Private Banking in Geneva A Cluster AnalysisGroup 1: Kahina El Hajji, Alexandra Megally, Laurel Nelson, Harith Soysa

Source OECD 2010 1

Agenda

• Introduction• Country Analysis

• Switzerland at a glance• Factor conditions of success• Swiss Financial Center

• Private Banking Cluster in Geneva• Legacy• Cluster Map• Diamond Model• Global Issues

• Recommendations

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Switzerland has no mineral resources and a restricted surface area. Its wealth depends on foreign trade...

Area and Demographics

Area 41285 km²

Population over 7,785,800

GDP/ rate US $ 500,26 billion- 3,10%

GDP/Capita US $ 37 872

Median Age 41.7 years

Languages French, Italian, Swiss-German

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Map of Switzerland

1960

2008

39%

73%

47%

23%

15%

4%

Agriculture Manufacturing Services

Composition of the Economy

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Swiss Economic Indicators

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2001 2002 2003 2004 2005 2006 2007 20080.00.51.01.52.02.53.03.54.04.55.0

Unemployment rate: total civilian labor force %

2001 2002 2003 2004 2005 2006 2007 20080.000.200.400.600.801.001.201.401.601.80

Exchange rates CHF per USD

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Gross Domestic Product (GDP) Billion USD currents PPPs

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Inflation rate all items, Annual Growth %

Competitiveness of Switzerland• Switzerland has “an excellent capacity for innovation” and a “very

sophisticated business culture” – categories where it ranked 2nd and 4th out of 139 countrieshad “an excellent capacity for innovation” and a “very sophisticated

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Switzerland AnalysisPolitical conditions

• Stable government and neutrality • Divided into Federations, Cantons, Communes • Dynamic: the Referendum laws• Local laws are more powerful• Direct democracy

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Bank secrecy and heritage • Swiss Banking Act of 1934• Experience and heritage of several centuries make these institutes unique for providing tailor-

made financial service to wealthy customers. • Swiss financial center is perceived as a safe haven for money seeking home• High quality advice and operational conditions at the forefront of international private banking• Excellent specialist expertise that boosts confidence in the whole financial market

Monetary Policy• The CHF is a minor currency but it is stable and independent from the Eurozone• The revised National Bank Act of 2004 stipulates that the SNB is to ensure the stability of the

financial system and the FINMA ensures an effective supervision of banks

Switzerland Analysis

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Economy

• Exports of goods and services are extremely competitive • More than 90% of goods and services are exported: watches,

chocolate and cheese, • Mechanical and electrical engineering and chemicals together

account for over 50% of Swiss export revenues.• Consultancy, insurance and tourism are also part of the export trade.

• Switzerland's main trading partners are European Union members. (Germany).

• In 2009, 59.7% of exports went to EU countries, and 78% of the imports came from EU states.

• Swiss economic policy is based on free trade, with low import duties and virtually no import quotas - the only exception being for agricultural products.

• Headquarters of major MCN, Nestlé ad 15 Swiss firms, including the pharmaceutical giant Novartis (No. 160) featured on the “Fortune Global 500”

The Swiss financial center is a central pillar of the Swiss economy• It generates over 11% of Swiss GDP and represents 6% of Switzerland’s total

working population (banks, insurance companies and other financial institutions) in 2009

• Switzerland’s financial center has three main hubs - Zurich, Geneva and Lugano.• The key players in the Swiss financial center are the banks: • Core businesses is asset management• The 3rd largest financial market after the US and the UK, but ranks first in Wealth

Management• The volume of assets under management is about 10% of worldwide AuM

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Share of assets under management in international private banking end of 2007

Switzerland 27%

United Kingdom 24%

Luxembourg 14%

Singapore 7%

United States 7%

Hong Kong 3%

Others 6%

Private banking is a centuries-long tradition in Switzerland. The first recorded private bank dates back to the 17th century..

