Macroeconomic upheaval is changing the business of private banks
It has been a very tough decade for Switzerland's private banks. Discussions about banking secrecy, the US tax program, tax transparency, negative interest rates and squeezed margins all had significant implications. Yet, the Swiss financial center and its private banks have generally been successful.
As part of our annual Clarity on Swiss Private Banks, we explore in an interview with Prof. Dr. Klaus W. Wellershoff, former chief economist for 12 years at Swiss Bank Corporation and UBS, how banks must adjust to a new reality of rising interest rates, inflation and a possible recession.
Viewed rationally, the traditional asset management approaches and recommendations do not stand up to empirical scrutiny at all.
Christian Hintermann: We have experienced many years of expansionary monetary policy, during which private banks in Switzerland were able to benefit from booming stock markets. How will we look back on this period in the future?
Prof. Dr. Klaus W. Wellershoff: The decline in interest rates over the last few years was the major reason the asset management industry reached such great heights. All assets under management are valued based on the present value of their expected future cash flows, and when interest rates fall, the various asset classes – whether real estate, equities or bonds – are simply worth more.
This tailwind of falling interest rates, which we've actually been experiencing since the early 1980s, will no longer exist in the future. Instead, we face a headwind for the time being.
The geopolitical and macroeconomic environment has changed dramatically in recent months against a background of high inflation, rising interest rates, the threat of recession, war in Europe, supply chains problems and uncertainty in the energy supply. We are facing upheaval – with major implications for the asset management industry.
I see two phases of development ahead of us. One is the search for the right level of interest rates and asset prices. Interest rates will definitely be higher than they are today.
In the long term, the interest on debt capital must at least correspond to the rate of inflation, and we're far from that being the case today. It means interest rates will certainly be corrected upwards even further. Moreover, we're left with the question of where the inflation rate will settle.
Things will go on from this point, but without a tailwind. This will put enormous selection pressure on the asset management industry. We will see many more years of negative performance. Not everything you buy automatically goes up in value.
Are we talking more about a soft or a hard landing?
Once the first phase of creating a new balance is over, the challenges will be huge. We have already lost around 20 percent of global financial assets as of mid-year, and we're not yet even done with the adjustments.
This new macroeconomic scenario is forcing banks, insurance companies and pension funds to rethink their business models. At the same time, confidence in these large institutional financial intermediaries continues to dwindle. So, for some it will end up being a hard landing.