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Banking in the Age of Economic Nonsense

herbert scheidt, präsident der schweizerischen bankiervereinigung und verwaltungsratspräsident der bank vontobel, in den räumlichkeiten des vontobel-hauptsitzes in zürich
Herbert Scheidt, the new president of the Swiss bankers' association, insists the industry must continue to change in order to regain consumer confidence.
  • Why it matters

    Why it matters

    Switzerland’s banks have been under sustained international pressure to crack down on bank secrecy since the financial crisis. That and low interest rates have left them unable to earn cash.

  • Facts

    Facts

    • The alpine country has had to change its culture of banking secrecy as tax authorities and taxpayers around the world have called for action to clamp down on tax evasion.
    • The banking industry in Switzerland, as elsewhere in the world, is struggling to make profits during a time of record low interest rates.
    • Brexit could impact Switzerland’s export-oriented financial services sector.
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    Audio

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On a beautiful late summer morning in Zürich, the new president of the Swiss Bankers’ Association was in a good mood as he looked out of his office across to the majestic mountains on the other side of Lake Zürich. And there is reason for Mr. Scheidt to be cheerful.

Elected unanimously to one of the most powerful jobs in the Swiss banking industry just two weeks ago, Mr. Scheidt’s appointment marks the first time the position has been filled by a German-born candidate, though for the last eight years the 64-year old has held joint Swiss as well as German nationality.

If only the same cheerfulness could be said for the troubled Swiss banks that he now represents. The country’s banking sector has had to transform itself from a model based on bank secrecy, not to mention being saddled with the “economic nonsense” of negative interest rates, he said.

“Many banking activities are no longer turning a profit and in fact this costs many private banks several million a year”

Herbert Scheidt, President of the Swiss Bankers’ Association

Mr. Scheidt started his career with Deutsche Bank, later becoming the chief executive of the Zürich-based private bank Vontobel for 10 years before becoming its chairman in 2011. In his new post, he will preside over a banking association that represents almost all of the country’s 266 banks.

So what does the former Deutsche Bank employee think of the position today of Germany’s largest commercial bank? And is there anything that needs changing at Deutsche Bank, which is currently experiencing the deepest existential crisis of its history.

Mr. Scheidt’s answer is diplomatic and to the point: “Deutsche Bank is still a strong global bank, which supports the German economy,” he said. “Otherwise, I have no suggestions that I would want to make from the sidelines.”

On the subject of whether Europe is heading towards another banking crisis, Mr. Scheidt is a little more forthcoming and occasionally even positive.

“Banks are now in a much more stable position than before the Lehman [Brothers] crash of 2008, but times remain difficult. The persistently low interest rates and the uncertain global political situation are all taking their toll on the industry, but I don’t see any evidence of a real crisis.”

He reserves some of his biggest concerns for Switzerland’s own financial firms. The Swiss banking system has come under severe international pressure in the past few years, especially from abroad with the U.S. and German tax authorities putting pressure on tax evaders.

Mr. Scheidt said he believed Swiss banks have successfully adapted to change and stressed that the banks of the small alpine country have adhered to all international regulations for years. That doesn’t mean there haven’t been serious challenges – and bankruptcies – along the way.

“Swiss banks have been through a tremendously painful and drastic transformation process over the last few years,” Mr. Scheidt said. “Switzerland’s decades-old and proven business model in private banking has been abandoned and the number of Swiss banks has fallen from 331 in 2006 to 266.”

Mr. Scheidt admitted that the Swiss banking industry should have reacted more quickly to international criticism of the county’s culture of banking secrecy. He pointed to the experience of private banker Hans Bär who was widely criticized within Switzerland more than 10 years ago for warning that banking secrecy would make Switzerland “impotent and fat”.

“In hindsight, you have to hold that he was right,” Mr. Scheidt said. “The banks should have addressed the issue of tax honesty among their customers much earlier.  The steps that have been implemented to meet internationally-accepted norms were late in coming, but the important thing is that they were agreed and we have now implemented them.”

Mr. Scheidt is seen as particularly suitable for his new post at the Swiss Bankers’ Association because his experience at Vontobel not only included working in international investment banking but also in asset management, which is an important part of Switzerland’s financial services sector.

For Mr. Scheidt, the support of both parts of the industry for his candidacy was not only important, he made it a condition of accepting the post. “During painful times of financial crisis the bankers’ association has to be able to show its coherence,” he said.

There are other unique challenges for Switzerland. Banks across the western world have suffered under a period of record low interest rates that have eaten away at their profitability. But nowhere has this been more true than in Switzerland, which has been forced to keep its rates lower than the euro zone to avoid its currency from surging in value.

The problem for Mr. Scheidt: There’s no telling how much longer the industry will be saddled with extremely low interest rates.

“For that I would need a crystal ball, but one thing is certain: the economic costs of expansionary monetary policy are immense and the pension funds are suffering [because of the low interest rates],” he said.

“Many banking activities are no longer turning a profit and in fact this costs many private banks several million a year. None of this contributes to the competitiveness of the financial sector, quite the contrary in fact: it is simply economic nonsense,” he added.

But for the Swiss central bank to raise rates, the 19-nation euro zone would have to move first. Mr. Scheidt said it was time for the European Central Bank’s quantitative-easing policy to be brought to an end.

In his view, the policy has bought more than enough time for countries, particularly in southern Europe, to implement necessary structural reforms to grow their economies. The fact that many reforms have yet to be implemented means  “a broad discussion is now needed over why the policy of creating extremely cheap money has not brought about the desired result,” he said.

There are further risks for Switzerland’s banking sector: As a consequence of Britain’s vote to leave the European Union, Mr. Scheidt said he believes Europe is headed for a period of extreme political uncertainty. In this state of flux, many important questions on the future of Europe have not yet been answered.

Switzerland’s financial sector accounts for almost 22 percent of the country’s foreign trade, but much of that business is dependent on being able to do business with the City of London. If the ability of London to carry out international business is reduced because of Britain’s departure from the European Union, then this would directly impact Switzerland’s financial sector.

Mr. Scheidt is in no doubt that the banking industry must continue to change in order to regain consumer confidence, which in the wake of the financial crisis fell to an all-time low because of scandals such as the manipulation of key interest rates, lack of transparency and a bonus culture for top executives.

“We need in our industry a culture that aims to extract not the maximum for banks but the optimum for customers,” he said. “The cathartic process that we have embarked on has been good for the industry, but we are not yet at the end of the process. We want to get back to the position when all our employees can again say: ‘I am proud to work in banking’.”

 

Tanja Kewes is a chief reporter for Handelsblatt and writes a weekly column. Peter Brors is Handelsblatt’s deputy editor in chief, based in Düsseldorf. To contact the authors: kewes@handelsblatt.com, brors@handelsblatt.com

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