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Goodbye Bank Secrecy, Goodbye Switzerland

Q UICK HITS Goodbye Bank Secrecy, Goodbye Switzerland Private banks are leaving the biggest centre of

Private banks are leaving the biggest centre of offshore wealth, as growing scrutiny chips away at their profits

No. of foreign- owned Swiss banks 129 145 May ’13 2012 Switzerland remains the biggest
No. of foreign-
owned Swiss banks
129 145
May ’13
2012
Switzerland
remains the
biggest centre
for global
offshore
wealth
with $2.2
trillion
But its Market
Share Slips
27%
25%
In 2011
In 2017
While
Singapore’s Grows
10%
12%
Now
In 2017

private bank in Switzerland by as- setsundermanagement,maysell parts of the unit, CEO Stuart Gulliver signalled in May. The bank doesn’t plan to exit Swiss private banking altogether, he said. Italian insurer Assicurazioni Generali is trying to sell BSI Group, the 140-year-old Lugano-based pri- vate bank. More banks may also be reviewing their presence in Switzerland, said Christopher Wheeler, a London-based analyst. The shake-up in Europe is leading to a widening gap between top per- formers and “also- rans,” McKinsey said in an industry survey last month. Almost a third of private banks in the region had outflows of funds in 2012, while about one bank in six recorded a loss, according to the report, based on an analysis of over 160 private banks globally. “As a result, many players are re- viewing their geographical foot- print, especially in offshore mar-

kets, leading to renewed M&A activity,” the McKinsey report said. An eastward shift in riches is nib- bling away at Switzerland’s lead over rival centres of cross-border wealth. Its market share slipped to 26% from 27% in 2011, and by 2017 may decline to 25%, according to Boston Consulting’s Global Wealth report in May. Singapore is likely to grow to 12% from 10%.

Secrecy Crackdown

The US has been investigating Swiss banks and units of foreign banks in the country, including that of London-based HSBC, after UBS in 2009 avoided prosecution by ad- mitting it fostered tax evasion and delivering data on about 4,700 ac- counts of Americans. France and Germany have been searching for tax dodgers using data stolen from Swiss banks and also sharing some

the information with authorities

in other European countries.

of

Aaron Kirchfeld & Elena Logutenkova

countries. of Aaron Kirchfeld & Elena Logutenkova F or European lenders with private-banking as- pirations, a
F
F

or European lenders with private-banking as- pirations, a presence in

Switzerland used to be a must. Now, with bank secrecy erod- ing and rising compliance costs chipping away at profits, more are saying adieu. The number of foreign-owned Swiss banks fell to 129 by the end of May from 145 at the start of 2012, ac- cording to data from the Associ- ation of Foreign Banks in Switzerland. Assets under manage- ment slid by a quarter to $921 billion in the five years through 2012 as cli- ents withdrew money or paid taxes. A crackdown on secrecy and in- creased regulatory scrutiny may unlock a wave of mergers and ac- quisitions in the next 12 to 18 months, according to bankers, con- sultants and analysts. While Switzerland remains the biggest centre for global offshore wealth with $2.2 trillion, or about 26% of the market, according to Boston Consulting Group, departures may further chip away at the Alpine re- public’s status.

Churn is On

“There will be a bit of a shakeout among private banks,” said Felix Wenger, a Zurich-based director of the private-banking practice at con- sulting firm McKinsey. “Specifically for Switzerland, some foreign players might conclude that an exit is a better option.” Some already have. Lloyds Banking Group, Britain’s biggest mortgage lender, sold its interna- tional private-banking business in May to Swiss wealth manager Union Bancaire Privee, which also bought part of the offshore business in Geneva from Spain’s Banco Santander a year ago. In 2009, Commerzbank sold its Swiss units and ING Groep disposed of its pri- vate bank in Switzerland. More deals may be imminent. HSBCHoldings,thebiggestforeign

Agreements with the UK and Austria to collect taxes on behalf of those countries on accounts held in Switzerland have been in force since January, and Switzerland is in talks with other European countries on taxing secret accounts. The country will join the international push against tax dodgers, Finance Minister Eveline Widmer- Schlumpf has said. “A combination of government ac- tions from the US and the EU and in- creased regulatory pressure is like- ly to trigger further changes in Swiss private banking because it will make it more costly to do busi- ness,” said Francois-Xavier de Mallmann, head of investment- banking services in Europe for Goldman Sachs Group. “We expect consolidation to continue in private banking and to likely accelerate as the uncertainty weighing on the sector decreases.”

