The current financial crisis is the biggest economic disruption I have experienced during my entire career. It is not unsimilar to a classic Greek play, though I hope the outcome will be happier than in the ancient tragedies. Apart from the stock exchange, the Swiss financial centre has been only slightly affected. The problems affecting Swiss banks are all connected with their foreign operations, as is the case with UBS, Credit Suisse, and the large insurance companies. Switzerland’s 372 banks are profitable and are not experiencing any major problems in their principal activities, that is, in wealth management and trade finance.
Still, the unfavourable news surrounding the major banks certainly has an impact on Switzerland’s image, doesn’t it?
The Swiss financial sector is large in relation to the economy. The fact that the country’s largest bank – long viewed as a model internationally – should have committed so many errors caused a shock in Switzerland. The popular reaction was emotional, but the emotion stemmed from events that took place outside of Switzerland and consequently don’t directly impact the Swiss financial centre. Abroad, our financial centre is as attractive as ever. And incidentally, federal government aid has been relatively modest compared to what has been done in other countries.
Many analysts are now coming out in favour of more regulation. Is this the right course of action? Governments are going to end up as shareholders in very large banks and there will certainly be more important interventions in the future. International regulatory agencies will play a greater role, for example in setting the leverage rate. The most important regulatory requirement will probably be greater capitalisation for banks.
All governments have taken steps to support their banks. You have said that if Switzerland had not taken similar action, foreign capital might move to other financial centres. This suggests that apart from their economic aspect, these measures also have a psychological function. This has nothing to do with psychology, but with the perverse effects of any government intervention. By helping the banking sector, you allow it to borrow at more favourable rates; but commercial business outside of this sector will, paradoxically, find it harder to borrow. This creates market distortions. If Switzerland had done nothing, investors might have turned their backs on Switzerland and gone to foreign banks that have received government aid.
Can a state that fails to offer some kind of guarantee to its banks still be host to an important financial sector? It is important to understand that we are confronted here with an exceptional situation that requires an exceptional response. Governments will shed their stocks and loans as quickly as possible. The state has neither the vocation nor the capacities to run a banking system.
In recent weeks attacks against bank secrecy have multiplied. Will Switzerland soon have to cede to the pressures being put on it by the EU and the United States? Switzerland will cede on the day Swiss citizens cede by popular vote. The government is certainly not ready to do so. And all the opinion polls indicate that the population is 80% in favour of bank secrecy. Paradoxically, the countries that created most of the problems in the current crisis are the same ones that are attacking Switzerland most vehemently. You can’t help wondering if this is not a manoeuvre aimed at distracting public attention. The attacks against bank secrecy in reality mask a combat directed against the tax rates offered by Switzerland to business enterprises and which have induced American and European multi-nationals to set up in our country. Geneva and Zurich continue to be very important financial centres and arouse considerable envy elsewhere, in particular in the Anglo-Saxon countries.
In this context, is bank secrecy still a strategic asset? In my opinion it is more important than ever. You cannot have an important financial centre without a high degree of protection. If you take as an example the most intrusive states, such as France and Germany, it is obvious that their financial centres are non-existent. On the other hand, countries like the United States and England have their own fiscal paradises and a well developed trust sector. Seen in this light, this represents the utmost in hypocrisy. Bank secrecy offers no protection whatsoever to criminal activities. In Switzerland, mere tax evasion without falsification is penalized by administrative sanction, and is not a criminal offence. This is applicable not only to the Swiss, but also to foreigners, and there is no reason to apply a double standard here. We should not be ashamed of this system; quite to the contrary: we should keep it at any price.
What lessons have the banks learned from this crisis? If you stick to your area of competence, you’ll be more protected from outside turbulence. This is the case with Pictet. For the last 200 years, we have exercised the same profession and have survived all difficulties, from world wars to financial crises. The major financial conglomerates, which emerged in recent years, have committed major errors which today they are paying for dearly. The lesson is: be prudent. But I doubt that in the future this lesson will have been learned. In recent years the major banks have been guilty of considerable excesses, and their top managers, imagining themselves to be above reproach, have at times lost all sense of reality.
Has the time come for a return to the classic banker, unfettered by exotic and incomprehensible financial products? Creating financial products is not the job of a traditional banker. This has been a matter for investment-bank specialists. Financial engineering has invented financial products that are totally incomprehensible and thus unsaleable today. It is time to return to an approach based on common sense and to keep things simple. The whole field of financial mathematics has put us in a situation from which it is hard to extricate ourselves today. The lesson to be learned from this is simplicity and humility.
So are the real winners in this crisis small banks? The lack of transparency surrounding the financial products and toxic assets on the balance sheets of certain banks is a valid reason for customers to leave and take their business to more specialised institutions with a more local character and higher capitalisation. Those banks, which, like us, did not take part in the marketing of structured products – unsaleable today – are seeing an important increase in new clients. For Pictet & Cie, this has been a record year in terms of capital inflows into private banking. The client of a large bank is confronted not only with the insecurity arising from the current crisis, but also with the stress that affects account managers as major banking groups reorganise. In our bank we have had to add additional, overtime staff to handle new customers. We should be happy about this, but in the final analysis nobody wins. Competition based on fear is not our preferred kind of competition.
In Moscow, President Medvedev announced his intention to create an international financial centre. What do you think of this? Moscow has good chances of becoming a regional metropolis in the medium term. It can become an important financial centre covering, for instance, the countries of Central Asia. At present, there are too many nonviable banks in Russia, and the country has to move toward consolidation of its financial centre. On the other hand, it must become more international, acquire the know-how associated with international finance, and play the game of international competition. Thanks to its natural resources and economic growth, Russia’s wealth has grown considerably in recent years. Surplus reserves in its stabilisation fund and budget revenues are such that this accumulated wealth can form a perfectly adequate basis to support and promote the development of a financial centre. For the moment, the problem is more a lack of know-how than capacity.
Many Russian specialists are interested in Swiss know-how in the financial sector. Could (or should) Switzerland play a significant role in the creation of a Moscow-based financial centre? In view of the speed with which Russia is developing, I don’t think that the culture of Swiss wealth management can be exported to Russia. Russian businessmen are young, and because of that their character reflects a certain impatience. However, a transfer of this culture in the future cannot be excluded, and it is through the transfer of know-how and financial culture that Russia’s financial centre will develop.
