Private bankers seeking break from Swiss crisis-era rules

A David vs. Goliath battle is brewing in the world’s biggest hub for offshore wealth. Big banks are pushing back against Swiss plans to relax rules that are making it hard for small financial firms to compete against the likes of UBS Group AG and Credit Suisse Group AG. While Switzerland is home to about 300 banks and securities dealers, most – about 260 – have no more than a few billion francs in assets. Together they represent just 10 percent of total assets.

“There should be differentiation in regulation between different types of banks,” said Yves Mirabaud, president of the Geneva Financial Center industry association and senior managing partner of family-owned Mirabaud & Cie. “This is contested by the large banks.”

“The big banks prefer to have everyone treated the same way as they are, for obvious reasons,” he said in an interview at his Geneva office.

Regulations in Switzerland have become more stringent and complex since UBS’s state bailout in 2008, drawing complaints from small banks that they are paying the price for a crisis they didn’t cause. Now the country’s financial regulator says some rules introduced to control big banks may have given them an competitive edge because the regulations are more expensive for smaller rivals to apply.

Major banks could be hard-wired to influence regulation to keep barriers to entry “nice and high,” Finma President Mark Branson said last week in a speech outlining plans to make it easier for small banks to report liquidity and capital adequacy. Other proposals include allowing them to perform audits every three years instead of annually.

Small banks are an advantage for the industry because they readily offer sophisticated services, have close contacts with customers and know the ins and outs of their localities. They are just right size for “road-testing and driving innovation,” said Branson, a former banker at UBS. 

Yet smallness has drawbacks. Rural lenders and boutique wealth managers are generally less profitable than big banks because they don’t benefit from cost-savings based on scale. UBS Chief Executive Officer Sergio Ermotti and Credit Suisse Chairman Urs Rohner have said Swiss banks need to consolidate to boost profitability. 

“It is important to Finma that small banks have a fair chance to grow, progress and continue to operate profitably in their various value propositions,” Branson said. “That is why the unnecessary hurdles and costs faced by small banks should be identified and wherever possible eliminated.”

A fixture in Swiss banking for almost 200 years, Mirabaud manages about 31 billion francs (USD36 billion) in client assets. That’s 60 times smaller than UBS, the world’s largest wealth manager. About 10 percent of its workforce is employed in making sure the bank follows laws, regulations and business standards, areas that barely existed 20 years ago.

“Our concern is the cost of doing business is more and more important,” Mirabaud said. “It is proportionally more expensive for us to calculate ratios, do reporting, have yearly audits.”

On a more positive note, Mirabaud said the bank’s brokerage may break even this year after an overhaul prompted by several years of losses. The business has gone through “tremendous changes” to make it profitable again, he said.

Swiss banks manage the largest share of the world’s privately held offshore wealth, a position under pressure from Singapore, Hong Kong and the Channel Islands.

Finma plans to set up an expert panel and to test proposals on some banks next year. The new rules would concern only the two smallest categories. The regulator classes banks in five categories based on total assets, assets under management, deposits and required capital. 

Credit Suisse and UBS are in the first group, meaning they have the potential to destabilize the financial system. Mirabaud is a category four bank with a broad international clientele, mainly in South America, Eastern Europe and the Gulf countries. It employs around 700 people, half of them in Switzerland.

“It seems like Finma is taking this issue into their hands. Whether in a good way or not – it’s too soon to say,” Mirabaud said. Bloomberg