Tuesday, May 27, 2014

Thoughts on What Swiss and Other Offshore Banks Whose Business Model of Secrecy Is No Longer Viable (5/27/14; 6/10/14)

I just picked up this interesting opinion piece:  Peter Gumbel, Secrecy’s out, so here’s what Swiss banks can still offer (Reuters Opinion 6/22/14), here.

The opinion piece starts as follows:
If Swiss banks were to cast off their usual discretion and make a marketing pitch these days, it might start off something like this: 
Dear Potential Client, 
While we would be delighted to open an account and manage your money for you, once you’ve complied with our anti-money laundering provisions, please be advised that we will no longer be able to help you avoid taxes back home, and in fact may soon start providing account details to your national tax authorities. Moreover, if you are American, please stay away. We’ve been so beaten up by the Justice Department that we’d rather not take your money at all.
I could quibble about several parts of this opening, but focus on only one.  The last sentence:  "We’ve been so beaten up by the Justice Department that we’d rather not take your money at all."
I have heard the variations of this refrain that, because of the U.S. allegedly short-sighted offshore account initiatives, including punishing the Swiss banks, a material number of Swiss and othoer offshore banks have stopped or will soon stop servicing U.S. citizens.  I can't speak to anecdotal instances where U.S. citizens may have heard or thought they heard that refrain from offshore banks.  It is hard to deal with anecdotes unless there is enough data to draw conclusions about the universe of offshore banks.

I do know that banks and other profit-seeking organizations seek, well, profit.  Banks do that by receiving deposits and exploiting those deposits while they hold them.  Banks do not turn away deposits unless the costs exceed the profit they can make.  Going forward, the critical mass of offshore banks will be FATCA compliant and compliant with similar initiatives by other countries, whether or not they take additional U.S. deposits.  So, will they stop taking U.S. deposits when the costs are really sunk costs and not materially different than required for other deposits?

Of course, there may be some banks that choose not to be FATCA compliant or compliant with similar initiatives by other countries.  Those banks could conceivably choose to isolate themselves from the world.  I fail to see how they will seek profit, except perhaps from handling money of skullduggers, such as drug dealers, corrupt potentates and their minions, etc.  But that too will eventually gain the world's attention, condemnation and reprisal.

So, I would not expect that profit-seeking banks generally will turn away deposits simply because they may be licking their wounds about past perceived mistreatment from the U.S. for calling them out for their enabling of U.S. tax cheats.

The article then goes on to note that deposits into Swiss banks from foreigner are up, not down as all the moaning and groaning might suggest.  But, after noting that, the opinion says:
Yet these strong numbers belie the existential angst among bankers in Zurich and Geneva. Switzerland is bowing to massive international pressure — regulatory, judicial and political — to clean up its banking system, and the big question is how it can remain competitive as a financial center once it has done so. The fabled secrecy that Swiss banks used to provide — and which was a key to its attractiveness as a financial center — has been cracked open and replaced by a more nebulous form of confidentiality and privacy, the full details of which still need to be hammered out in international agreements. 
True, the article notes, the pressure is coming from the U.S.  But:
 Pressure is coming from elsewhere, too. Earlier this month, Switzerland marked a sea change in its thinking by agreeing to sign up to a new global standard on automatic tax information exchange. (The exchange requires governments to collect data about non-residents from financial institutions, and share that information with the individual’s home government.)  In 2011, the Swiss government signed an automatic tax withholding agreement with Britain, under which account holders either declare their accounts or pay taxes anonymously on them. It came close to finalizing a similar deal with Germany, but the German parliament failed to ratify it. 
These measures are part of a worldwide crackdown on offshore finance and tax evasion, and Switzerland has little option but to comply if it wants to maintain its place in a globalized industry. “It’s a huge shift in culture for Swiss banking,” says Stéphane Garelli, a professor at IMD business school in Lausanne. “Everyone is fed up and wants to turn the page.” 
But without secrecy as a competitive advantage, what is the future of Swiss banking? Switzerland has some undeniable strengths, including a long tradition of wealth management, political stability, an independent currency and what Garelli describes as an extensive “ecosystem” of lawyers, fiduciaries, accountants and other experts alongside the bankers. Banking alone accounts for about 6 percent of Swiss gross domestic product, and the banks are major employers. 
Yet the financial crisis took a big toll on the industry. The government had to mount an emergency rescue operation for UBS, and despite the inflow of overseas deposits, as many as one in four private banks have been losing money, according to Tomi Laamanen, a professor at the University of St. Gallen’s Institute of Management in Switzerland. 
Moreover, as Thomas J. Jordan, chairman of the governing board of the Swiss National Bank acknowledged this week, “the most important pillar of the Swiss banks’ export business — cross-border wealth management — has suffered major reputational damage.” 
It’s quite possible that for both of these reasons, the inflow of new money may tail off in coming years and begin to decline, especially as Switzerland faces tough competition from emerging financial centers such as Singapore, as well as existing powerhouses like London. 
And here is the positive -- Swiss banks will have to compete by offering something of real value other than secrecy: 
Today Swiss banks of all sizes are trying to determine what they can offer clients to make up for the erosion of secrecy. The National Bank’s Jordan provided some answers in his speech, saying banks need to ensure they can provide “considerably above average” value added for their customers, as well as stability during crises and “business conduct and reputations far beyond reproach.” 
In other words, that pitch to prospective clients will need to say more than “We can do what banks elsewhere can do, and maybe even as well.” A more effective line, albeit in conservative Swiss banker language, would argue: “We may not be able to protect your secrecy as well as we once did. But boy do we rock — and here’s how.”
Competition is a good thing.

Addendum 6/10/14 5:30pm:

James Shotter, Switzerland’s private banks come to terms with past (Financial Times 6/9/14), here.  Relevant excerpts:\\
The tearing of this veil of secrecy – long a source of competitive advantage for Swiss banks – has put pressure on the fees that lenders can charge their clients. 
At the same time, the cost of ensuring customers are compliant with the tax rules of their home jurisdictions has risen sharply, meaning that banks’ margins have been squeezed. 
As a result of this, many observers expect further consolidation of the Swiss private banking sector, particularly once banks have settled their problems with the US. 
* * * * 
In the absence of secrecy, Swiss banks will also have to be able to offer clients better investment performance and advice than in the past.

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