Is the demise of Swiss private banking gathering pace?

Back in the early noughties, two originally family-owned Swiss banks called Vontobel and Bank Sarasin sought outside shareholders to bolster their ailing balance sheets. Both banks had been hurt by the bursting of the tech bubble and needed new investors to get them through a tough period.

Beyond talk at the time from a few consultants that difficulties at the banks would herald in a period of consolidation in Swiss banking, not much thought was given to the wider implications of what was going on at Sarasin and Vontobel.

That’s largely because less than a few months later in the back end of 2003 up until, and including, much of 2008 Swiss private banks started again to siphon up accounts from the newly minted rich from all around the world and charge fat fees for the privilege. All seemed well in the world of Swiss private banking.

But what was going on nearly 10 years ago represented the first indication that the health of Swiss private banking was beginning to suffer. The boom in between only covered up the widening fault lines.

With news that one of Switzerland’s supposedly more sober private banks is facing US charges against it for allegedly helping Americans evade paying taxes, those fault lines are beginning to look exposed again. Wegelin, based in the out-of-the-way town of St Gallen in eastern Switzerland, always seemed to come across as a sensibly run institution. Indeed, it was conservative, not exposed to the toxic financial products like some of its Swiss counterparts – no doubt helped by being tucked away from the more aggressive financial centres of Zurich and Geneva.

But analysts are now beginning to question whether Wegelin can come through the court case in one piece. More alarmingly, they are also thinking, if it could happen to Wegelin then is any bank in Switzerland safe?

The concerns are palpable, and are being fuelled by other problems besetting Swiss finance. The recent scandal at the country’s central bank, leading to the resignation of its president, coupled with the sale of a majority stake in Sarasin to the Brazilian Safra Group, are prompting further questions over the health of the sector.

Although they aren’t about to admit it, most Swiss banks are having a torrid time in their home market. The ongoing pressure on the legitimacy or otherwise of offshore bank accounts held by Americans and Europeans in the Alpine nation isn’t going away - the US authorities have an additional 10 Swiss banks in their sights. Most of this money is leaving – whether because of regulatory reasons, or generational attitude changes – for its home markets and becoming legitimate. The recent case against Wegelin suggests that pressure on offshore accounts isn’t going away.

That’s going to leave the wealthy asking questions like if they can’t keep their money in Switzerland and evade taxes anymore, then why continue to keep money there?

True, Switzerland will continue to attract offshore money from countries where taxing the rich is less of a contentious issue, and political and economic instability plays a bigger role in reasons to have an offshore bank account. And that’s a lot of the world, including much of the Middle East and a fair few countries in eastern Europe, Latin America and Asia.

But even this money is likely to stay more at home in the years ahead as economic conditions improve, or at least be deposited more with regional offshore centres like Singapore and Dubai. Some Swiss banks have been very good at seeing this trend and are moving resources to these countries.

There’s little doubt that the cache of having a Swiss bank account will continue to have its allure – like a Swiss watch has considerable appeal, so too will an account at a Swiss bank. And the high level of expertise and specialist knowledge in the country’s financial sector makes the country one of the most financially sophisticated centres in the world.

But the trend that first saw its beginnings nearly 10 years ago with Vontobel and Sarasin seeking outside help isn’t going away. Swiss private banking will be a completely different (smaller) animal in 10 years time.