Read behind headlines on the changing corporate structures at Pictet & Cie and Lombard Odier & Cie and we find two Swiss banks facing up to the challenge of being too big to fail.
There has been speculation these structural revamps were prompted by fear among partners at both institutions of a swoop by US authorities. It comes after Switzerland’s oldest private bank, Wegelin & Co, was fined for helping US citizens to avoid paying taxes and is set to close.
While such a scenario may keep Swiss bankers up at night, what keeps international regulators awake is the fear of a bank collapse happening on their watch.
Systemic risk is the real bogeyman in the global banking market. And global banks are precisely what Pictet and Lombard Odier have become.
In their public statements both banks point to their expansion in recent years. Pictet has grown from 300 staff in 1980 to 3,300 staff operating in 25 locations, and it plans to keep growing.
Meanwhile, Lombard Odier has expanded from 650 staff in the mid-1990s to 2,000 staff today in 24 locations.
In each international market, the Swiss banks’ corporate entities have been established as limited liability structures.
However, until January 2014, when the new structures come into effect, these international entities report back to a head office in Switzerland protected by the personal wealth of 16 very private individuals – a nightmare scenario for any international banking regulator.
Under their new structure the Swiss entities will be changed to sociétés en commandite par actions de droit Suisse (SCAs), or corporate partnerships.
In this the partners retain unlimited liability for the corporate partnership, but they relinquish liability for all the underlying entities, including the banks in Switzerland.
This cannot have been an easy decision to make for the partners, who carry 200 years of history on their shoulders.
But the hybrid structure allows them to remain owners and managers, and they will continue to run the businesses in ways they regard as prudent for their clients.
It will also allow the banks to retain their much-vaunted independence. However, there will be a firewall in the structure should a contagion break out.
So, is this the end of Swiss banking as we know it?
Yes, probably – and about time too. This move does not signal that Swiss private banks are running from international regulators. On the contrary, it shows these traditional players recognise that their legacy to the noble profession of Swiss banking lies in building businesses that protect not only the interests of their clients, but also the integrity of the financial system.
For many years, Switzerland’s government and regulators have been facing up to the challenges of internationalising traditional Swiss banking. Last month, its most traditional banks may have had a crack at reinventing it.