No more dirty money for Swiss banks – what happened?
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In the world of high finance, Swiss banks have long been the embodiment of discretion, stability, and immense wealth. However, the winds of change are blowing, and the prospects for Swiss financial institutions appear bleaker by the day. Are these once-mighty banks headed for extinction?
For generations, Switzerland’s banking sector held the reputation as a fortress of financial secrecy, attracting the world’s elite to entrust their assets within its vaults. The golden age of Swiss banking, however, appears to be fading into obscurity.
A fundamental misstep by Swiss banks was their decision to forsake their sacred secrecy. This seismic shift came under international pressure for greater transparency. The allure of Swiss banks as a sanctuary for the world’s wealthiest to shield their fortunes has now been compromised. In a world where information flows freely, the cherished sanctuary of Swiss banking secrecy has crumbled, and with it, the trust of the global elite.
A looming and formidable challenge emanates from the United States, where the government has deftly leveraged every available opportunity to impose exorbitant penalties on Swiss financial institutions. The genesis of this friction can be traced back to the Foreign Account Tax Compliance Act (FATCA), a legislative measure compelling Swiss banks to divulge intricate financial particulars not only pertaining to American account holders. The repercussions of this legislation have resounded throughout the industry, prompting numerous banks to reevaluate their associations with American clients as well as those hailing from the Middle East or Asia.
In a twist of absurdity, clients from Asia, despite having no substantive ties to the US, find themselves compelled to execute FATCA-related documentation. This peculiar compulsion has been instigated by Swiss banks, which, driven by an apprehension of incurring future penalties, have mandated the signing of FATCA documents even for their domestic customers. This regrettably has eroded the once-unassailable bedrock of trust that was inherent in the relationships between Swiss banks and their clientele.
Furthermore, Swiss banks’ inclination to align themselves with the European Union has alienated wealthy clients from Asia. The unpredictability of Swiss institutions’ compliance with international sanctions in an ever-evolving geopolitical landscape has eroded the trust that once characterized these relationships. Swiss banks are no longer seen as a stable harbor in the tumultuous sea of global finance.
Recent financial data paints a dismal picture for Swiss banks. According to the Swiss Bankers Association (SBA), aggregate annual profits fell by a substantial 16.3% to CHF6.5 billion (around $7.2 billion) in 2022.
UBS: Too big to fit
The takeover of Credit Suisse by UBS has added turbulence to the already troubled Swiss banking sector. The transition, accompanied by negative stock market developments and client fund shifts, has further strained the sector’s profitability. The aggregate balance sheets and assets under management have also witnessed declines.
UBS is grappling with a substantial exodus of highly skilled personnel defecting to rival firms. Following its merger with Credit Suisse (CS), UBS announced layoffs numbering in the thousands, yet it has also witnessed the departure of individuals pivotal to its future prospects. Domestic operations have been hit particularly hard, with the bank hemorrhaging seasoned professionals. In the wake of the CS merger, competitors have seized upon the opportunity presented by the sudden availability of numerous top-tier talents. These departures have not been confined to Switzerland alone, as they have reverberated throughout the global wealth management and investment banking sectors of UBS. The competition is luring employees with heftier compensation packages and improved terms.
UBS faces cost-cutting imperative after Credit Suisse acquisition
In the aftermath of its acquisition of Credit Suisse, UBS is confronted with an immediate need for rigorous cost-cutting measures. The banking giant now boasts an extensive global workforce of almost 116,000 employees, including a significant 35,000 personnel situated in Switzerland. To address this challenge, the bank must swiftly embark on a campaign to streamline its operational expenses.
Despite these setbacks, the number of employees in Swiss financial institutions has continued to grow, albeit with an uncertain future. The declining number of banks, which amounted to just 235 in the Swiss financial center at the end of 2022, has not yet significantly impacted business performance.
Looking ahead, Swiss banks anticipate that a turnaround in interest rates will have a positive impact on profits. However, challenges loom on the horizon, including the cost of IT systems, regulatory measures, and potential reputational risks that could threaten customer confidence.
In a revealing interview with the Financial Times, prominent Swiss banker Boris Collardi acknowledged that Asian clients were shocked when “Bern matched all of the EU’s sanctions against Russia,” and yet Switzerland portrays itself as neutral. Asian clients of Swiss banks, in particular, he says, are now wondering whether that neutrality actually means anything at all, asking, “OK, so can we still trust Switzerland?” He added that, as anyone with an ounce of experience knows, all the actual dirty money “has gone to Dubai and elsewhere in the Middle East.”
In the end, the once-venerable Swiss banking sector stands at a crossroads, and its future is far from assured. It must adapt to a changing world or risk becoming a relic of a bygone era. The shift away from banking secrecy, international pressure, and evolving client preferences all paint a picture of an industry in transition, one that must navigate treacherous waters to remain relevant on the global financial stage.