By Marcia Christoff-Kurapovna for mises.org
The strong showing in banking stocks may show some optimism following the presidential election victory of Donald Trump. But, a healthy future for US banking will only take root if that industry comes to terms with the original purpose for which banking was intended — wealth management. As such, the great American bank in generations to come will not be of the calamitous Wells Fargo or Bank of America type — or even Facebook’s Electronic Money Institution license or Google’s Mobile Wallet. The most solid banks will be remakes of that timeless classic, the Swiss private banker. It is this “back to the future” philosophy of banking, already prevalent in some of the past decade’s best performing and least known banks in the US, that must become predominant if that sector is to remain resilient.
Analysts have ascribed the banking stock surge to the promised roll back of post-crisis financial regulations, including the 2010 Dodd-Frank law and the red tape of the Consumer Financial Protection Bureau; a Trump transition team in part composed of conservative businessmen and economists, and Mr. Trump’s promise of heavy infrastructure spending. But in view of the Fed’s persistent omnipotence and of the country’s stratospheric national debt, these developments alone will not sustain a robust banking sector.
The focus instead must be on the cultivation of localized, community-centered but nationally ambitious banks that one rarely reads about amid the stories of pointless bail-outs, fake-account scandals, ZIRP, and robo-trading. Superbly managed and often family-owned, these banks profited throughout the post-crisis period, enduring regulatory mayhem, Fed mission-creep, and the rise of ‘alternative banking” fintech and mobile-app technologies. They did it by sticking to sound fiscal fundamentals and never underestimating the “psychological” preference on the part of the public for sturdy institutions whose owners or managers are members or descendants of that founding banking family itself. Though PriceWaterhouseCoopers gloomily predicted that traditional banking would not survive beyond 2025, it is precisely highly successful banks like Beal Bank of Dallas, Texas, or the 100 year-old Bank of Fayette County in Tennessee, that will be the only banks to survive the next decades and beyond.
What is a Swiss Private Banker?
To understand the real next-generation banking, let us look to the forefather role model that embodies the very best of ultra-traditional banking principles: Switzerland’s national legend, the unlimited liability banquier.No American bank, including the two examples mentioned above, follow this ‘severe’ Swiss model. Still, such Geneva, Zürich, and Basel-based aristocratic workhorses in the art of wealth management and no-frills (not even on-line) banking are the kinds of institutions where money still means gold and Ms. Yellen’s machinations an amusing, yet comfortably distant, American curiosity.
First off, a nuance of definition. The expression is “Swiss private banker,” and not “private bank,” or “private banking.” This first refers to a very specific institution, defined by 1934 Swiss law and, as an expression (“Swiss private banker”), is a registered trademark. These are not UBS- or Credit Suisse-type banks (which are, for all intents and purposes, American banks), nor simply lesser-known tax-evasion vehicles shrouded in glamorous secrecy. Instead, the term refers to a narrowly defined privileged few “houses,” often centuries old and almost always still family owned, that, by law, must adhere to unheard-of (on these shores) personal liability among their partners and high reserve requirements, among other standards. Indeed, in the last three years alone, the number of these banks has dwindled from twelve to six, as pressures from the global economic crisis forced several of them into limited liability companies.
They are in a class of their own, synonymous with unbounded responsibility. The six remaining are: Baumann et Cie.; Bordier et Cie.; E. Gutzwiller et Cie; Mouge d’Algue et Cie; Rahn & Bodner; and Reichmuth & Co. “Private bankers” as these are: (1) exclusively organized in the legal form of a partnership or limited partnership; (2) run by partners who are usually family descendants of the banks’ founders; (3) invest their own capital in their banks and maintain high cash reserve ratios; (4) defined by a special private-banker status that is dependent upon the presence within management of one or several partners with unlimited liability for investment obligations. This last is their greatest distinction. Other Swiss banks offer wealth management services but their maximum liability is confined to equity capital. With private bankers, liability is not solely limited to the company equity, but partners are additionally liable with their private assets.
Thus, their primary duty is to their clients, to their own families, and to their own vested responsibilities — a quaint notion these days, to be sure. They are run by a flat management structure; decision-making chains are short; they do not develop their own products and are therefore not subject to any conflicts of interest in investment advice. Investments must be tradable and liquid at all times; bankers can’t act as brokers and they are not on-line banks. They are not allowed to sell their own instruments, tend not to invest in global real estate, and, as mentioned before, have strict rules on reserves.
A Preference for Different Kinds of Investments
Furthermore, these banks share a fundamental preference for investment in real assets. In general, they tend to follow the investment philosophy of the traditional “Swiss Way of Wealth,” with emphasis on gold and commodity-based industry; investment in art, and land ownership. Cash is still king in Switzerland; debt is a form of indebtedness and not a form of wealth; derivatives and casino-speculation are frowned upon. Most of these banks do not offer commercial loans and mortgages and investments are almost always chosen on the basis of historical performance records.
As the Swiss Private Bankers Association in Geneva likes to point out, so trusted was the Swiss private banker in the past that many rose to become advisers to ministers and kings — and some became ministers themselves. Albert Gallatin became Secretary of the US Treasury after negotiating the purchase of Louisiana in the nineteenth century; George Prevost became the Governor General of Canada; Pierre Telluson became Director of the Bank of England; and Jaques Necker, the Minister of Finance under Louis XVI in France. Even more pride is taken in the fact that the status of partner is handed down from generation to generation with a view to protecting the permanence of the business.
In the US, there are three drivers of industry change — technology, customers, and regulation — that have threatened to destroy the traditional banking model. Alternative providers have emerged across almost all aspects of the sector (except for insured deposits, which are still the exclusive domain of the licensed banks), and the rapid spread of mobile banking, together with the introduction of improved wireless and broadband infrastructures, is challenging the branch-based model. Even among the physical banks, the rise of the friendly-yet-impersonal, convenient-yet-slightly-unserious American chain-bank has turned “banking” into little more than glorified ATM runs.
Nonetheless, old-world traditional banks retain and will increasingly gain great advantages in such an environment. Reputation remains everything. Experience, trust, and image all matter. Alternative banking providers still must grapple with the lack of trust in their security. The switch from physical, tangible distribution into technology-enabled channels still must take care to establish brand reliability, not to mention the recognition of integrity, security and quality of service (not just teller friendliness) to the customer. To quote PWC once more: “While [banks’] brands have traditionally been seen as a relatively limited part of their value, in the future they may become central to it.”
Enter the Swiss private banker model as inspiration for such a most-welcome trend. The US banking industry could use a strong dose of this good old-fashioned Swiss medicine.
Marcia Christoff-Kurapovna has contributed articles and op-eds on Swiss and Liechtenstein banking issues for The Wall Street Journal Europe; she also authored a column, Swiss Watch. She currently lives in Washington, DC where she is a speech and op-ed writer to foreign dignitaries.