Apologies to my non-German speaking readers. The document to which this post refers is in German but its main points are summarized in the post.
This first “oldie” post is about a speech that I gave over twenty years ago (in 1989) in Basel to an audience of about 100 Swiss bankers. At the time, I was running a small cap boutique in London. The bankers were a rather smug group, much more so than they would be today, and they did not much care for this outsider’s critical views on the Swiss capital market. I am posting the summary of the talk because some basic issues have not gone away in the intervening years: our tendency to consider Switzerland a “special case” to which special rules should apply, preferably of our own making, and our inability to understand that other people may consider this unreasonable. The current discussion about banking secrecy and offshore private banking is a classic example of this.
I had been asked to talk about the challenges for the Swiss capital market in the 1990s as seen from abroad. My talk covered three areas: investment in Swiss stocks by foreign institutional investors, portfolio management in Switzerland and Swiss stock exchanges. I was rather critical on all three issues. In those days, Switzerland was a bit of a backwater with archaic rules that discriminated against foreign investors and with banks/brokers who found it difficult to provide an adequate service to an institutional clientele. Most Swiss corporations had dual share structures, financial statements were largely devoid of meaningful content and front running and insider trading were quite common and very obviously tolerated. Progress has been made on all fronts but minority shareholders are still discriminated against and many local rules appear to lack teeth. On portfolio management, I contrasted the great reputation of Swiss (offshore) private banking with the lack of success of Swiss banks as institutional asset managers – the point being that they were mostly unable to compete on a level playing field. In that context, I also mentioned the potential conflicts of interest introduced by the universal banking system, given the lack of serious Chinese walls and minimal supervision. My rhetorical question of which client of what part of a universal bank might get the first phone call in case of a serious problem was widely quoted in the media but not much appreciated by the audience. Finally, Switzerland had too many regional stock exchanges at the time. They offered limited liquidity and rather poor execution. But this is the one area where serious progress has been made.
The basic message of my talk was a reasonably polite suggestion to the assembled bankers that they and the services that they offered were perhaps not quite as good as they thought and that, as a consequence, their competitive edge was likely to be unsustainable. But the panel discussion that followed my talk demonstrated that nobody believed my arguments. The locals were simply too comfortable in their highly profitable little world.
The tenor of the current debate on offshore private banking and banking secrecy suggests that a non-negligible part of the Swiss banking industry remained stuck in the mindset of the late eighties. For them, Switzerland is indeed still a special case that deserves privileges. Some Swiss institutions have made enormous progress and have become leading players in the global markets, but many others refuse to face the fact that traditional offshore private banking is about to disappear. It was a great business while it lasted but only fools could have ever believed that it would last forever.
Switzerland used to have a number of world class engineering firms. Many are gone, most of those that remain are but a shadow of their former self. Inept management, in particular the inability to adapt to technological change and to face the challenge of new competitors, is the main culprit. Traditional offshore private banking is likely to follow their example with similar regrettable consequences for employment. Only those institutions who had the foresight to develop the skills necessary to meet the competitive challenges imposed by a level playing field will prosper, the others will and probably deserve to fail.
Download the pdf file of the summary of the talk.