Switzerland shifts gold off the books in preparation for Basel III

Swiss banks move private investors to institutional accounts.

Contrary to popular myth, there are at least a few Swiss people who won't shy away from a fight. One of them is Nicolas Pictet, chairman of the Swiss Private Bankers Association.

The American Internal Revenue Service (IRS) has been duffing up the Swiss banking industry for quite some time now. Some of the biggest Swiss banks have had to surrender their US client list to the IRS under subpoena, and the US tax authority has been dogged in its pursuit of those US citizens they have found to be using the international banking system to avoid domestic tax requirements — even little old ladies.

Now, Pictet has decided enough is enough… it is time for the banks in question to stand up and if not hit back, at least defend themselves properly.

This week we saw another move that is likely to alter the perception of Swiss banks. UBS and Credit Suisse, two of the banks at the centre of the IRS investigations, significantly raised their charges for holding gold — making it very unattractive for private individuals to deposit the precious metal with them.

The primary reason for the decision was not to stick it to the IRS, of course. Rather it is to move gold off the banks' balance sheets ahead of the introduction of the Basel III rules, which require them to change the ratio of capital to assets.

The banks are encouraging clients to move their gold deposits to “allocated” accounts, which sit outside the banks’ balance sheets and generally attract far larger fees, and are primarily aimed at institutional investors.

The rise in charges on “unallocated” will undoubtedly discourage private individuals from keeping gold on deposit with Swiss banks. One gold market analyst told me the banks were now “terrified of US clients, who account for a significant proportion of their client base”.

“The Basel III requirements are providing the banks with a good excuse to get rid of their American clients,” they said.

So is it a case of Swiss banks reflecting some of the IRS’s heat onto its US clients? That would probably be to cut off their nose to spite their face, since there are plenty of other places investors can keep their precious metals.

But it will undeniably cause private investors, both in the US and elsewhere, problems. For many, there is no more solid investment than bars of gold, and nowhere more secure - or private - to keep them than a Swiss bank.

Either way, those banks are changing their rules. And with Basel III deadlines ramping up we are likely to see even more drastic changes to the private banking landscape.

Most of those changes are likely to further weaken the relationship between Swiss banking institutions and their clients. As Pictet told his compatriots: “[Switzerland] runs the risk of being dropped from the squad and finishing the race out of time, in the complete indifference of the political world.”

While shifting gold deposits off the balance sheet might help in some way to pacify the IRS, the result may well be the erosion of Switzerland’s position in the global banking world – leaving a lot of people holding out for a turnaround in the cuckoo clock market.

Photograph: Getty Images

James Ratcliff is Group Editor of  Cards and Payments at VRL Financial News.

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The problems with ending encryption to fight terrorism

Forcing tech firms to create a "backdoor" to access messages would be a gift to cyber-hackers.

The UK has endured its worst terrorist atrocity since 7 July 2005 and the threat level has been raised to "critical" for the first time in a decade. Though election campaigning has been suspended, the debate over potential new powers has already begun.

Today's Sun reports that the Conservatives will seek to force technology companies to hand over encrypted messages to the police and security services. The new Technical Capability Notices were proposed by Amber Rudd following the Westminster terrorist attack and a month-long consultation closed last week. A Tory minister told the Sun: "We will do this as soon as we can after the election, as long as we get back in. The level of threat clearly proves there is no more time to waste now. The social media companies have been laughing in our faces for too long."

Put that way, the plan sounds reasonable (orders would be approved by the home secretary and a senior judge). But there are irrefutable problems. Encryption means tech firms such as WhatsApp and Apple can't simply "hand over" suspect messages - they can't access them at all. The technology is designed precisely so that conversations are genuinely private (unless a suspect's device is obtained or hacked into). Were companies to create an encryption "backdoor", as the government proposes, they would also create new opportunities for criminals and cyberhackers (as in the case of the recent NHS attack).

Ian Levy, the technical director of the National Cyber Security, told the New Statesman's Will Dunn earlier this year: "Nobody in this organisation or our parent organisation will ever ask for a 'back door' in a large-scale encryption system, because it's dumb."

But there is a more profound problem: once created, a technology cannot be uninvented. Should large tech firms end encryption, terrorists will merely turn to other, lesser-known platforms. The only means of barring UK citizens from using the service would be a Chinese-style "great firewall", cutting Britain off from the rest of the internet. In 2015, before entering the cabinet, Brexit Secretary David Davis warned of ending encryption: "Such a move would have had devastating consequences for all financial transactions and online commerce, not to mention the security of all personal data. Its consequences for the City do not bear thinking about."

Labour's manifesto pledged to "provide our security agencies with the resources and the powers they need to protect our country and keep us all safe." But added: "We will also ensure that such powers do not weaken our individual rights or civil liberties". The Liberal Democrats have vowed to "oppose Conservative attempts to undermine encryption."

But with a large Conservative majority inevitable, according to polls, ministers will be confident of winning parliamentary support for the plan. Only a rebellion led by Davis-esque liberals is likely to stop them.

George Eaton is political editor of the New Statesman.

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