New Tricks Needed

The pretax margin for the group of foreign banks in Switzerland fell to 20 basis points in 2012 from 38 basis points in 2007, calculations based on data from the association show. A contraction in profitability is more pronounced for offshore pri- vate banks than for onshore banks, according to the McKinsey report. “Smaller players will either be forced to close or merge with larger banks as the compliance and regu- latory costs become unbearable,” said Eleni Papoula, a London-based analyst at Berenberg Bank. Banks in Switzerland will also need to develop new products and services to attract foreign clients now that banking secrecy is no long- er an argument, said Ray Soudah, founder of MilleniumAssociates, a Zurich-based M&A adviser. “Every country has its own tax rules and reporting, so banks have to have products and reporting for each country, and that’s a huge cost,” Soudah said. As Switzerland tries to transform itself from a haven for undeclared funds, the private-banking land- scape is likely to undergo a further makeover. “Historically most inter- national banks considered their Swiss private-banking presence as an important — and often strategic — part of their footprint,” said Goldman’s De Mallmann. “The question is how strategic will it be at the end of this period.” Bloomberg

Chinese Bank on Top of the World

RUSSELL LYNCH

The financial world’s shift in gravi- ty towards the East was underlined today as China boasts the world’s biggest bank for the first time, ac- cording to new figures. The Industrial and Commercial Bank of China is now the biggest bank in the world in terms of bal- ance sheet strength, with $160.6 bil- lion in tier one capital, according to figures compiled by The Banker magazine. icBc is one of China’s four state-

owned behemoths in the top 10. China’s rise contrasts with the for- tunes of UK-based banks, which now have just one major player — HSBC — in the top 10. Standard Chartered, which does the lion’s share of its business in Asia, was the only UK player to improve its ranking, moving up to 33rd in the global pecking order. Brian Caplen, editor of The Banker, said: “UK banks always used to outperform in the ranking, but for the past several years they

have been slipping back.” The total profit of the world’s top 1,000 global banks is now almost back to its 2007 peak of $786 billion at $749 billion, but the once-domi- nant UK financial sector is punch- ing far less weight in global mar- kets. UK banks now account for just 2.6% of global profits, compared with 11% in 2007. Although the Chinese government has recently clamped down on lend- ers to cool a credit boom, its march into global banking markets is like-

ly to continue. Caplen added: “The strategy now is for more Chinese companies to go overseas, and the more they do that, the more Chinese financial institutions will follow to do their banking.” But the global banking industry is far less profitable in terms of return on capital. Banks now hold $6.2 tril- lion in tier one equity capital, com- pared to $3.4 trillion in 2007, because financial institutions can no longer employ borrowing to the same de- gree to boost returns. The Independent

World View

same de- gree to boost returns. The Independent World View What Went Wrong For Julia Gillard?

What Went Wrong For Julia Gillard?

Minority government and misogynistic politics hastened the fall of Australia’s first woman PM

politics hastened the fall of Australia’s first woman PM Vidya S Sharma embarrass her. With a
politics hastened the fall of Australia’s first woman PM Vidya S Sharma embarrass her. With a

Vidya S Sharma

the fall of Australia’s first woman PM Vidya S Sharma embarrass her. With a woman prime

embarrass her. With a woman prime minister at thehelmforthefirsttime,gender came to the fore in Australian poli-

tics. And it laid bare a starkly misog-

ynisticpoliticalculture.Sexistcom-

ments were pointedly made at her. Personal became political in the most unseemly way, as the fact that she was an atheist, unmarried and childlessgotrakedup:shewas called “barren by choice”, banners screamed“DitchtheWitch”.

Costly Mistakes

Gillard also made political errors. To breathe life into her 2010 cam- paign, she said it was time for “the real Julia [to be] well and truly on display”. This was a heaven-sent gaffe to the Opposition, which tore into her. Later,whenshetoppledRudd,she erred again in not explaining to Australianshowdysfunctionalhis administrationhadbeen. ThentherewasaU-turnthat proveddisastrous:duringthelast days of the 2010 campaign, she

promisedthatshewouldneverin-

troduce a carbon tax. She had to change her stance to get the support

of a Green MP. The introduction of

carbontaxenragedmany,including aright-wingcommentatorwho called her “Ju-liar” on his show. The

WhydidJuliaGillardlosetheconfi-

dence of her party and resign as the prime minister of Australia? On many counts, she led a good

governmentfrom2010tillthelast

week of June: it was largely free of corruption,andinflationwaswell within the Reserve Bank of Australia’s target range of 2-3%. Also,Australiadidwellcompared

withthebatteredWesterncoun-

tries.Sincethe2008financialcrisis,

in contrast to the US and EU econo-

mies,theAustralianeconomygrew by 13%. Under Gillard, Australia alsoenjoyedtriple-Adebtrating fromallthreeratingsagencies, somethingunprecedented.

According to a recent IMF report, the tax to GDP ratio averaged 21.1% of GDP in the five years of the cur- rentLaborgovernment(threeyears of it under Gillard). These levels werelastseenunderPaulKeating’s Labor government in the early 1990s. It averaged 23.4% under the

conservativeHowardadministra- right-wingmediawentallgunsblaz-

ing at her. Even when she toppled Rudd, the media painted it not as a legitimate political victory, but as a coup — from the very beginning Gillard’sgovernment,therefore, had to contend with this image that it was somehow unworthy. Leadingaminoritygovernment severely handicapped her, more so whenGillardcouldnotdiscipline unruly MPs or leakers within her party. On every issue, she had to ne- gotiatebothwithinLaborandwith the independents, as it was a hung parliament,andshewasquickly portrayed as a weak leader. Anotherbigchallengeshefaced was from Tony Abbott: an aggres- sive opposition leader. He often madeexaggeratedclaimsbutshe failed to put a blow-torch to them. All these incidents chipped away at her authority and led to her unwar- ranted exit as prime minister.

governmentsince1940.

