Swiss Private Banking

Table of Contents: I. Introduction:
1) Economy of Switzerland;
2) Overview of Swiss Private Banking Sector;

II. Strengths and Opportunities of Swiss Private Banking:
1) Privacy;
2) Protection and Safety;
3) Stability and High Quality Standards;

III. Weaknesses and Problems that Swiss Private Banking is facing:
1) Dependency on socio- demographic factors;
2) Shifting of wealth concentration;
3) Speed of recovery of markets;
4) Threat to offshore banking;
5) Hard to ensure sustained profitability;

IV. Offshore banking in the light of current financial crisis

V. Differences in the way different sized banks were effected:
1) Megabanks;
2) Small – medium sized banks; VI. Strategies adopted by private banks after financial crisis:
1) Credit Suisse;
2) UBS; VII. Conclusion

Switzerland is one of the most stable, modern and highly developed economies in the world nowadays. Percentage of Swiss Workforce by Sector of Economy is as following:
- 1960: Services (39%); Manufacturing (47%) ; Agriculture (15%) ;
- 2008: Service (73%); Manufacturing (23%); Agriculture (4%). Economic history of Switzerland is characterized by steady movement to higher productivity industries and services. Traditionally, the Swiss economy used to ran as calmly and soundly as a Swiss clock, well-oiled by the money inflows to Swiss private banks. The country of Switzerland has a small territory compared to surrounding countries and spans only about 16,000 square miles. However we should not underestimate its size. It is a fact that Switzerland is one of the wealthiest countries in the world nowadays. Switzerland is a nation with a gross domestic product (GDP) higher than that of most neighbor western European nations. Swiss Banks are one part of Switzerland’s superior financial system, and contribute to the great wealth of this tiny country. Switzerland stands on the second place in the world in political stability ahead of such highly developed nations as Singapore, Hong Kong, and the USA. General political stability and direct voting system in Switzerland contributed a lot to the rise of private banking industry. In fact we can even say that Switzerland has become a leader of the private banking industry.
Private Banking sector starts its history from 14th century with such activities as money exchange and lending activities by the Italian immigrants. Sector of Swiss Private Banking refers to:
1) Banks that are Swiss-owned and Swiss headquartered entities;
2) Banks that are Swiss-managed autonomous units of foreign-owned entities. The biggest Swiss banks are UBS and Credit Suisse. They have a market share of 50% in Switzerland. The Swiss banking system is mainly based on the universal banking model. Banks with such a model are able to deliver all kinds of banking services. It means that they can manage money of wealthy individuals while also providing consultancy and advising the client on business issues and providing information and access of public financing options. Swiss private banking is well known for its high standard quality services and has become one of the several options that sophisticated clients, who are looking for a quality services may choose from. However, just like a lot of others successful industries in the world, this banking system have both strengths and weaknesses. I suggest us first take a look at the strengths and competitive advantages of Swiss Private Banking. Then I will introduce some disadvantages and weaknesses of the industry and mention the problems Private Banking is facing as the result of current financial crisis.
Strengths and competitive advantages of Swiss Private banking:
■ Privacy
The most important competitive advantage of private banks’ is its banking secrecy laws. Even before it was established as federal law the practice was common in many cantons.
The privacy regulations in Swiss Banks cannot be compared to anything else. When one opens his/her Swiss Bank account, provided information is kept confidential and cannot be obtained without appropriate identification. Swiss law restricts and forbids bankers to disclose the existence of any account or any other information about it without owner’s agreement (except for certain circumstances). A banker divulging information about a bank account without permission has to be charged a penalty and is deemed immediate prosecution by the Swiss public attorney. The punishment for such a crime is even more extreme than in the United States: The bankers may face jail time and be fined up to 50,000 Swiss francs. That is why they say the relationship with Swiss bank can be even compared to doctor vs. patient confidentiality or the relationship you might have with an attorney who you can trust all private information without a fear. Therefore Privacy of Swiss Private banking is a big deal if one has money he/she doesn't want other people to know about, and unless he/she is a criminal it's highly unlikely anyone will ever find out about one’s account.
■ Protection and Safety:
Money is of a great value nowadays. All transactions are made with help of money and day-to day quality of life depends highly on money. That is why individual’s money should always be safe. After current crises that whole world had to face, fraud and theft is becoming more prevalent than ever before. But once a person has his/her account in a Swiss bank he/she can sleep at night without worries. This is all due to the existence of the Depositor Protection in Switzerland which is governed by the Swiss Bankers Association (SBA). The SBA came up with a self-regulatory Depositor Agreement with member banks which guaranteed that depositors will for sure quickly receive their money back in the event of a bank failure.

