Swiss banks at post-secrecy crossroads

As Switzerland's long-cherished banking secrecy practices evaporate, the institutions that helped create the world's largest offshore tax haven are dramatically rethinking their business models in a bid to survive.

Swiss banks at post-secrecy crossroads
Photo: AFP

Already reeling from the painful process of making amends for allowing foreign nationals to hide assets from the taxman back home, the secretive sector is now bracing for another seismic shift.

Under heavy pressure from international regulators looking to root out shady practices after the global financial crisis, the wealthy Alpine nation has agreed to phase out its long tradition of banking secrecy and open the way to the automatic exchange of bank data.

The shift from the long-held mantra among Swiss bankers that accounts should be taxed, but that all information about them should remain confidential, is driving "structural change in the sector", the Swiss Bankers Association (SBA) said this month.

"It must be expected that … a number of institutions in the Swiss banking centre will shut their doors or will be acquired," it warned.

That trend has already become apparent with the raft of mergers announced in the sector this year.

There was J. Safra Sarasin's purchase of US giant Morgan Stanley's Swiss private banking business, while Britain's Standard Chartered said it is looking to sell its Swiss wealth management business.

Julius Baer, one of Switzerland's largest banks, also recently announced it would take over the Swiss private banking operations of Israeli lender Bank Leumi.

Rumour even has it that Julius Baer itself could soon be swallowed by Switzerland's second-largest bank, Credit Suisse.

Last month, auditor PricewaterhouseCoopers estimated around 20 percent of all Swiss banks could eventually go under.

"A lot of banks, especially those of a certain size, are looking forward to positioning themselves on the future private banking model," said Martin Schilling, head of financial services in Switzerland at PwC.

"All banks will not, however manage, to adjust," he told AFP, adding that "there will clearly be further consolidation in the market".

The industry has also been weakened by Washington's crusade to get Swiss banks to make amends for allegedly helping to cheat US tax authorities out of billions of dollars.

More than a dozen Swiss banks have been placed under criminal investigation by the US Justice Department, with some already hit by crippling penalties.

Credit Suisse swung to a loss in the second quarter after it was slapped with a hefty $2.6 billion (€2 billion) fine.

Many others have signed up to a scheme where they acknowledge they may have unwittingly helped US citizens dodge taxes and agree to pay large fines to avoid criminal prosecution.

Industry giants like UBS and Credit Suisse will weather the storm, but a number of smaller banks are under threat, observers say.

After analysing the annual reports of 94 private banks in Switzerland, KPMG and Switzerland's University of St. Gallen found more than one third were in the red.

Those that survive will be forced to rapidly rethink their business models, observers say.

As suspicion of the offshore banking model that long served as a cash-cow for Swiss institutions grows, bankers are shifting to managing clients' assets inside the countries where they reside.

But there is a downside to "onshore banking" too: differing regulatory frameworks mean banks must do three times as much business serving clients abroad to rake in the same profit they make on their Switzerland-based activities.

The Internet is also helping chisel away at the once unshakable standing of Switzerland's age-old institutions, since clients can easily see how much more they sometimes charge than rivals without always showing better results, Geneva University finance professor Osmond Plummer told AFP.

In a sign of the changing times, three ultra-discrete Swiss private banks — Pictet, Lombard Odier and Mirabaud — late last month published their first results since they were founded some 200 years ago.

"This is a sector that changes very slowly," Plummer said, stressing that Swiss banks would now need far more than their reputations to get by.

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Reader question: Can a foreign national obtain a loan in Switzerland and under what conditions?

When it comes to borrowing money from a Swiss bank, nationality may play a role in some cases, but not in others. This is what you should know about this process.

Reader question: Can a foreign national obtain a loan in Switzerland and under what conditions?
Getting a losn in Switzerland is subject to many conditions. Photo by Claudio Schwarz/Unsplash

Like almost everything in Switzerland, consumer loans are regulated by legislation, in this case the Consumer Credit Act.

It defines a loan as between 550 and 80,000 francs, “offered by commercial providers of financial services”. Lower or higher amounts are not subject to the Consumer Credit Act.

As is the case in many other countries, Swiss banks have strict criteria about who they lend money to. After all, no financial institution wants to deal with people who are not creditworthy.

Whether or not a foreign national can borrow money from a bank depends on their permanent place of residence and permit status.

As a rule, Swiss lenders don’t give loans to non-residents. So if you reside abroad, there is practically no chance that a bank in Switzerland will lend you money.

However, some financial institutions make exceptions for cross-border workers. If you fall under this category, you can use this interactive tool, select “ Permit G” under “Residence Permit” and see what, if any, options, there are.

READ MORE: EXPLAINED: What cross-border workers should know about taxation in Switzerland

If you are a foreign national but have a permanent residence status (Permit C), your chances of getting a loan are practically the same as those of Swiss citizens — provided, of course, that you meet all the requirements set by lenders (see below).

What about other permit holders?

If you have a B Permit, you might be approved for a loan, depending on how long you have had this permit — obviously, the longer the better.

However, “you may be offered a higher interest rate or a limited loan amount. This is because of the statistically higher probability that you will return to your home country. Some lenders require the loan to be repaid by the time the B permit expires”, according to consumer comparison site 

Holders of other, temporary or conditional permits are not accepted.

READ MORE: ‘A feeling of belonging’: What it’s like to become Swiss

What conditions — other than residence permit — should you fill to be considered for a loan?

You must be at least 18 years of age, though additional restrictions may apply to applicants under 25 — for instance, a higher interest rate or a limited loan amount. That’s because “lenders are generally more cautious with young applicants as their financial circumstances are usually less settled and the risk of default is deemed to be higher,” Comparis noted.

The same cautious approach applies to pensioners, especially those who have no regular income. The social security payments (AHV/AVS) do not count as income for the purpose of the loan.

There is also other eligibility criteria, based on employment status and salary. People with a regular income have a higher chance of obtaining a loan than those who are self-employed, temporarily employed, work on hourly basis or, logically, unemployed.

Other factors, including your existing debts, are also taken into account in the decision process.

Basically, lenders favour applicants with a stable income and good financial standing, in much the same way as supplemental health insurance carriers prefer young and healthy people.

Keep in mind that if your loan application is rejected, this will be recorded in the database of the  Central Office for Credit Information, making it more difficult, though not impossible, to get a loan in the future.

The same rules do not apply to American citizens

That’s because Swiss and European banks are subjected to US demands to disclose the assets of Americans overseas in order to prevent tax evasion.

As adherence to these requirements is a major headache for the banks and in some cases also violates their country’s privacy laws, financial institutions prefer not to deal with Americans at all, even those who are permanent residents.

If you are a US citizen who also has Swiss nationality, you may have an easier time of it, but could still face hurdles in obtaining loans and other banking services.

There is no immediate relief in sight, although many organisations representing Americans abroad are lobbying in Washington to change the existing legislation.