Newsletter – March 2012
Cornered, the financial market-place should be inspired by the watch-making crisis of the 1970’s
The difficulties presently facing Swiss private banking are not insuperable. The example, as given by the watch-making industry, attests to the fact that revival in any sector depends on its ability to accept change.
While 2012 has begun under the best auspices for Swiss watch-making, their industrial success is in striking contrast with the difficulties facing the Swiss banking sector, particularly for private banking.
For over three years, the Swiss financial center has been under pressure. Repeated attacks on bank secrecy have sharply reduced access to the offshore market. The various scandals and excesses of big international banks as well as the circulation of toxic and fraudulent products have injured the reputation of all actors without distinction. The new regulations which have ensued, the resulting increase of cost of compliance, the strength of the franc and fierce competition in international financial centers leave little respite for the sector. To survive, the private banks have to change, not to disappear, but change without disappearing.
It’s a threefold challenge for these centuries’ old establishments, a challenge which consists of adapting their way of functioning, their management, as well as their organization. Without denying their values or putting the quality of their client relations in danger they must offer better quality and added value which make a real difference.
Imagine for moment a fictional situation in which the watch-making industry would undergo similar difficulties.
Setting aside the strong Swiss franc for a moment, let us imagine that the competitors of the Swiss watch-making industry launch a structured attack against the label “Swiss Made” (bank secrecy). By analogy, what the private banking sector has experienced through the use of defective foreign components (toxic and fraudulent financial products) would then create an important reduction in the quality of the watches made and create massive returns under guarantee. To protect the clientele, competent authorities then impose dismantling and reassembly of all the watches by an independent body to ensure conformity (regulation and cost of compliance). Enough to destroy the sector.
This nightmare scenario illustrates the “existential crisis” in which the private banking sector now finds itself. The pressure, not to be underestimated, is very strong. Nevertheless, these difficulties are not insuperable.
In the context – real this time – of the watch-making crisis of the 70’s and 80’s, the Swiss watch-making market share fell significantly.
According to Pierre-Yves Donzé, Fellow researcher at the University of Osaka, there were multiple causes. In an article which appeared in Le Temps, on January 18th, 2011, he commented that the sector was very fragmented and that all actors were trying to cover all market segments. Added to that was the growing competition of quartz watches and the strength of the franc. Nevertheless, the primary cause of that crisis was linked to a lack of rationalization of the production systems.
The watchmakers, unable to act on the monetary front, were led to revise their strategy by concentrating their efforts on a reduced number of models (at the beginning of the 80’s, Omega was marketing more than 1600 models). But it was the merging of the main actors on one hand and the rationalization and modernization of the production systems on the other hand, which allowed the industry to rise again to re-conquer the market. It is because they knew enough to reinvent themselves that we can read in the press these days that «the Watch-making market is showing no signs of a slowdown”.
What are the lessons for private banking in this watch-making revival story? Primarily and very importantly one must look to the future with optimism, as a source of opportunity. Certainly, the situation has changed with the easy years behind us. But nevertheless, this lesson from the Watch-making industry – a very conservative sector – shows us that the first phase is irrevocably the acceptance of change.
Then, merging in the sector would appear inevitable as the weight of new regulation reduces profitability. This movement is already observable. However just any merger to create a bigger entity will not be enough if there is no rationalization of the practices, modes of management or “banking production tool”.
Finally, by focusing on its traditional know-how and its values as well as innovation in high value-added service to clientele, Private Banking will bounce back. Following the example of the Swiss Watch-making industry the Private Banking sector could develop a sharp competitive alternative to other financial centers and thereby respond to the drop of bank secrecy.
This difficult period for Private Banking opens with it a window of opportunity for rebirth. Let us pledge that in a few years, we will be reading in the press that the Private Banking sector shows no sign of slowing down.
Edgar Brandt Advisory
This article was published in Le Temps, March 19, 2012