* Stability and High Quality Standards:
Switzerland for many-many years has had an extremely stable economy and infrastructure and hasn't been at war with another country since the year of 1505. Swiss bankers are also highly trained in investing and know how to grow clients’ money. Therefore one can be sure that he/she will be provided with high standard service and consultancy if required. Research concludes that banking in Switzerland is an amazing way to keep your money protected and growing without any additional risks. The stability of Switzerland’s financial markets makes is a wonderful place to open large accounts. After current financial crises the world is full of distrust and foul play, but Switzerland still stands for сcountry one should certainly trust with his/her money.

Now that we have discussed all main benefits and strong sides of Private Banking it is time to mention some of its weak spots.

Weaknesses and Problems Private Banking is facing: * Dependency on socio- demographic factors:
Current financial crisis, when economy collapsed and most of the people lost money, reduced trust in the society. People became more doubtful. The fact is that during the times of crises people preferred simple product and no complex and nontransparent one. Distrust toward banks takes place as well. Clients of Private Banks are looking for reliable consultancy from bankers. And though Swiss Private Banks have proven highly resilient and were able to generate profits even in times of current financial crisis, they are facing a problem of bringing this trust back to people and convincing clients that they still remain the credibility and ability to provide stability and safety for client’s money accounts no matter what. In the event of bringing trust back private banks have to consider a fact that there are various segments of clients who has completely different needs. Therefore they need to adopt the strategy of bringing trust back according to the preferences and characteristics of each segment.

* Shifting of wealth concentration:
Nowadays we are able to see an increase in high-net-worth individuals (In the private banking sector HNW defined as those individuals, who have investable assets not less than US$1 million). Available information, innovation in technology, globalization, economies of scale, cheaper labor force and natural resources available in particular countries give people following opportunity: using input in the most efficient and effective manner, create higher economic output. Therefore more and more people are able to earn larger amounts of money and the tendency of increase in HNW takes place. But here it is very important to mention that due to all the factors that allow company to produce at a lower cost, the concentration of wealthy people is shifting toward such regions as China, India and Middle East. These developing markets, as critics say, will become soon the most important places to generate new wealth and more and more people will be willing to hold their capital onshore accounts. These markets require completely new way to operate the business. * Speed of recovery of markets:
Different regions recover from current financial crisis with various speeds due to the depth of financial crisis in particular country. Because of that the global wealth distribution is shifting to East, especially such countries as China, India and Middle East. While majority of developed and industrialized economies, including Switzerland, are just being in the stage of recovery from financial crisis, most of the developing markets have already returned to a pre-crisis stage. * Threat to offshore banking:
Recently G20, who is responsible for bringing together systemically important industrialized and emerging economies to discuss key issues in the global economy, started enforcing stricter regulations regarding the tax benefit clients, who hold assets offshore, have. It is common knowledge that offshore business is an important part of private banking in Switzerland. Offshore locations have to soften their regulations according banking secrecy, because G20 ruled on the fact of bringing down on tax havens. G20 decided that it is no longer acceptable to avoid tax. Slowly tax-neutral wealth management, so common in Switzerland, is becoming a thing of the past. The result of losing tax benefits as expected is: decrease in number of clients in Private Banks, because they more likely to be willing to withdraw part of their funds. * Hard to ensure sustained profitability:
Because of such factors as regulatory pressure and the rise of cost of compliance, rather high cost reduction measures will be required to ensure further sustained profitability of business.
Critics say that because of the problems mentioned above private banks are more likely to face some extra cost. Managing the Business will require more complex and precise approach to be profitable.
Some critics also mention that the biggest part of costs will come from the problems with loosening banking privacy laws. Let me elaborate on this topic more.
Switzerland is said to be world’s largest offshore tax haven. Main characteristics of offshore banks are the stringent privacy protections, tax advantages and flexible regulations that onshore banks lack. In contrast to onshore banks, offshore banks do not require to disclose personal information to the government or tax agencies.
But economists claim that most people are not actually in Swiss banks for tax reasons. Tax stopped being the major factor in driving people offshore years ago. Sure, people don’t like to hand over half of what they have earned to the state. In the bigger picture, it is the distrust of big government’s stability and will to keep all the information concerning money capital in secrecy that is driving people to protect their wealth offshore.
Bank secrecy, also known as bank privacy refers to a legal principle under which banks are not allowed to provide to authorities individual information and information about the account of their customers unless certain conditions apply. The Principle was created by the Swiss Banking Act of 1934. This has led to the famous Swiss banking; the principle of bank privacy is always considered one of the main characteristics of private banking.
Professionalism, soundness, reliability, and client confidentiality have been the basis for private banking in Switzerland. Swiss bank has expectedly put that nation’s fabled banking secrecy laws back in the spotlight.
But several important issues arise in the matter of keeping information secretly. One of them is the failure to provide appropriate information. More specifically, it is doubtful whether the financial service provider remained a principle of good faith with regard to the processing of the data and information collected.
The other issue that arises here is that numbered bank accounts, used by Swiss banks and other offshore banks located in tax havens, have been accused of being a major tools of the underground economy, facilitating tax evasion and money laundering.
All this puts offshore banking under a big question whether or not it is an appropriate policy to hold nowadays. Especially after current financial crisis it became clear that trust is no longer there between client and bank, bank and government, client and government. Economy is slowly getting back on track from the downturn, but reliability and trustworthiness while dealing with money is lost forever. Therefore regulations are becoming stricter, which encourage such institutions as private banks loosen their privacy laws and provide government and other authorities with data regarding personal account when required.

