THE END OF BANKING SECRECY – THE END OF SWITZERLAND?
“Switzerland is simply a large, lumpy, solid rock with a thin skin of grass stretched
~ Mark Twain
Last week I returned to Switzerland from Miami, where we held our latest Inner Circle Briefing on April 28th. The event was both interesting as well as very gratifying. The group of people that attended consisted of long-time friends, clients and business partners, all of whom were very sophisticated and engaged in the topics we covered.
The general topic of our Briefing focused on “The Future of Offshore Investing for Americans”.
As part of that discussion, we also took a closer look at the following questions:
Is Switzerland doomed after banking secrecy has been broken?
Is Switzerland still a safe haven?
Will Switzerland and its private banking industry survive the rapid regulatory changes and attacks by “bankrupt nations” with an interest in having a piece of Switzerland’s success?…
In response to the aforementioned questions, I shared some hard facts and figures regarding Switzerland with the group. What struck me was the expression of surprise on the faces of many attendees; clearly, although the group was very familiar with Switzerland, they too had been concerned and led to believe that Switzerland is hurting and fledgling.
This, of course, is the result of on-going propaganda and the continuous denigration of Switzerland in the mainstream media.
However, it has little to do with reality.
Is Switzerland still a safe haven for investors?
The question of whether Switzerland will be destroyed by the “end of banking secrecy” is not unwarranted.
Mark Twain was correct: Switzerland may indeed be described as a rock with grass over it. Contrary to countries like Norway, who benefit vastly from the production of oil and gas, Switzerland has never been blessed with an abundance of natural resources.
Historically, it was a poor country of farmers and mercenaries.
However, over the past 300 years or so, Switzerland increasingly developed into a wealthy and esteemed nation. James Joyce, the famous Irish writer, went as far as to say that Zürich’s Bahnhofstrasse was so clean that “one could drink minestrone soup off it”. Maybe that was true at one point. Honestly, I would not advise it today however…Switzerland is not THAT clean.
Some believe that the Swiss success story is based merely on a single gadget, that of banking secrecy. This view would of course imply that Switzerland has little outside of banking secrecy; without it, Switzerland’s success story would come to an abrupt and rapid end. Obviously, now that the loss of banking secrecy has largely become reality, one would therefore expect Switzerland to be in trouble and that it would hit the financial services and banking industry of Switzerland first…and hardest.
But let’s take a closer look at Switzerland and Swiss banking in general. Has the tide changed? Are investors fleeing from Switzerland in droves? Is the capital outflow resulting in the destruction of the Swiss financial center?
Switzerland’s economy is not built on financial services alone Contrary to a common belief, Switzerland does have a well-diversified economy. It is, for instance, one of the biggest exporters of machinery and high tech products in Europe.
Manufacturing, one of Switzerland’s most important economic sectors, consists largely of the production of specialist chemicals, health and pharma goods, and precision measuring instruments, to name a few. In other words, Switzerland does not exist on banking alone.
However, in 2013, the Swiss financial center made up roughly 10.5% of the country’s GDP.
That is a substantial piece. Therefore, the demise of the Swiss financial services industry would certainly put a considerable dent in the Swiss household.
Switzerland continues to be the world’s leader in cross-border wealth management and private banking.
For many years, Switzerland held the largest global market share in the realm of cross-border wealth management and private banking.
It continues to do just that.
In 2012, 26% of the total market was captured by Swiss financial institutions. No other country even comes close. In
aggregate, Singapore and Hong Kong only hold a second ranking with half of the market share of Switzerland.
The question is whether this is merely a legacy of former more glorious days, or whether the recent years, particularly the years since the UBS crisis and since America’s Department of Justice (DOJ) has taken Switzerland into its crosshair.
One would expect – and that certainly is the common adage you will generally encounter in the media – that client assets have fled from Switzerland in leaps and bounds, never to be heard from again. The common belief might be that Swiss banks and other financial services players are shrinking, set in a long-term mode of demise and suffering.
Well, the facts paint a very different picture altogether. Not only is the Swiss economy overall one of, if not the strongest economies in the world today, the volume of assets held in accounts with Swiss banks have seen substantial growth over the past three years.
From 2011 to 2013, total securities held with Swiss banks have grown from CHF 4.113 Trillion to CHF 5.097 Trillion, an increase of 24%. The value of securities held for foreign clients have grown even more, from CHF 2.162 Trillion to CHF 2.768 Trillion, an impressive 28%.
This growth, by the way, is not explained with investment performance. Overall, the investment performance of client portfolio during the past three years has been stable, or in low gear at best.
In conclusion, one can firmly state that the assets on deposit and under management with Swiss banks continue to grow.
In fact, after a few years of stagnation and retreat prior to 2009, the growth has picked up over the past few years. So, despite all the bad news, despite all of the Swiss-bashing and the spectacular, albeit largely irrelevant, hunt for “tax evaders”, international investors continue to seek the safety and solidity of Switzerland’s banking center.
However, the key observation which you may have noticed already is the following:
The largest growth by far has taken place in the institutional investors sector. From 2011 to 2012 that market sector has grown from CHF 1.512 Trillion to 2.107 Trillion, a whopping 39%! Institutional investors – funds, trusts, asset managers, pensions, etc. – are depositing their assets in Switzerland, and they are doing it in big numbers.
Meanwhile, private investors indeed may have successfully been “scared away” from Switzerland. The numbers there show a stagnating picture. From 2011 to 2013, the value of securities held in Swiss banks for private investors grew by less than 3%. And, from 2012 to 2013 there was no growth at all. It is quite secure to assume that the same can be expected from the coming year.
What does this tell you?
