Swiss stagger under weight of franc fallout

Rapid Swiss currency movements, triggering uncertainty among safety-seeking investors, may have broader implications for private banks. One of Geneva’s best-known institutions, Lombard Odier, has already announced that clients with cash balances exceeding SFr100,000 (€100,725) will be charged 0.75 per cent, reflecting negative interest rates imposed by the Swiss National Bank (SNB).

The feeling among consultants in Geneva and Zurich, intimately connected with the levers of power, is that the SNB was right to quit the peg, previously capping the Swiss franc from rising above SFr1.20 per euro. Some believe this should have been done last summer. Julius Baer sees the move as a mistake.

The Swiss are also keen to point out that any adverse effects on brokerages are not really their fault. Foreign exchange broker Alpari – shirt sponsor of London football club West Ham United – has filed for administration, while Denmark’s Saxo Bank expects to sustain losses from the turmoil. Others are also suffering.

What hasn’t sunk in for financial services players is that standard statistics-based risk management may not suit an environment of frequent structural change. We have seen this before in 1992, when derivatives traders failed to budget for similar massive intra-day currency shifts during the collapse of the European Exchange Rate Mechanism.

If these structural breaks are becoming more common, it could be time for banking CEOs to lock up their key staff with “the mattresses,” along with several days’ supply of coffee and sandwiches, for regular “wargaming” exercises. The global crisis may only be seven years in the memory, but many previously paranoid institutions seem to have dropped their guard.

When management consultancy Oliver Wyman released its latest “Survival Compass” for business leaders breathing in the crisp mountain air of Davos in late January, it noted that average returns of large finance firms have fallen from more than 20 per cent at the turn of the millennium to 7 per cent in 2013. The consultancy also points to “expensive growth of middle management” in the same institutions.

These mounting Swiss franc denominated costs – against a backdrop of foreign currency revenues – will stir up a headwind for private banks, for so long Switzerland’s lifeblood.

“The situation is challenging for the Swiss economy, geared towards exports, but with a Swiss franc cost base,” says Shelby du Pasquier, head of the Banking and Finance Group at Geneva lawyers Lenz & Staehelin and an SNB board member. “This will impact the profitability of the businesses, including Swiss private banks, and will probably result in increased delocalisation outside of this country.”

This means accelerating the shift of some of the cost-base abroad, with a centralised operations HQ and technology platform, yet a growing onshore presence in different geographical markets. 

But let’s not write off Switzerland just yet, echo Geneva’s lakeside voices, talking about a fluid currency picture that could shift significantly by the end of 2015. Any negative impact on Swiss banking revenues may accelerate consolidation, believes Francois Savery, chief strategist at family-run banking boutique Reyl & Cie, favouring emergence of more competitive players in a “new landscape” for the Swiss financial centre.

We should not forget the currency conundrum emerged because the Swiss economy and environment is viewed as “more stable than most of the rest of the world,” argues Stefan Jaecklin, Zurich-based head of Oliver Wyman’s Wealth and Asset Management practice.

“This clearly will offset some of the negative aspects and arguably in the longer term, outweigh them.” In other words, there is no need for us to be overly pessimistic about Swiss private banking.