The reaction to the current financial crisis has been different for large and small institutions. Megabanks, medium-sized and small private banks are 3 different types of banks by size. If we take a look at megabanks, who operate worldwide, business has long been up for revaluation. For this type of banks financial crisis cause threat to reputation and operational risk. As I already mentioned Swiss Private Banks have brilliant reputation and probably are the most reliable banks in the world. But financial crises touched each and every branch of industries, including Swiss Banks. Therefore people lost trust even in them. For medium-sized and small private banks, protection of privacy has always been of a key importance. Therefore in this case financial crisis harmed them a lot in terms of losing a right to keep privacy to the accounts data.
Let us take a closer look at megabanks. UBS and Credit Suisse are respectively the largest and second largest Swiss banks and account for over 50% of all deposits in Switzerland; each has extensive branch networks throughout the country and most international centers.
Due to their size and complexity, UBS and Credit Suisse are subject to an extra degree of supervision from the Federal Banking Commission. In the light of current financial crisis both banks has to renovate their business strategies and add some key points to it.
UBS and Credit Suisse are trying to restore their credibility among customers and bring back their previous profitability after current financial crisis with help of new aspects in their business strategies.
For example Credit Suisse decided to take a closer look at the needs of a population that is highly divergent in terms of its objectives. They decided to implement customer centric strategy and segment them accordingly to their language, culture and wealth preservation. They also saw a need to increase individual financial responsibility by establishing full-fledged advisory models. As well as this they saw an opportunity in establishing an onshore and offshore presence with local representation to enable onshore as well as offshore investments.
Other example is UBS. The Bank realized that following changes in strategies should be adopted as soon as possible:
a) Guaranty a high standard presence in those places where HNWs feel it is a rather reliable and safe place to keep their money. In this case, place should be of a critical importance to provide a base for serving these individuals.
b) Low profile with differentiated services. In the light of current financial crisis it is important to make clients feel safe with money investments. Therefore USB realized that they should not draw a lot of attention to themselves. Rather than that they should keep profile as low as possible while providing high-touch personal advisory service.
c) Focus on the very wealthiest. Family offices, who operate the wealth for whole family and ultra-high-net worth clients should became the main target groups of private banks.
As well as this several other points should be considered when coming up with a new strategy for Private Banks nowadays:
a) Show respect to cultural traditions which are of the great importance to each nation. Make sure to consider family relationships, and behavioral preferences of the diverse client base in the region.
b) To succeed in new emerging markets it is important to integrate offerings and start changing it from individual wealth management to family businesses consulting services.
c) Establish a hybrid of business models that would combine both offshore and onshore banking based on holistic client needs. d) Client Service Model Strategy: client will need to be segmented according to their true needs and preferences;
e) Client Coverage Models: managers who have to have personal relationships with clients should focus on limited amount of individuals and have to be an expert in what they are actually doing;
I believe that all the pointes mentioned above will truly improve the reputation of the banks and slowly bring them back on track.

Summarizing all what have been said above, I can make the following conclusion:
To be successful in future banks will need to:
a) Become aware and more serious about developing economies and emerging markets such as China, India and Middle East;
b) Combine their onshore and offshore businesses into one hybrid system;

c) Reassess their business strategies and adapt them in a way it would restore client trust while ensuring compliance and cost-efficient servicing;
d) Segment customers and work with them according to their true needs and wants;
e) Try to should increase the attractiveness of Switzerland as a host country for private banking service.
Having said all that, I want to thank you for your attention!

Sources: 1) Private Banking in Switzerland Facing Fundamental Change http://www.isc.hbs.edu/pdf/Student_Projects/Switzerland_Private_Banking_2010.pdf 2) Private Banking after a perfect storm http://www.booz.com/media/uploads/Private_Banking_Switzerland.pdf 3) Difference Between Offshore Banking & Onshore Banking | eHow.com http://www.ehow.com/facts_6127586_difference-offshore-banking-onshore-banking.html#ixzz1KZGRUNHP 4) FATCA: Foreign Account Tax Compliance Act http://bankir.ru/dom/showthread.php?t=105240&page=1 5) Smaller private banks tipped to struggle http://www.swissinfo.ch/eng/Specials/Rebuilding_the_financial_sector/News,_results,_regulations/Smaller_private_banks_tipped_to_struggle.html?cid=28596258 6) History of Switzerland Banking http://www.offshorelegal.org/offshore-banking/swiss-switzerland-offshore-banking/history-of-switzerland-banking.html 7) Offshore Banking, Offshore Bank Account, Offshore Jurisdiction
http://www.offshorebankingtoday.com/