EA planned tightening of EU guidelines endangers one of the most important pillars of the Swiss wealth management banks. According to experts, if the supporters of a sharp capital market reform prevail in the European Union (EU), over time the hundreds of billions of francs worth of business with assets booked by rich Germans in Switzerland will erode. A corresponding draft has startled many Swiss banks.
“The worst case scenario would mean that cross-border business with Germans could no longer be conducted in this way,” explains Norman Karrer from banking consultant ZEB. How drastic the reform ultimately turns out depends on the talks between the EU bodies in the coming months.
The EU is currently working on a comprehensive adjustment of the capital guidelines. The so-called Capital Requirements Directive VI (CRD VI) stipulates, among other things, that the rules for EU market access for banks from third countries are to be standardized. At present, individual countries have a lot of leeway in this regard. While France or Italy, for example, are restrictive, Germany allows banks from outside the EU to offer services across borders. According to a draft by the EU Commission, this could now be over.
“Switzerland is collateral damage”
This would mean that only banks with a physical presence would be allowed to actively serve customers in the relevant EU country. One driver of the change of course was Brexit, explains a Swiss industry representative. “Switzerland is collateral damage, it’s actually aimed at the UK.”
The Swiss institutes are unsettled. “This is a highly explosive topic,” explains a banker who wished to remain anonymous. And the Swiss institutes have a lot to lose. According to the SBA Banking Association, a total of CHF 2.4 trillion was held by private customers from abroad in banks in Switzerland in 2021. An expert assumes that a fifth to a quarter of this could come from Germany. In the case of smaller institutes, this proportion is likely to be much higher.
Should CRD VI be implemented in a strict form, Swiss banks such as UBS, Credit Suisse, Julius Baer and dozens of others would not lose this money immediately. But the consultants could no longer address customers who live in Germany from Zurich, Basel or Geneva. In addition, the banks in the neighboring country should no longer be actively recruiting customers. Together, this would lead to customer deposits dwindling over the years due to inheritance or expenses for real estate, for example. “The annual base loss is about five percent,” estimates Karrer. “It’s much more difficult to acquire new customers if you can’t actively approach them.”
Germans head for Switzerland as a safe haven
In order to counteract such a shrinkage, the banks could serve customers locally, i.e. from a German branch. The large asset managers in particular are already doing this, but the volumes are significantly lower than in the offshore business. Also, it’s not a full replacement. “It’s a different business with different customers and different products,” explained the Swiss industry representative. Many Germans deliberately bring part of their money to Switzerland. In contrast to the past, it is no longer about hiding black money. Clients wanted to diversify into a different currency and jurisdiction to protect assets in times of crisis.
For many small banks, setting up branches would also be too expensive. A total of 56 Swiss financial institutions currently have permission from the financial supervisory authority Bafin to look after customers in Germany across borders. Opinions on the Commission’s proposal have not yet been formed within the EU bodies. As a non-EU member, Switzerland cannot have a say, but the country is still trying to turn the tide by lobbying members and MPs. The Swiss banks can still hope that only the deposit business, but not asset management, will be subject to a branch office obligation.
In the end, the Commission has to come to an agreement with the Council of Ministers and Parliament. “All policy makers are willing to close the dossier as soon as possible and are working to ensure that the final drafts will be published in mid-2023,” said a person familiar with the situation from an EU country. The reform would then come into force in 2025.