Nironjan Roy
Within a year of collapsing one of the world’s largest financial institutions, Credit Suisse, another Swiss bank has fallen into big financial trouble. Compliance failure, regulatory issues and over exposure in the market brought down the giant financial institution Credit Suisse, which was subsequently salvaged by UBS. Similar situation has come to the fore with reports of irregularities in another Swiss bank named Julias Baer International (Baer), which has turned out to be a facepalm for Swiss Financial Authorities (Finma).  

The problem caused by the Benko debacle was persisting for long, but Baer was deliberately allowing to continue with an objective of generating profit at the cost of their professional ethics. Within a year of Credit Suisse’s fall, no one imagined that another Swiss bank may follow the same fate.

The Baer was founded in 1890 as a money changing house rendering services to the mobile businesspeople who were brought in by the railway authorities. However, after a decade, the bank’s co-founder Julius Baer renamed the bank as “Julius Baer International”. Since inception, Baer was focusing their business on the rich community who were the main beneficiary of Switzerland’s rapid industrialisation. During the World War II, Baer set up a branch in New York with an objective of helping the people who fled war-torn Europe and thus protected their wealth. This was the beginning of Baer’s cross-border expansion in the financial market.

In 1980, Baer became a public company through listing with Zurich Stock Exchange. Thenceforth this bank undertook extensive business acquisition attempts and in 2013, this bank acquired Merril Lynch’s wealth management operation outside the USA and Japan, what ensured its strong presence in Asia and Middle East. Bank’s growth strategy worked very well like UBS and Credit Suisse. At certain point, bank’s portfolio of customers’ assets reached 430 billion Swiss Francs equivalent to USD 483 billion.

The rapid growth of Baer also brought some perils which started with trouble in Latin America where the bank was accused of having inadequate anti-money laundering control. The Swiss regulator Finma temporarily restricted Baer from undertaking large-scale acquisition. Baer along with some other financial institutions were subject to investigation in Singapore over the allegation of handling funds that were associated with suspected criminal.

For growing business rapidly, Baer resorted to hiring people from outside in its wealth management area, because new recruits bring with them new business prospects. As a part of the bank pursuing strong growth strategy, Baer hired a veteran banker from Credit Suisse in 2018, who brought a credit customer Benko, an Austria-based company with business presence across Europe. While other banks and financial institutions were reluctant to finance Benko, Baer eagerly accepted this customer while providing extensive private debt (what was expected to generate considerable amount of revenue for the bank). Baer also relaxed many risks assessment control and compliance parameters for Benko. In doing so, Baer compromised conflict of interest as the bank’s team which managed credit risk also reported to the same person or chief financial officer who was responsible for loans to private clients including Benko. In the standard practice, risk department reports to the Chief Risk Officer. In this way, Benko’s loans were getting compromised and at certain point it exploded while wiping out bank’s half of the profit in 2023.   

After Credit Suisse, Baer’s trouble has come as a big blow to the Swiss regulators. They may not presumably pursue the same strategy in protecting Baer, instead they may pursue different approach which is evident in Finma’s action of nominating its own staff in Baer’s headquarter. In addition, they have initiated several investigations in the area of bank’s risk processes, client monitoring and bank’s activities in Russia as well. With a view to restoring Baer’s credibility, Finma has hired a veteran of European Central Bank as its next CEO.

However, the positive side is that there is no report of panic withdrawal from the bank and no report of losing customers’ money. Moreover, there is report of rising inflow of fund from the customers to the bank. So, there is little risk of collapsing. Nevertheless, the investors appear to have less confidence as Baer’s share prices got slashed by 20% after the bank’s trouble surfaced. Bank’s executives are receiving strategy advice from Goldman Sachs Group Inc. There is strong speculation in the market that like Credit Suisse, Baer might be acquired by the rival. However, bank’s high valuation has made that possibility very unlikely to happen.  

As reported in the local media, the bank’s Chief Financial Officer has assured the analyst, market experts and shareholders that they have extensively reviewed the quality of their credit risk and are strengthening risk mitigating tools.

They have completely shut down private debt unit as well. Baer is now focusing on their traditional business of wealth management. Despite these attempts, only time can tell what will happen to Baer in the long run.
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The writer is a certified anti-money laundering specialist and banker based in Toronto, Canada. Email: [email protected]