SWISS BANKING IN AN INTERNATIONAL CONTEXT

SWISS BANKING IN AN INTERNATIONAL CONTEXT Also by W. Blackman THE CANADIAN FINANCIAL SYSTEM Swiss Banking in an International Context w. Blackman...
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SWISS BANKING IN AN INTERNATIONAL CONTEXT

Also by W. Blackman THE CANADIAN FINANCIAL SYSTEM

Swiss Banking in an International Context w.

Blackman

Associate Professor of Economics The University of Calgary Canada

Palgrave Macmillan

ISBN 978-1-349-10658-5 ISBN 978-1-349-10656-1 (eBook) DOI 10.1007/978-1-349-10656-1

© W.

Blackman, 1989

Softcover reprint of the hardcover I st edition 1989 All rights reserved. For information, write: Scholarly and Reference Division, St. Martin's Press, Inc., 175 Fifth Avenue, New York, N.Y. 10010 First published in the Uni ted States of America in 1989 ISBN 978-0-312-02813-8 Library of Congress Cataloging-in-Publication Data Blackman, W. (Warren), 1923Swiss banking in an international contextfW. Blackman. p. cm. Bibliography : p. Inc1udes index. ISBN 978-0-312-02813-8 1. Banks and banking-Switzerland. 2. Banks and banking, International. 3. International finance. I. Title. HG3204.B56 1989 88--33333 332.1'5'09494-dc19 CIP

Contents List of Tables

vi

List of Figures

vii

Foreword

ix

Preface

x

PART I THE BANKING PARADIGM 1 2 3 4 5

The Banks of Switzerland Banking, an Industry of Confidence Euro-Banking and the Swiss Banking Paradigm Capital, Investment and the Swiss Banking Paradigm The Swiss National Bank

PART 11

A THEORETICAL STRUCTURE OF INTERNATIONAL BANKING IN CONDITIONS OF INFLATION

6 An Analysis of Deposit and Credit Markets 7 Euro-Currencies and International Banking 8 Financial Markets and Government PART III

3 28 54 78 104

127 152

174

A WORLD OF FINANCIAL INSTABILITY

9 International Liquidity and Capital Markets 10 ConcIusion: Stability Midst Instability?

211 241

Notes and References

263 274 276

Bibliography Index

v

List of Tables 1.1 1.2 2.1 3.1 4.1 4.2 5.1 5.2 9.1 9.2 9.3 9.4 9.5 9.6 9.7

Foreign investments of principal banking systems Proportions of domestic and foreign liabilities (1984) Growth of the Swiss Bank Corporation The growth of loans to LDCs and servicing costs, 1970-80 Swiss liabilities (passive) by source, 31 December 1984 Swiss assets (active) by use, 31 December 1984 The Swiss monetary base for 1985 Sources and uses of liquidities (changes from 1983 to 1984) Changes in extern al claims of banks and international bond issues Cross-border positions of banks Domestic positions in foreign currency Net international bank lending Lending in international markets, 1985 Cross-border positions for 1985 New issues in international bond markets

VI

15 23 45 67 87 87 109 117 217 220 221 221 222 228 237

List of Figures 1.1 Gross domestic product and total assetslliabilities of Swiss banks 23 1.2 Geographic distribution of assetslliabilities, 1984 24 1.3 Geographic distribution of assetslliabilities, fiduciary accounts, 1984 25 2.1 Equating the value of society's marginal product with the internal rate of return 32 2.2 Deposit roll-over to equate the internal rate of return 34 2.3 A collapse of liquidity between the credit market and the 41 deposit market 3.1 The costlrevenue banking construct 58 4.1 Protection against devaluation via the forward market 81 5.1 Comparative price changes, 1929-36 113 5.2 Comparative price changes, 1963-72 113 5.3 Comparative price changes, 1973-85 114 6.1 (a) and (b) Investment, interest, and the value of the marginal product 130 6.1 (c) The credit market 131 6.2 Inflationlinterest equilibrium in the credit market 134 6.3 Inflationlinterest equilibrium in the deposit market 136 137 6.4 Deposit and credit markets 141 6.5 loteTest and exchange rates 143 6.6 Collapse of the US dollar exchange rate 6.7 Deposit and credit market equilibrium and administered 146 interest rates 158 7.1 The Euro-currency credit market function 160 7.2 Euro-currency borrowing 162 7.3 Euro-lending 179 8.1 Deposit market shifts with fixed exchange rate 180 8.2 The appreciation of the Swiss franc 8.3 Impact on the exchange rate of shifts in the credit 182 market 183 8.4 Transmission of inflation via liquidity transfer 189 8.5 Capital values and exchange rates 190 8.6 Rates of interest and exchange rates 192 8.7 A greater importance of the aftermarket 8.8 Relationships of inflation, interest, and exchange rates 194 vii

Vlll

List o[ Figures

8.9 The Swiss paradigm 9.1 Deposit and credit markets with foreign intermediation 9.2 International deposit markets, world inflation rates, interest rates and exchange rate stability 9.3 International credit markets, inflation rates, interest rates, and exchange rates 10.1 Expected exchange rate depreciation vis-a-vis the US dollar: instability of equilibrium in international capital markets

