look less attractive places to stash one’s wealth.

“Frankly, these legal moves have not affected the development of business,” Dérobert told swissinfo.

“The more cautious approach in the industry has more to do with the state of the market than these legal questions,” he added.

Analysts believe it will be the medium-sized Swiss banks, not as flexible as the small establishments and lacking the financial muscle of the larger ones, that will be under most pressure in the present climate.

In an overcrowded sector, where the top ten banks control just eight per cent of the market, they believe mergers and take-overs will be necessary to compete.

“It’s not impossible, but it very much depends on how things develop in the future,” Dérobert says, adding that those banks that failed to turn a healthy profit in the recent boom years, will struggle now that times are lean.

“It’s like the Tour de France. When the riders have to go uphill, it is the weak who get left behind,” he says.

by Roy Probert