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Jacques Necker, Geneva banker (1732 – 1804)

1387Residents of Geneva allowed to

lend money against interest

14th & 15th CenturiesTraders became

bankers

17th CenturyGeneva’s bankers

financed Dutch West Indies Company and

Royal Bank of England

19th CenturyGeneva’s bankers financed railway

companies and issued public loans

1857Oldest stock exchange in Switzerland opens in

Geneva

20th CenturyBanks moved towards

asset management

Pictet Asset Management, Ltd

In Switzerland, the term "private banker" refers to a specific definition in the Swiss Banking Law

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Specific status of “private banker” – justified by the presence within the bank of at least one partner with unlimited liability for the bank's commitments.

• If the bank goes bankrupt, the partner with unlimited liability could lose their entire private fortune.

The expression “private banker” evokes images of free enterprise, independent personalities, long-standing tradition, discretion, an open attitude and above all, the mastery of a profession: asset management and securities trading.

• It is not easy to describe the characteristics of these multifaceted personalities who are conservative yet progressive, steeped in tradition yet unconventional.

Jean Gédéon Lombard Henri Hentsch Thierry Lombard Christophe Hentsch

The two founders and their heirs – current managing partners of Lombard Odier

Geneva Private Banking Cluster Map

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Geneva Private Banking

5 leading Geneva-based private banks Bordier & Cie, Lombard Odier Darier Hentsch & Cie, Mirabaud &

Cie, Pictet & Cie

Educational, Transfer of Resources

FAME, HEI, 26 Finance and Technology Companies to train advances banking specialistInstitute for Banking at the Hoschschule St,Gallen

Business Regulation

Bank of International Settlements1934 Banking Secrecy Laws “Bankgeheimnis”

Local Association

“Finanzplatz Genf”, Groupement des Banquiers Privés Genevois, FINMA

Cluster of Private Banks in Zurich and BaselSwiss Insurance Industry

Financial ServicesTraditional service and sophisticated investment Mutual funds, Hedge Funds, Private Equity, Venture Capital, Insurance, Trade flows

Luxury goods: Breguet, Patek Philippe, Richemont

Exclusive Tourism

High end Sports

Strong social/family ties

Factor Conditions • General Factors • Location at the middle of Europe as an advantage in terms of reducing travel

cost for clients• Proximity to famous tourist destinations in the Alps • Stable political system and neutrality

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• Specialized factors• Highly-skilled personal service, fluent in languages, well-versed in dealing

with different cultures, traditionally risk-averse and respecting property• Advanced training and apprenticeship programs in banking • Legal system and business regulation: Swiss Bankgeheimnis (banking

secrets) to attract investors wishing to avoid taxes at home• Tax evasion not considered as a crime in Swiss law • Legislative environment allowed emergence of the “universal banking” system• Initially under-developed Swiss telecom communication infrastructure led the

industry to develop its own telecom infrastructure which later seems to have become an advantage on its own

Sophisticated Demand and Strong Links to Other Clusters

• Sophisticated Demand as Advantage • Domestic and international private banking clients are very demanding and

prefer low risks at the price of low returns • However, demands from foreign institutional investors who seek higher

returns were less in line with Swiss locals resulting in Swiss demand conditions to be slight disadvantage for this segment

• Benefits from highly specialized and expertise banking advice

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• Strong links to other greater Swiss banking clusters • Swiss insurance industry

• 70% of their global premium income is generated overseas• Swiss insurance companies have increasingly specialized in re-insurance, i.e.

where an insurer insures other insurers, making Switzerland the fourth largest re-insurer in the world.

• Swiss financial center is also a major international force in currency trading, commodity trading and the management of funds of hedge funds.

• Competitive Swiss tourism industry feeds customers to Swiss private banking services

Context for Strategy & Rivalry• Rivalry• Vigorous competition among local companies drives innovation

• With the evolution of the banking market, private bankers are facing ever stiffer competition from the major banks, which now offer similar services.

• Cluster’s Economy is open to Foreign Direct Investment FDI• Strong presence of Foreign banks in Geneva (60 foreign-owned banks out of 140)

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• Cooperation• Firms cooperate and invest

jointly to upgrade the cluster in Geneva • Finazplatz Genf Foundation, • International Center for FAME

• The leading private banks in Geneva have been owned by the same families for hundreds of years. While being strong competitors, these families have strong social ties and know each other well.

