Swiss supremacy in wealth management has been challenged by recent events such as the collapse of Credit Suisse. Can the original heartland of private banking continue to prosper?
The failure of Credit Suisse and its emergency $3.2bn takeover by banking rival UBS in March 2023, followed by Julius Baer’s private debt debacle, which led to the resignation of chief executive Philipp Rickenbacher earlier this year, were major blows for the reputation of Switzerland as a safe financial centre.
With competition growing around the world, can the heartland of private banking, where the industry dates back more than 250 years, continue to prosper? And what will the landscape look like in the future?
“The collapse of Credit Suisse was entirely predictable and self-inflicted, and a major policymaking failure,” says Beat Wittmann, chairman and partner at Porta Advisors in Zurich.
The bank’s long-term demise, due “to incompetence of management, repeated scandals and wrong incentives”, also has laid bare “key weaknesses” in the Swiss supervisory and regulatory framework, namely the regulator (Finma), the central bank (SNB) and finance ministry (EFD).
Finma is especially to blame, he believes, for its “hands-off” attitude towards top management, supported by the government.
Credit Suisse was given to UBS “as a gift”, with a negative goodwill of $34.8bn. Today the country’s sole globally systemic lender faces a substantial increase in regulatory capital requirements, under reforms that the Swiss government is advocating for.
But this move would only make UBS less profitable for its shareholders, and higher capital buffers would have not changed Credit Suisse’s fate, believes Mr Wittman, his views echoed by other leading commentators.
Silo thinking
What Switzerland must address is “the damaging silo thinking, lack of coordination and bring the framework up to the level playing field of New York, Frankfurt and London”, says Mr Wittman, pointing to lack of transparency and competence in the Swiss regulatory framework.
To ensure a global level playing field, global, systemically important banks must adhere to the same standards, and an international body, such as the Bank for International Settlements, should be responsible for ensuring it, he believes.
Meanwhile, while the parliamentary commission of inquiry is expected to deliver a report on the Credit Suisse debacle in 2025, UBS’s management and the Swiss government are already “at loggerheads”. UBS’s stock price has stalled for months and has “no chance” of competing on valuation level with leading US peers such as JP Morgan and Morgan Stanley.
Unless Swiss policymakers make much needed reforms, UBS will have to migrate to a different domicile, he says, pointing to Frankfurt or Paris, “which have the adequate qualitative and quantitative regulatory resources in place to deal with such a large bank”.
Better regulation would have benefited other banks as well. “[For too many years] legacy assets have been tolerated, and that is very bad for the reputation of Switzerland,” says Mr Wittman.
Julius Baer is marketing itself as a pure play private bank, but its annual reports indicate the bank has generated significant profits from its trading and lending activity to clients, even though the bank lacks expertise and systems to run this business. Incentives at the bank are wrong too, adds Mr Wittman. But with the regulator lacking resources and competence to deal with these situations, he expects more of such cases in the future.
Accountability
Despite the perception, the collapse of Credit Suisse and Julius Baer’s demise have had “no real impact” on the Swiss wealth management sector, says Shelby du Pasquier, partner, head of banking and finance group, Lenz & Staehelin, in Geneva.
In fact, there has been an influx of money from Credit Suisse to other institutions, with some of its clients not wanting to be overly dependent on UBS.
Competition also benefited from Julius Baer’s woes, but to a lesser extent. In fact, although the massive loan write-off hit the bank hard, Julius Baer “was able to stabilise the situation pretty quickly”, says Mr du Pasquier.
The only way the Swiss authority can tackle banks’ activities such as “highly risky lending”, is by holding decision makers accountable, he says.
The introduction of an accountability system and claw back provision on compensation of top managers is one of key recommendations made by the Swiss parliamentary committee, together with the increase of the equity ratio applicable to large banks. While the latter may not go through, the former is likely to be approved by parliament, believes Mr du Pasquier.
“Accidents will always happen, but if we have an appropriate risk framework whereby people are held accountable for what they do personally and financially, it will reduce the occurrence of such situations,” he says.
When it comes to the business model of private banks, there will be a tendency for larger banks to focus more on wealth management, “which is less costly and less risky”, says Mr du Pasquier. Yet, banks will still want to keep “some commercial and investment banking activity” to meet client needs.
Ray Soudah, founder of MilleniumAssociates in Zurich, believes the so-called ‘one bank model’ has never existed, despite what banks claim. Investment, corporate and private banking are separate businesses. “The one bank model has never taken off, because of the lack of a good incentive system that encourages people from different departments to work together,” he says.
In Switzerland, only UBS and some cantonal banks – a category of retail banks in which cantonal governments hold significant stakes and shareholder voting rights – have investment banking capabilities. UBS has much-reduced investment and corporate capabilities compared to the past, following issues in 2008, and because of this reduced scope, it is now having to “get rid” of some of the inherited Credit Suisse clients.
Stricter regulation
Mr Soudah predicts “several years of stricter regulation and oversight on the banking and financial sector” as a reaction to management and regulatory failures, with less tolerance for bad risk management. The withdrawal of the banking licence from two smaller banks, FlowBank and Bank Havilland, earlier this year is testament to this new trend.
