The Regulation of Foreign Banks in Switzerland (1956-1972)

Thibaud Giddey

Foreign Financial Institutions and National Financial Systems2013 EABH Annual Conference

Warsaw, 8 June 2013

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Structure of the presentation

1. The growth and specificities of the Swiss financial

centre (1945-1970)

2. Foreign banks in Switzerland: development, origin,

motivations

3. Reactions of Swiss authorities: dissuasive strategy

followed by regulations.

4. Conclusions

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Source: Mazbouri/Guex/Lopez, Projet Place Financière Suisse.

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Source: Mazbouri/Guex/Lopez, « Finanzplatz Schweiz », in Halbeisen/Müller/Veyrassat, Wirtschaftsgeschichte der Schweiz im 20. Jahrhundert, Zürich, 2012, p. 477

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Source: Meyer, Max, Die ausländischen Banken in der Schweiz, 1975, pp. 94-96

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Source: Pecchioli, Rinaldo (éd.), Les pouvoirs publics face à l’internationalisation des activités bancaires, Paris : OCDE, 1983, p. 72

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National origin of foreign banks in Switzerland (as share of total assets of foreign

banks)

Source: 1958: Author’s calculations based on (E 6520(A), 1983/50, vol. 1, dossier « Ausl. Banken 1959-1974 »). 1972: Meyer 1975, 24.

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Attractiveness of Switzerland

• Liberal banking regulation: – Low barriers to entry: minimal requirements.– No separation of commercial and investment banking

activities.– Banking secrecy

• Political stability, neutrality

• Geographic position, multilingualism

• Stability and strength of the Swiss franc

• Lenient tax system

• Reputation as a safe haven spared from war

• Prestige and competition reasons

• Several internationally-active companies, especially in the commodity trade business

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3. Reactions of Swiss authorities

3 phases:

1958-1965: appearance of the ‘threat’ of foreign banks, dissuasive tactics

1965-1967: financial scandal, increase of the number of foreign banks, soviet-bank

1968-1969: parliamentary intervention, federal decree ‘establishing the system of license for foreign-controlled banks’

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3. Reactions of Swiss authorities (1956-1965)

Arguments against new foreign banks

• Swiss Bankers Association:– Threat to the reputation of the Swiss financial centre– Increased competition in the wealth management market– Presence of foreign banks could amplify international

restrictions on the entire banking industry.– Domino effect– Overbanked market, lack of qualified staff, wage inflation

• Swiss National Bank:– Inflationary effects due to the inflows of foreign capital

through the foreign banks

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Measures to take against foreign banks

• Regulatory change could lead to unwanted reforms

1956-1968: avoid legal modification by adopting a dissuasive strategy (indirect obstacles):

•Refuse the opening of interbank payment accounts by the central bank

•Restrictive policy in the granting or extending of residence permits

•Foot-dragging tactics in the processing of requests

3. Reactions of Swiss authorities (1956-1965)

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April-July1965 : “Muñoz Scandal”

March 1966 : opening of the Wozchod Handelsbank AG

Revision process of the banking law initiated in 1966

Swiss Bankers Association makes the question of foreign banks its hobby-horse in case of a revision of the banking law.

3. Reactions of Swiss authorities (1965-1967)

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The system of licenses for foreign-controlled banks (21 march 1969)

4 conditions to meet in order to obtain a license:•Reciprocity should be granted to Swiss banks

•Company name should not suggest any Swiss origin

•Inopportune advertisement with the Swiss head office should be avoided

•Respect Swiss monetary policy

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Effects of the new regulation

• In the short-term, no reduction of the number of requests (1969-1972).

• Reciprocity = only condition that could actually justify the refusal of a request.

• Creation of the Association of Foreign Banks in Switzerland in 1972.

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Conclusions

The passing of the 1969 decree met the needs of Swiss banking interests in four ways:

1. Attempt to quickly limit the expansion of new competitors without necessarily questioning the very liberal regulatory framework

2. The question of the limitation of foreign banks played an important role in the delay in the revision process of the banking law.

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3. Effort to silence international criticism directed against the Swiss banking haven, by imposing slightly higher entry conditions for foreign banks

4. Reciprocity clause used simultaneously as a protectionist measure to prevent the establishment of new competitors and as a diplomatic tool for the expansion of Swiss banks. In fact, the expansion of the international network of Swiss banks took place mainly in the 1970s.

Conclusions

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Thank you for your attention !