But Rudd, never a team player, could not accept the decision. Whenever Gillard seemed to gain traction with the electorate, his supporters leaked cabinet delibera- tions that would undermine and

The writer, based in Australia, advises on countryriskmanagement

tion — described by IMF as “the

most wasteful” of all. So what went wrong for Gillard? ThoughKevinRuddledtheLabor to victory in 2007, his egotism, chaot- ic management style and non-exist- entpeopleskillssawhimbecoming unpopular within the party. It was at

thisjuncturethatGillardchal-

lengedRuddandbecametheprime minister in June 2010.

Sexist Politics

In the August 2010 elections, both theLaborandtheCoalition(of LiberalandtheNationalParty)won 72 seats each in the 150-member House. Four crossbenchers chose to supportGillard,thus allowingher to form the first federal minority

THE OTHER SIDE OF NEWS All Thanks to the Invisibility Cloak JLo Just Didn’t Know
THE OTHER SIDE OF NEWS
All Thanks to the Invisibility Cloak
JLo Just Didn’t Know
The invisibility cloak is a long-time
staple of science fiction and more
recently of the Harry Potter series.
But it has also fascinated scientists.
Britain and the US have long been
working on creating a so-called
cloaking device. Pendry works on
metamaterials that can guide light
A
British physicist, Sir John
Pendry, who first proposed the idea
around them, thus rendering them
invisible. The invisibility cloak is
in
2006, has now won the top honour
thought to have a wide number of
at
the UK’s Institute of Physics for
his pioneering work on this
fabulous concept. Researchers in
applications — and could be used in
military stealth technology.
The Independent
Singer-actor Jennifer Lopez, who
performed for Turkmenistan
President Gurbanguly
Berdimuhamedow in his home
country, says she would not have
performed at the concert if she had
knowledge about his record on human
rights issues. The singer had been
criticised by human rights groups for
singing “Happy Birthday” to the
56-year-old politician.
suddenly
something
The New Language of Photographs NICK BILTON Sergey Brin, Google’s co-founder, had an epiphany about
The New Language of Photographs
NICK BILTON
Sergey Brin, Google’s co-founder,
had an epiphany about the sim-
plicity of communication through
images while wearing Google
Glass, the company’s contro-
versial high-tech glasses.
Brin said he was eating a
meal when he received a text
asking what he was doing.
He snapped a picture with
his glasses and replied
with it. “It was fascinating
to see that I could just reply
with a photo,” he said. He
didn’t need to type anything;
the image was enough.
Photos, once slices of a mo-
ment in the past, are fast becoming
an entirely new type of dialogue.
The crowd is learning that com-
municating with a simple image is
easier than bothering with words.
“This is a watershed time where
we are moving away from photog-
Photos are creating
a new type of
communication
raphy as a way of recording a past
moment,” said Robin Kelsey, a pro-
fessor of photography at Harvard,
and we are “turning photography
into a communication medium.”
Not surprisingly, the largest so-
cial networking companies are
spending billions of dollars to be
the place where consumers latch
onto these visual nods. While it
might seem that Yahoo’s Flickr,
Facebook, which also owns
Instagram, and Twitter are fight-
ing to become the ultimate online
photo album or video vault, these
companies are really fighting to
provide the service for the newest
way to communicate.
In another form of brisk visual
response, Snapchat is a mobile ap-
plication that allows a person to
take and send a picture or video,
then control how long — up to 10
seconds — it’s visible to the person
who receives it. After the photo is
viewed, it disappears forever, like a
casual exchange on the street.
“You have now images that have
no afterlife,” said Kelsey. “They are
simply communicative.”
From the paleolithic drawings of
the Lascaux Cave in France to the
fleeting pictures of Snapchat, over
20,000 years or so we continue to
express ourselves through images.
But the art of ancient hunters
never had the opportunity to go
viral. Evan Spiegel, Snapchat’s
co-founder, said that Snapchat us-
ers sent 200 million images a day.
Instagram said that people
shared 45 million photos a day on
the site, and 16 billion in total
since it began less than three
years ago. On Facebook, people
share 300 million images each
day, or 100 billion a year.
It’s a shift that appears to be com-
ing at the expense of the last big
thing. Images sent between cell-
phones are on the rise as texts con-
tinue to fall, according to CTIA, the
trade association for the wireless
industry. So isn’t this another blow
for the language where children
won’t even bother to communicate
in LOL-speak anymore?
“We’re tiptoeing into a potential-
ly very deep and interesting new
way of communicating,” said
Mitchell Stephens, author of The
Rise of the Image, the Fall of the
Word. “And you start in the shal-
low waters.” NYT