202 226 234 236 256

Foreword There are ample books on the subject of Swiss banks and their somewhat suspect behaviour regarding foreign bank deposits of dubious origins. We have seen the Iran Contra Affair, which involved a Swiss bank account, and we know that there are many equally unsavoury, though less publicised, examples of similar accounts. Unfortunately for the Swiss banking industry, these te nd all too often to be about the extent of the public's awareness of Swiss bankers. Such examples are the me re tips of icebergs - visible enough, but hardly representative of what lies underneath. It was to discover more of wh at lies at the heart of Swiss banking and why it has been singularly successful in a world of banking inadequacies that inspired this particular study. The result of the effort, perhaps not so surprising to the skilled observer of banking, is not that the Swiss banks have reached such a high degree of excellence, but that the banking systems of other nations have been inadequate to the task of moving deposits among and between nations with a corresponding degree of security. This book, then, is not just a discussion on Swiss banking but also a theoretical analysis of international banking, the art of which has been nearly perfected by the Swiss. In effect, it is an analytical survey which utilises the Swiss as a case-study in banking technique. This was the objective of the research involved; it was not to argue, as might appear at first sight, that the Swiss are paragons of banking virtue. If professional readers may learn from the Swiss experience as weIl as their own, then the objective of the book will have been weIl served. W.

ix

BLACKMAN

Preface This is a book which uses a tradition al approach to monetary economics as its subject. 'Traditional' me ans that if readers expect econometric or sophisticated statistical analysis they will be disappointed. As in the earlier books of economic theory which my academic colleagues know so weIl, the methodology is simple - to develop a theoretical approach which makes logic of wh at is otherwise an inchoate set of facts. If the objective is served, then it may be possible to build further on the foundation laid herein, to develop a theory of banking and finance, certainly a neglected aspect of economics. Since the beginning ofthe 1980s, the world's banking system has not been in sound condition. Most of us have discovered this from the daily press and the financial and economic journals. There is, however, one exception to this generalisation, and that is the Swiss banks, which have maintained an astonishing degree of integrity throughout the stormy periods of loan defauIt by country after country and corporation after corporation. Robin Leigh-Pemberton, Governor of the Bank of England, noted in an article in The Financial Tim es , 30 December 1982, that the 'financial crisis is over' . He believed this because a tripartite effort had been launched at that time among commercial banks, central banks, and international financial organisations to rescue the system. This cooperation was novel in the sense that the world had not seen anything Iike it before. Hans Bär, Chairman of the Swiss bank, Julius Bär and Sons, sharply disagreed. He argued that the banking crisis had not really begun. Indeed, he stated, only an aid package such as a financial 'Marshall Plan' will save the system. Of the two, we must agree with Hans Bär. There is, as this book shows, a fundamental instability introduced into the international financial system by world inflation. It is introduced as a third independent variable into the system of interest rates and exchange rates. Further, since the system itself now consists of powerful aftermarkets which sometimes behave inversely with the ordinary interest rate effects, the possibility of anything but crisis after crisis with 'band-aid' solutions is more remote than ever. The objective, then, of this book is to explore the international banking system, hoping to find its faults, its defects, and, at the same x

Preface

Xl

time, to examine the Swiss banks in their posItIon within this international system in order to find out what is to be learned from their experience. It is as simple as that. This is not to suggest that the Swiss are paragons of banking virtue to be emulated by everyone else. It so happens that at the present time the Swiss bankers are the best. This is what we, as economists and bankers, have to learn. In discussing international banking, the methodology used is to develop a logical structure somewhat typical of economists. In constructing this, we are indebted to the work of Karl Brunner and Alan Meltzer. Their explicit analyses of the Money Market (referred to herein as the Deposit Market) and the Credit Market have served as the starting points for the theoretical material of Part 11. Anyerrors committed in the use of this brilliant logic are, naturally, OUTS. We make no apologies for drawing rather heavily on a single volume written by Hans Bauer, former Chief of the Economic Department of the Swiss Bank Corporation, entitled Swiss Bank Corporation, 18721972. It would be impossible to duplicate the enormous bibliography which Mr Bauer has used in the preparation of this rare and wonderful volume. In addition, his own insight, the perception of a fine professional economist, into Swiss banking history makes this book an absolute essential for any researcher in the subject of Swiss banking. As usual, those who so graciously gave of their time and patience to answer our many questions during interviews deserve a very special thanks. Dr Halbheer and his staff at Credit Suisse were particularly helpful in developing the paradigm of modern Swiss banking. John Wicks, Swiss correspondent of The Financial Times, was also kind enough to fill in very many of the missing details which are so important. Finally, to John Hervey-Bathurst and staff of Lazard Bros. in London we owe a debt of gratitude for their patience in discussing some of the philosophical arguments underlying this book. To all of these wonderful people, we express our sincere thanks and hope that their contributions have been treated with the respect and care that they deserve. Lastly, to the librarians of the Institute of Bankers for their patience and guidance we must be eternally grateful. Without these and the library facility itself, academic research of this kind would be impossible. W.

BLACKMAN

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