Term Paper on "History of Swiss Banking System"

Term Paper 7 pages (2877 words) Sources: 1+

[EXCERPT] . . . .

History Of Swiss Banking

In addition to the secrecy of Swiss banks, they differ from United States (U.S.) banks in two other significant ways, the variety of services offered and the quality of their loans. In the U.S., banks are historically divided into investment and commercial banks, and offer different services. Investment banks create financial instruments, sell securities and create markets for these securities. Commercial banks take deposits and lend money. The Glass-Steagall Act of 1933 regulated these activities, although the legal barriers separating these banks have been decaying since the 1980's.

In the last months of 1999, that barrier broke down officially when President Clinton signed into law reform of the Glass-Steagall Act, which kept bankers and brokers separated. Swiss banks have always been authorized to engage in all banking activities, whether they are what we consider commercial activities or investment activities.

Another major difference is safety. During 1985 alone, over 120 U.S. banks failed. Contrast this with Swiss banks, of which only a handful have failed in the last 50 years. Although there is no government-sponsored insurance agency to guarantee deposits such as the Federal Deposit Insurance Corporation (FDIC) in the U.S., Swiss banks are considered to be at least as safe as U.S. banks. Part of this is because of several unique accounting techniques. Swiss banks are required by law to allocate a certain percentage of their earnings to a statutory reserve fund. Many banks also take advantage of the Swiss accounting procedures to overstate liabilities and understate assets and thus cerate a hidden reserve fund. This technique is widely use by Swiss banks and contributes to their stability. They have among the highest equity to asset ratios of any banks in the world. In addition, Swiss banks have kept international loans to the Third World at low levels and therefore have limited exposure. This policy has contributed greatly to their stability.

The other major difference between U.S. banks and Swiss banks that is most well-known, of course, is the secret nature of the banking relationship. Cloaking of bank accounts began in Switzerland in 1922 during a tax dispute with the government. In a move to prevent large outflows of deposits to England and other countries, Swiss bankers offered depositors confidential numbered accounts and the promise of concealment. In 1932 the Swiss codified banking secrecy into laws making it a crime punishable by fines and incarceration for bank officers to disclose secrets entrusted to them by a client. These laws were further strengthened by legislation in 1934. It also makes it a crime to induce someone to violate the secrecy laws or to fail to report a violation of the laws. The limitation on this ban is lifted in cases where it conflicts with other Swiss laws and also does not apply when a court order is issued to provide information about violations of Swiss laws. In order for this ban to be lifted however, the violation has to be a crime punishable under Swiss law. Although the Swiss have recently indicated a willingness to cooperate with foreign governments in pursuit of criminal conduct, it must be emphasized that it is not sufficient that the violation be a crime in a foreign country, such as tax evasion. It must also be a crime in Switzerland.

History records that the first people to inhabit the area we now know as Switzerland were a Celtic tribe, the Helvetia. The Romans first appeared in 107 BC, but by the fifth century the Germanic tribes had attained dominance. In 1032 the area was united under the Holy Roman Empire, but they did not exercise much control. The Swiss gained their independence in 1499, after years of territorial expansion, but found themselves on the losing end when they took on a combined force of French and Venetians in 1515.

The 16th century Reformation caused upheaval throughout Europe. The Protestant teachings of Luther, Zwingli and Calvin spread quickly, although central Switzerland remained Catholic. While the rest of Europe was fighting the Thirty Years' War, the Swiss closed ranks and stayed neutral. In 1648, at the end of the war, realizing they could not compete on a military basis with the other European powers, they declared their neutrality, and it was recognized in the Treaty of Westphalia. Nevertheless, in 1798, the French invaded Switzerland and established the Helvetic Republic. The Swiss chaffed under the centralized control of the French. This situation ended following the defeat of Napoleon by the British and Prussians at Waterloo. The Congress of Vienna guaranteed Switzerland's independence and permanent neutrality in 1815. In 1848 a federal constitution was agreed upon and Bern was established as the capital.

In 1550 John Calvin established the Reformed Church and within the church were a group of Frenchmen called the Huguenots. During the late sixteenth century in France, the Huguenots were the subject of violent persecution. As a result, of this during the sixteenth and seventeenth century over "200,000 French Huguenots fled to countries such as Switzerland, Germany, England, America, and South Africa, where they could enjoy religious freedom." Many of these settled in Switzerland.

Banking started in Switzerland in the 18th century. John Calvin's unique Protestant teachings lent themselves to the concepts of savings and investment. The bankers were primarily those Huguenots who had fled from France, and settled in Geneva, and were able to build financial intermediaries over time since their migration to Switzerland. The lack of Swiss involvement in warfare for most of the 1800's allowed its banks to prosper. Being a landlocked country, devoid of natural resources further enhanced its banking system.

The industrial revolution of the nineteenth century and the movement from an agricultural society to an industrial one enhanced the need for financial intermediaries to supply the capital necessary for growth. Switzerland, because of its geological and geographical situation became more involved as the financial intermediary between those needing capital and those seeking a safe haven for their financial investments. More and more, the Swiss became known for their expertise in international finance.

In 1912 the Swiss Banking Association was founded in Basel. Today its membership includes 370 banks and over nine thousand members. Its mission is, to represent the interests of the banks in dealings with the authorities in Switzerland and abroad, to promote Switzerland's image as a financial centre throughout the world, to foster an open dialogue with a critical public in Switzerland and worldwide, to develop the system of self-regulation in consultation with regulatory bodies, to support the training of junior staff and established executives in the banking industry, to facilitate the exchange of information and knowledge between banks and bank employees, to advise its members, to coordinate joint projects undertaken by the Swiss banks. Pierre Mirabaud, Senior Partner of Mirabaud & Cie, has been Chairman of the SBA's Board of Directors since September 2003

During the early part of the twentieth century, the Swiss banking system continued to evolve slowly, but events in the 1930's were unfolding in Europe that would have a dramatic impact upon the nature and uses of the Swiss banking system. In January 1933, Adolph Hitler was appointed Chancellor of Germany, in a political deal that would come back to haunt the German people. By 1934 he had consolidated his position as dictator after the death of Hindenburg. In 1937, after years of military buildup, he outlined his plans for world domination, which began with the annexation of Austria the following year.

As Hitler began his persecution of the Jews in the 1930's, Jews in Germany found the structure of the Swiss banking system and their secrecy laws very appealing. They sought out accountants, lawyers and other professionals in Switzerland to serve as trustees in order to open accounts. Because of the humanitarian reputation of the Swiss, Jews had ample reason to rely upon these trustees; however, unscrupulous trustees were abundant.

German officials were also beginning to take an interest in Swiss banking institutions. As economic laws against Jews in Germany became tougher, they began to travel to Switzerland to obtain information about account holders, sometimes bribing Swiss bankers. "As early as the mid-1930's, Swiss banks regularly received visits from members of the Gestapo, sometimes posing as customs agents or business agents, armed with forged powers of attorney or accompanying nervous account holders in person." In other attempts to break the veil of secrecy, Germany placed French-speaking Nazis in the leading Swiss banks, according to U.S. intelligence reports.

For those Jews wanting to emigrate to Switzerland, there were other obstacles. The Swiss religious community had traditionally been prejudiced against Jews, blaming them for the murder of Jesus Christ. This unreasonable hatred seeped over into other aspects of Swiss life. "Long after Jews had been granted civil rights in neighboring countries, Switzerland continued to discriminate and persecute Jews until, the last country in Europe to do so, it granted them political rights in 1886." On April 7, 1933 legislation was passed in Switzerland that distinguished between those seeking asylum in Switzerland… READ MORE

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