This paper traces the history of Swiss banking from its earliest roots in eighteenth-century Geneva to its complex role during World War II. It examines how Swiss banks differ from American banks in terms of services, safety, and secrecy, and explains how banking secrecy laws were codified in the 1930s. The paper also covers the founding of the Swiss Banking Association, the influence of Calvinist and Huguenot traditions on Swiss financial culture, and Switzerland's deeply controversial wartime conduct — including the acceptance of Nazi looted gold, the treatment of Jewish refugees, and postwar restitution efforts. The paper concludes with a brief assessment of Switzerland's modern anti-money-laundering reforms.
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, each offering different services. Investment banks create financial instruments, sell securities, and create markets for those securities. Commercial banks take deposits and lend money. The Glass-Steagall Act of 1933 regulated these activities, although the legal barriers separating these two types of banks had been eroding since the 1980s. In the final months of 1999, that barrier broke down officially when President Clinton signed into law a reform of the Glass-Steagall Act, which had kept bankers and brokers separated. Swiss banks, by contrast, have always been authorized to engage in all banking activities, whether commercial or investment in nature.
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 their American counterparts. Part of this stability stems from 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 Swiss accounting procedures to overstate liabilities and understate assets, thereby creating a hidden reserve fund. This technique is widely used by Swiss banks and contributes greatly to their stability. They maintain among the highest equity-to-asset ratios of any banks in the world. In addition, Swiss banks have kept international loans to developing nations at low levels and have therefore limited their exposure. This conservative lending policy has contributed greatly to their long-term stability.[1]
The other major — and most well-known — difference between U.S. and Swiss banks is, of course, the secret nature of the banking relationship. The 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 law, making it a criminal offense — punishable by fines and imprisonment — for bank officers to disclose secrets entrusted to them by a client. These laws were further strengthened by legislation in 1934. The laws also make it a crime to induce someone to violate the secrecy statutes or to fail to report a violation. This prohibition is lifted in cases where it conflicts with other Swiss laws, and it does not apply when a court order is issued to compel disclosure of violations of Swiss law. For the prohibition to be lifted, however, the conduct in question must constitute a crime under Swiss law as well. Although the Swiss have in recent years indicated a willingness to cooperate with foreign governments in pursuit of criminal conduct, it must be emphasized that it is not sufficient for the violation to be a crime only in a foreign country — tax evasion, for example. It must also be a crime in Switzerland.[2]
History records that the first people to inhabit the area now known as Switzerland were a Celtic tribe, the Helvetii. 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, though imperial control remained limited. The Swiss gained their independence in 1499 after years of territorial expansion, but found themselves on the losing side when they faced a combined force of French and Venetians in 1515.
The sixteenth-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 fought the Thirty Years' War, the Swiss closed ranks and remained neutral. In 1648, at the end of that war, recognizing that they could not compete militarily with the other European powers, they declared their neutrality, which was formally recognized in the Treaty of Westphalia. Nevertheless, in 1798, France invaded Switzerland and established the Helvetic Republic. The Swiss chafed under the centralized French control. This situation ended following Napoleon's defeat 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 adopted and Bern was established as the capital.
In 1550, John Calvin established the Reformed Church, within which there was a group of French believers known as the Huguenots. During the late sixteenth century in France, the Huguenots were subjected to violent persecution. As a result, during the sixteenth and seventeenth centuries, over "200,000 French Huguenots fled to countries such as Switzerland, Germany, England, America, and South Africa, where they could enjoy religious freedom."[3] Many of these refugees settled in Switzerland.
Banking began in Switzerland in the eighteenth century. John Calvin's distinctive Protestant teachings lent themselves to the concepts of savings and investment. The early bankers were primarily those Huguenots who had fled France and settled in Geneva, and who were able to build financial intermediaries over time following their migration. The absence of Swiss involvement in warfare for most of the 1800s allowed its banks to prosper. Being a landlocked country devoid of natural resources further enhanced the importance of its banking system.
The industrial revolution of the nineteenth century, and the transition from an agricultural to an industrial society, heightened the need for financial intermediaries to supply the capital necessary for economic growth. Because of its geological and geographical situation, Switzerland increasingly served as the financial intermediary between those needing capital and those seeking a safe haven for their 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; and 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.[4]
During the early part of the twentieth century, the Swiss banking system continued to evolve slowly. However, events unfolding in Europe in the 1930s would have a dramatic impact on the nature and uses of Swiss banking. In January 1933, Adolf Hitler was appointed Chancellor of Germany in a political arrangement that would come back to haunt the German people. By 1934, following the death of Hindenburg, he had consolidated his position as dictator. 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 1930s, Jews in Germany found the structure of the Swiss banking system and its 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 increasingly harsh, German agents began traveling to Switzerland to obtain information about account holders, sometimes bribing Swiss bankers. "As early as the mid-1930s, 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."[5] In other attempts to pierce the veil of secrecy, Germany placed French-speaking Nazis inside the leading Swiss banks, according to U.S. intelligence reports.[6]
For those Jews wishing to emigrate to Switzerland, there were additional obstacles. The Swiss religious community had traditionally harbored prejudice against Jews, holding them responsible for the murder of Jesus Christ. This unreasonable hatred permeated other aspects of Swiss life. "Long after Jews had been granted civil rights in neighboring countries, Switzerland continued to discriminate against and persecute Jews until, the last country in Europe to do so, it granted them political rights in 1886."[7] On April 7, 1933, legislation was passed in Switzerland distinguishing between those seeking asylum for political reasons and those seeking it for religious ones. The asylum automatically granted under the Swiss constitution was denied to those fleeing for religious reasons. By 1942, only 9,150 foreign Jews were legally resident in Switzerland, an increase of just 980 since 1931.
It was the Swiss government that requested the German government to help identify Jews by stamping all Jewish passports with a prominent letter "J," following the Nuremberg Laws of 1935. "By 1942, acting at the behest of Switzerland's establishment and the majority of its people, its authoritarian police apparatus was dedicated to keeping the country 'pure' and to saving it from being 'overrun with Jews'."[8] Until 1942, the working Jewish community in Switzerland was compelled by the government to financially support Jewish refugees.
The other dimension of German interest in Swiss banks involved the business of financing Germany's war machine and laundering the proceeds of looted conquered countries. By 1941, Germany had exhausted all of its foreign exchange and central bank gold bullion. In June 1941, Germany halted the transit of Swiss goods through its territories for three weeks, cutting off Switzerland's supplies of coal, iron, and steel — raw materials needed to produce the weapons Switzerland was supplying to both sides. On July 1, 1941, the Swiss reached an agreement with the German government known as the Swiss-German Clearing Agreement. This pact provided massive loans to Germany, disguised as credits, to pay Swiss manufacturers for weapons to fight the war, and was ostensibly to be balanced at year's end. For bankers, the Swiss were surprisingly lenient with these credits, allowing them to accumulate to 850 million Swiss Francs by 1942. This arrangement allowed Switzerland to supply the Nazis with much-needed war material without risk of Allied bombing.
"Swiss acceptance of Nazi gold and wartime financial complicity"
"Allied pressure, dormant accounts, and restitution funds"
"Modern reforms, anti-money-laundering, and ongoing tax secrecy"
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