- The Washington Times - Sunday, November 4, 2012

One of Switzerland’s signature industries, Swiss banking no longer has the same allure it once did and could be in for tough times in the years ahead, analysts say, as it struggles to cope with a changing regulatory environment in the wake of the global financial crisis.

Zurich-based banking giant UBS, formerly known as the Union Bank of Switzerland, shook the industry last week by announcing job cuts of up to 10,000 by 2015. UBS also warned that other Swiss banks will be forced to take similar measures to survive the country’s tighter regulations and higher capital requirements, which have hurt the banks’ ability to compete in the worldwide investment-banking trade.

Swiss banks also have come under pressure from governments around the world for their reputation for banking secrecy, and investors are losing their confidence in the Alpine nation’s centuries-old system.

“Most of Swiss banking is stuck in the past,” said Scheherazade S. Rehman, an international business and finance professor at George Washington University. “One of the fears is that there could be a slow death for Swiss banks down the road. A lot of Swiss banks have disappeared, really you just have a few left.”

The changes at USB come after Switzerland’s largest bank did poorly with its investment banking unit, which received much of the blame for the company’s $2.31 billion net loss in the third quarter.

UBS Chairman Axel Weber told the German daily Handelsblatt that changing regulations are making it more difficult to compete in investment banking, though he said his own bank’s cuts will spread through the industry.

“I suspect that many banks have not yet really understood what the consequences of the new capital rules for business will be when they come into full effect in 2019,” he said, adding, “We, on the other hand, see this new world very clearly. Besides that, Swiss rules commit us to even higher capital demands than the 10 percent capital quota that Basel III orders.”

Swiss banking problems go beyond UBS. The country’s second-largest bank, Credit Suisse, also could face restructuring, analysts say. Credit Suisse isn’t facing as much pressure to drop out of investment banking at the moment because it is much smaller than UBS — thus doesn’t pose as great a “too-big-to-fail” problem in the event investment banking goes sour, as it did in 2008.

Credit Suisse has the same problems,” Ms. Rehman said, “but they’re smaller.

Banks have been widely blamed for the role they played in the global financial crisis, and governments have since cracked down on them in efforts to prevent another such disaster.

The Bank for International Settlements, a Basel, Switzerland-based group that coordinates with central banks around the world, developed the Basel III rules that tightened global banking regulations. Some countries have developed even stricter national regulations, including the Dodd-Frank bill in the U.S., which affect banks everywhere at least somewhat because so much finance is now international.

These financial reforms are forcing banks to take fewer risks with their money. They tend to require banks to hold more capital reserves, which can help to better absorb losses and protect against future bank failures that would rattle world economies.

“Between Basel III and Dodd Frank, banking in the Western world is going to change dramatically,” said Edward Goldberg, professor of global studies at Baruch University.

But the side effect is a less competitive environment for investment banking, because they have less money to spend.

This problem is particularly challenging for investment banks in Switzerland, where the government imposes higher capital-reserve requirements because it won’t have the money to bail out its biggest banks.

Story Continues →