Swiss private banks seem to be losing their mojo. Gone are the days where one could open a bank account in Zurich or Geneva and sit back, relax and enjoy the returns. Now you worry your home country will bite into your yields.
Switzerland’s oldest private bank, Wegelin, fell prey to the United States’ tax-evasion squeeze in February; it was charged with helping wealthy Americans hide a whopping $1.2 billion in offshore bank accounts.
“Wegelin was a very special case,” says Jacques de Saussure, senior partner at Pictet & Cie, the third largest private bank in Switzerland with more than $360 billion of assets, in an interview with Executive. “As a consequence of the recent regulatory changes, undeclared US assets in Swiss banks must be very small, and probably much more limited than in other countries. As a result, Swiss banks are probably much better prepared to deal with FATCA (Foreign Account Tax Compliance Act)”, the US law requiring non-US financial institutions to provide details of their customers with American citizenship.
Washington is not the only cash-strapped capital eyeing Switzerland to raise revenues; other European states are targeting accounts of their high net-worth nationals in Swiss banks too. A tax treaty between Germany and Switzerland aimed at German tax dodgers is scheduled for 2013, with up to €10 billion ($12 billion) at stake for Germany’s coffers according to Der Spiegel. More recently, debt-ridden Greece is looking to sign an agreement with Switzerland to tax Greek citizens’ deposits held in Swiss accounts.
“Holders of foreign bank accounts are easy scapegoats for the troubles of governments with unbalanced public finances,” says Saussure. “Governments certainly grossly overestimate the amounts involved, and should start focusing on other types of assets, in particular real estate; also, and above all, they should review fundamentally their spending and tax systems.”
While internationally there is a trend toward greater compliance and transparency, Saussure notes that “unfortunately… we have a lot of hypocrisy from other countries. A paradox to me is that we know of many dictators and politically exposed persons who own real estate in Paris and London, and who checks that? This is rather disturbing.”
As Swiss private banks feel the pinch, they are turning to emerging markets, and the Middle East is on their agenda. “The Middle East is still growing faster than the industrial countries in Europe and America, with the wealth creation this growth implies,” says Saussure. With turmoil shaking several countries in the region, Middle Eastern clients are reducing their exposure to local real estate and diversifying to other markets, “with a specific focus on the United Kingdom and the US as well as Asia, notably Malaysia”.
Investors from the region are more attracted to “the culture of discretion and the respect of private sphere inherent to Swiss private banking” than to the tax component of Swiss banking secrecy, particularly in the Gulf Cooperation Council, which enjoys low level of taxation, says Saussure.
Saussure believes that Swiss banks benefit from their country’s strong fundamentals. As Europe struggles with ballooning public debt issues and as its banks suffocate in sluggish domestic economies, he sees Pictet’s base in balanced-budget Switzerland as a new asset. “Don’t forget that our equity in the bank is essentially kept in Swiss francs. The Swiss franc has appreciated — too much for some and also for us — but one of the benefits is that our equity base, relative to other banks, has increased.”
He expects the private banking business to have to deal with more risk going forward as emerging markets take on a bigger share. “When we deal with investors in emerging countries, they are very frequently entrepreneurs in an early phase of the development. That is the case here in the Middle East and also in Asia.” For the Middle East, he sees additional political risk but he believes that “this is improving quite rapidly.”
As for Lebanon, he advises private bankers in the country, “to do the same as a Swiss banker, which is to make sure that they provide more added value to their clients through safety, security, expertise and quality of service; they have the potential to do that.” Lebanese private bankers, like Swiss bankers, are facing pressure to comply with new transparency and disclosure requirements such as FATCA but, says Saussure, “what is of course more difficult is that they are in a country that does not have the same rating as Switzerland.”