While many private investors can be bamboozled into believing that the end of banking secrecy would imply the end of Swiss private banking and wealth management, the big money knows better.
Big and institutional investors are turning to Switzerland more than ever before. While most countries around the world are fighting with high unemployment numbers, with budget deficits and debt, Switzerland’s stands out as a rare example of solidity and safety.
The Swiss economy – a unique and positive outlier.
Switzerland is one of the wealthiest countries in the world. Low inflation rates, low capital costs, a good investment climate and solid purchasing power make the Swiss economy one of the most liberal and competitive in the world. The country’s gross domestic product is considerably above the EU average.
Last year, once again, it was voted as the most competitive economy in the world by the World Economic Forum (WEF).
According to the WEF study, the Swiss success story was largely based on the fact that Swiss governmental system is built on the principle of federalism. There is a high degree of grassroots involvement in politics. I would agree with that. But, let’s have the facts speak for themselves once again.
Contrary to literally all other major economies in the world, amidst a global economy driven entirely and exclusively by breakneck monetary expansion and debt, Switzerland continues to write budget surpluses year after year.
In 2013, the Swiss debt to GDP ratio stood at 36.4%. While other major economies, including the US, Germany, Great Britain or Italy, are dealing with growing debt loads and debt to GDP ratios of over 100%, and while Japan is even looking at a debt to GDP ratio of over 200%, Switzerland is actually reducing its very low debt load even further.
The single most important goal of fiscal policy is (or should be) to make sure the private sector grows faster than the government. This “golden rule” is the best way of enabling growth and avoiding fiscal crises.
Growth without the helping hand and cheap money of central bankers?
This must sound like blasphemy to the ears of many current-day “economists”. Yet, the Swiss facts speak a clear and unambiguous language.
Just a few economic facts and figures to prove the point.
Can an economy grow while reducing its debt? Can you save and still be prosperous? Possibly, some 50 years ago, most people would have responded with a quick and emphatic “yes”. However, today more than ever, Keynesians rule the world, or at least the central banks and financial system, and they certainly have a huge influence on the belief systems of investors. Most have become acquainted with and used to the current-day economic wisdom based largely on the quantity theory of money, whereby the growth of money supply, all else equal, will increase nominal GDP. John Maynard Keynes considered this, and his favorite formula (MV = PQ, or whichever diversion thereof he may have applied), “true without question”.
Switzerland’s success and growth, empirically, appear to prove him wrong. During the last decade, Switzerland outperformed other developed economies in terms of real GDP growth.
The Swiss economy proves a further current-day economic wisdom to be wrong. Switzerland’s currency, the Swiss franc, has been considered a strong safe haven currency for many decades. However, the assumption is that economies with strong currencies will suffer in terms of their trade balances.
That again has been proven wrong in the fact that Switzerland, despite its strong currency, has been producing trade surpluses for the past 15 years and more.
For many decades, the German currency (Deutsche Mark) was one of the strongest currencies. Yet, Germany has been and to this day is considered the export champion amongst western nations. A weak currency does NOT automatically translate into a weak trade balance. That is just another myth constructed by those who pretend to “manage the economy and currency” by merely increasing the money supply and devaluing the currency.
Ultimately, the economic strength of a nation will be judged by its people and reflected in statistics such as wealth per capita and employment levels. Here too, Switzerland stands out as a rare exception. With an unemployment rate (based on transparent and trustworthy numbers, by the way…) of only 3%, Switzerland effectively continues to enjoy full employment.
BUT, political and economic challenges exist
No such success comes without challenge or envy. Switzerland is a small country with only 8 million residents. It is smack dab in the middle of a Europe that, despite the recent calm and supposed recovery trend, is on the cusp of economic and financial collapse. It is a rare exception of fiscal and economic health. It should not come as a surprise that the debtor nations around us are interested in getting a share of that cake.
The political pressures on Switzerland are thus considerable and are being confronted continuously. Furthermore, the economic implications to be expected from the wake of decades of increasingly low interest rates and the growing credit / debt problems that have come with it will not leave the Swiss economy unscathed.
For instance, property prices in Switzerland, particularly in the private sector (owner-occupied apartments, single-family homes and rented apartments) continue to rise and do look toppish, if not “bubble-ish”. Low mortgage rates, with real interest rates in the negative, have driven the Swiss real estate market upwards. Now the expectation for rates to increase in the near future and the concerns over the effect on property owners and the economy are justified.
Furthermore, with inflation rates in the negative zone, Switzerland, like the rest of Europe, faces the ugly specter of deflation. Depending on how things develop in various emerging markets, but most importantly in Japan and China, Switzerland faces considerable deflationary prospects.
Don’t be misled by the drums of debtors!
In conclusion, while Switzerland certainly faces a number of challenges and risks ahead, it is not at all on the road to demise. Very much on the contrary, the Swiss economy is doing amazingly well in the midst of economic uncertainty. And, its financial sector continues to grow.
The reason Swiss banks see a growing inflow of assets, particularly in the institutional sector, lies in the fundamental strength of the Swiss system – its direct democracy, its independence and neutrality, its decentralized confederate structure, fiscal control and tax competition.
According to Jay Leno, “Senator John Kerry released his plan to eliminate the US deficit. He said all we have to do is find a really rich country like Switzerland and marry it.” I’m not sure that will ever be an option. But, certainly, for investors in search a safe haven for the purpose of jurisdictional diversification, Switzerland remains without question the number one destination.
If in doubt, follow the money! Large institutional investors are depositing their wealth in Swiss banks as fast as they can. They must have their reasons and have decided to put their trust in that large, lumpy, solid rock with a thin skin of grass stretched over it.