“Political backlash against banks” is also another consequence to deal with. “But memories are short,” says Mr Soudah. “Ironically, UBS is hailed as a hero now, for buying Credit Suisse at 10 per cent of its true value, while in 2008 it was rescued itself. And that’s all forgotten now.”
The regulator wants to show “it is tough and strong”, trying to impose new capital requirements, but it was lack of trust from markets and investors in Credit Suisse that caused the bank’s liquidity crisis. This was exacerbated by the fact Switzerland and its banking system are very integrated globally, with most of its private banking assets being international assets.
Regulators should have influenced Credit Suisse’s management long before it got into trouble and induced the bank to sell itself a couple of years before it had to be rescued, he adds. This would have allowed shareholders to get a much better deal, “five to 10 times better”, believes Mr Soudah, and bond holders would have not been wiped out.
Julius Baer’s private debt issues were a consequence of “flamboyance of dealing with mega clients”, which led the bank to deviate from its core business, namely asset management. Most of the private banks in Switzerland are asset managers, not bankers, he explains.
But the regulator could have not influenced individual banking decisions, as banking licences in Switzerland are universal, and “banks are fully licensed to do what they like”.
Yet, the wealth management business in Switzerland continues to prosper, believes Mr Soudah. The number of private banks in the country has reduced significantly in past years, partly because of the 2008-2009 financial crisis, but also to gain bigger distribution networks or acquire economies of scale. But client assets under management in aggregate have not decreased, he says, merely shifted from one bank to another, with only “a very small percentage of clients” leaving the jurisdiction.
According to KPMG, excluding UBS, there are today 90 private banks in Switzerland, versus 160 in 2010. They managed SF2.9tn ($3.4tn) in client assets at the end of 2023, versus SF3.2tn the year before. The world’s largest global wealth manager, UBS, manages SF3.8tn globally, and has the ambitious target of reaching $5tn by 2028.
Smaller players
Recent events may further promote a system where niche or smaller players thrive alongside much larger, international institutions.
Cantonal banks, especially, have benefited from Credit Suisse’s disappearance and will keep growing, because clients find comfort in their “quasi-state status”, says Lenz & Staehelin’s Mr du Pasquier. The Zurich Cantonal Bank is today the country’s third-largest bank and a systemically relevant one.
In coming years, there will be a tendency for smaller banks to let go of their banking licence to become asset managers, which are less regulated, he predicts. “It’s much easier and cheaper to be an asset manager than a bank.” Their focus would be on advising clients and managing assets, relying on banks for the custody role.
While Swiss private banking is focused “on a cautious and long-term approach” and is highly diversified, encompassing universal banks, listed private banks and privately owned banks, recent events have created new opportunities for family owned banks, explains Cynthia Tobiano, deputy CEO group, at Edmond de Rothschild.
“Family owned banks play a crucial role in the stability of the Swiss banking sector. They are the true backbone of this stability, due to their obsession with longevity, strong values, and long-term vision,” she claims. There has been a clear trend for wealthy families to diversify their banking relationships in favour of independent players, who can offer alignment of interest and long-term views, states Ms Tobiano.
Solid ecosystem
Despite its reputation being hit various times over the past few decades, Switzerland remains a leading wealth and asset management centre, says Beatriz Sanchez, chair Americas, Julius Baer.
In a world that is becoming “more politically charged”, the country’s democratic governance is increasingly important, and its geopolitical stability a key strength,
The country’s financial services industry relies on considerable expertise, a well-educated and multilingual talent pool, as well as “a solid ecosystem”.
Switzerland has innovated and adjusted considerably over the past decades, adds Ms Sanchez. “We are a small country, so we have always been very outward-looking. And that outward-looking personality will continue to keep us competitive in this space.”
Scale is also a key strength. Switzerland remains the world’s leading offshore wealth centre with $2.6tn offshore assets booked in Switzerland in 2023, out of $13.2tn of global cross-border wealth, according to BCG.
But competition is growing with other financial centres, in particular Singapore, Hong Kong and the Middle East, proving a more powerful magnet for offshore assets.
While Switzerland is expected to capture about 15 to 20 per cent of global new cross-border wealth through 2028, there will be “strenuous competition” for first place, according to BCG. Hong Kong is expected to overtake Switzerland as the world’s leading offshore wealth centre by 2028.
“Switzerland has a unique value proposition, but we cannot rest on our laurels,” states Ms Sanchez. The country has a significant advantage, having provided “holistic wealth management services” for more than two centuries. But it needs to ride “global mega trends,” she says, pointing to demographics and the generational transfer of wealth, women being increasingly in control of wealth, technology and sustainability.
Core strengths
It is therefore important to upskill people and embrace innovation. In this increasingly complex world, where finance is becoming “weaponised”, the Swiss financial industry and each individual player need to identify their core strengths and value proposition, adds Ms Sanchez.
In fact, the industry is evolving rapidly, and many services originally considered core are now perceived to be commodities, she says. Clients will only pay for differentiation and will choose the most efficient, low-cost providers of those commodities.
Today, believes Ms Sanchez, wealth managers have two options: to go down the route of specialisation or become a universal bank.
“Finance is a very competitive industry, and it is crucial to stay close to clients, to have transparent, open communication with them, even more at difficult times.” It’s also important to explain how mistakes can be remedied, she concludes.