Cantonal Banks; 24Big Banks; 2

Regional Banks and saving Banks; 70

Foreign Con-trolled banks; 49

Stock Exchange Banks; 123

Branches of Foreign banks;

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Private Bankers; 14 Others Banking Instu-

tions; 9

Global Issues : The 2008 global financial and economic

crisis significantly shaped the last three years

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The2008 Global Financial Crisis• With its long tradition

of banking and finance, Switzerland coped better than many other financial centers, thanks to: • extreme

heterogeneity of the Swiss banking industry

• the stability of the Swiss franc

• still a very attractive location for highly qualified financial experts to work

But over the last 10 Years• Swiss banking industry has

consolidated from 372 institutions down to 325.

• International competition for assets has stiffened correspondingly.

• investors are seeking greater geographical diversification in their portfolios.

• the rapid structural changes in financial services mean that a constant review and optimization of government regulation and supervisory instruments is required.

Tax Regulations• by adopting the OECD

article 26 standard on information exchange in tax matters and entering into fresh negotiations about a final withholding tax, the Swiss financial center took a key step forward and has been efficiently implemented.

• Some argue that Switzerland will not be as attractive as it used to be and investors may look for new financial centers overseas.

Union Bank of Switzerland• involved in so

many international issues

• Subprime crisis• Madoff case• Tax evasion with

the US residents

RecommendationAt the National Level For the Cluster

• Harmonize the policies of the Cantons to avoid overlapping and competitions between them

• Work on the centralized process to collect tax

• Develop a culture of innovation through the universities and schools to retain talent

• Develop the other clusters such as tourism to promote Green Tourism

• Government should increase the presence of Foreign Banks which is a source of growth

• Raise the Bank Regulatory Standard to avoid terrorist funds or widespread tax fraud

• Attract innovative financial institutions such as hedge funds or private equity firms that are looking for new financial places

• Opportunity to attract home manufacturing: most of the products are produced in Europe

• Lower its labor barrier

• Create a center of research for the finance industry

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The Swiss federal government should actively pursue a national Cluster policyThe Swiss federal government should actively pursue a national cluster policy

Questions & Answers

Thank you for your attention

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Back Up slide

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Trade • Exports of goods and services are extremely competitive • more than 90% of goods and services are exported: watches,

chocolate and cheese, • however mechanical and electrical engineering and chemicals

together account for over 50% of Swiss export revenues.• Consultancy, insurance and tourism are also part of the export

trade. • Switzerland's main trading partners are European Union

members. (Germany). • In 2009, 59.7% of exports went to EU countries, and 78% of the

imports came from EU states. • Swiss economic policy has always been based on free trade,

with low import duties and virtually no import quotas - the only exception being for agricultural produce. 19

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Key Sectors

• Companies• Nestlé headquarters in Vevey, on Lake Geneva© Nestlé S.A.• Most businesses are small or medium-sized. According to the 2008 business

census, more than 99% of enterprises had fewer than 250 full-time workers, employing about two-thirds of the total work force.

• The largest company is Nestlé, the biggest food company in the world. It has around 278,000 employees, about 97% of them outside Switzerland (2009).

• In 2010, 15 Swiss firms, including the pharmaceutical giant Novartis (No. 160) featured on the “Fortune Global 500”, an annual ranking of the 500 most powerful corporations which is compiled by the eponymous American business magazine.

• Many companies are still in the hands of families who founded them. However, a survey conducted in 2002 showed the impact of globalisation on large firms: it found 40% of board members and 26% of managers were non-Swiss, mostly from Germany, the UK and France. However, there were still few foreign managers in medium and small businesses.

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• The second most important players are insurers. Close to 70% of their global premium income is generated overseas, indicating a high degree of internationalisation. Swiss insurance companies have increasingly specialised in re-insurance, i.e. where an insurer insures other insurers, making Switzerland the fourth largest re-insurer in the world.

• The Swiss financial centre is also a major international force in currency trading, commodity trading and the management of funds of hedge funds. However, in other financial services, such as the funds business, institutional asset management, investment banking, as well as commerce and corporate banking, it continues to play only a minor role.

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