Abstract
This paper analyses how banking regulation was introduced in Switzerland – one of the world’s most prominent financial centres – which remained in place until the beginning of the twenty-first century. It shows that the law adopted on 8 November 1934 is a perfect example of capture of the regulator by the regulated. Essentially a political response in the context of the economic crisis of the 1930s, it largely reflected the interests of banking circles by limiting the intervention of the State as much as possible. The introduction of the new legislation was facilitated by the temporary weakness of Swiss banking circles, as they depended on the State to delay or prevent the collapse of many major credit institutions. They did not manage to derail the law as they had two decades earlier when they scuppered the federal bill on banks drawn up between 1914 and 1916. But this time they were better organized and more united, and intervened all the more effectively in the legislative process itself. The 1934 law is thus distinctive in that it made no structural changes to the architecture of the financial centre but merely codified its practices through flexible legislation meant to reassure the public. The law was aimed less at controlling banking activity than at keeping – thanks to skilfully calibrated political concessions – the State from having to intervene more directly in the internal management of banks or in the fixing of interest rates and the export of capital.
If we were to legislate too strictly, we would prevent our country from becoming the financial hub of Europe.
R. de Haller (banker and former vice-president of the board of governors of the Swiss National Bank) in November 1933 to his colleagues on the committee preparing the Swiss Federal Law on Banks and Savings Banks of 1934
The magnitude of the crisis unleashed by the collapse of sub-prime loans on the American mortgage market in summer 2007 has led to a pressing call for better public control over financial markets. However, despite the huge costs and far-reaching consequences of the Governments’ rescue attempts, no substantial re-regulation of the financial sector has resulted from these circumstances. It is true that the complexity of the sector in question partly explains the caution – not to say the pusillanimity – of public legislators. But, if banking regulation is a complex technical and legal issue, it is first and foremost, as we wish to argue as a preamble to this paper, a political problem and a problem of existing power relations.
Seen in this light, the history of banking regulation is part of the ‘battlefield’, 1 which, according to Jean Bouvier, describes the arena of the multiple and changing relationships established between private and public agents, banks and the State. The crisis of the 1930s, so often evoked since 2007/2008, is exemplary in this respect: it was the beginning of the age of banking regulation, as well as a moment in which the loss of legitimacy in the financial world generated the conditions for redefining the balance of power between governments and banks. For reasons which we cannot go into here, the issue of banking regulation was handled in diverse ways in different countries during the 1930s. Thus, the United States, Germany, Italy, Belgium and Switzerland (among other states) participated in the first round of legislative planning and either introduced new laws regulating the banking sector or reinforced existing laws; whereas the United Kingdom, Holland, and France – despite intense debates – did not. 2 The fact remains that in the 1930s bankers almost everywhere lost the prestige they had enjoyed during the previous decade. 3 In the United States, they were ‘fair game for congressional committees, courts, the press, and the comedians’, 4 and on the other side of the Atlantic, according to Patricia Clavin, ‘one of the most unpopular groups of people in Europe’. 5 In the explosive political climate of the 1930s, these circumstances, along with the fraudulent activities and dubious practices revealed by the crash – for which bankers were largely held responsible – helped to strengthen the hand of groups demanding that the State reform, or even nationalise, financial institutions. The banking legislation adopted during the 1930s was therefore not only a technical and legal response to the malfunctioning and abuses revealed by the crisis, but it can also be read as a political response addressed to the different circles (such as the labour movement, farmers’ organizations, and employers’ associations) demanding more or less firm State intervention.
In the present article we shall develop this perspective by dealing with both the text and context of two federal bills relating specifically to the activities of Swiss banks. One was drawn up between 1914 and 1916 at the request of the Government, and did not go beyond the draft stage because it was scuppered by parts of the banking sector. The second, to a certain extent inspired by this stillborn draft bill, was the first piece of federal legislation regulating banks, passed in November 1934. The Swiss banking world operated under the aegis of this legislation, from one revision to the next, until the beginning of the twenty-first century. Bitterly contested though it was, the Swiss Federal Law on Banks and Savings Banks of 8 November 1934 was distinctive in that it made no structural changes to the architecture of the financial centre. The controls introduced by the law clearly revealed the Government’s determination not to interfere with the financial sector but merely to codify its practices through ‘appropriate and flexible legislation’ 6 meant to reassure the public. The law of 1934 also gave birth to the famous Article 47, according to which the violation of banking secrecy became a criminal offence. This was a very far reaching and effective measure, included in the legislation at the request of the banks. 7
Our central hypothesis is that the banking law of 1934 was aimed less at controlling banking activity than at keeping – thanks to skilfully calibrated political concessions – the State from having to intervene more directly in the internal management of banks or in the fixing of interest rates and the export of capital. It is clear that the adoption of the 1934 law was facilitated by the temporary weakness of Swiss banking circles, as they depended on the State for considerable sums of money to delay or prevent the collapse of many major credit institutions. Because they were in a more vulnerable position than when they had succeeded in getting the 1916 bill withdrawn, bankers did not manage to derail the law in 1934. Nevertheless, they were better organized and more united than in 1916, which enabled them to intervene all the more effectively in the legislative process itself. In this respect, the two laws offer an example of capture of the regulator (public and political authorities) by the regulated (organized banking circles), the latter managing – not without discord – to represent their own specific interests as those of the community as a whole. 8 All the more so since, despite the virulent conflicts at the time, a form of national consensus was taking shape on the importance of protecting the position of the Swiss financial centre as a hub for international capital. In our opinion, the 1934 law was central to the formation of this consensus, and a part of the labour movement that had been kept in the background in 1916, was a major participant in it.
Since the beginning of the sub-prime crisis, international banking regulation has gained fresh attention from historians. Thus, the effect of financial crises on regulation was examined for a series of different countries in a workshop organized at the Bank of Italy in April 2009 that resulted in a book edited by Alfredo Gigliobianco and Gianni Toniolo. 9 Another volume put together by Stefano Battilossi and Jaime Reis in 2010 presents historical case studies that essentially centre on the correlation between state regulation of financial markets and economic growth. 10 Our focus is different: rather than discuss the benefits of market discipline over public regulation of a crisis, we deal with the question of the impact of different social groups, industry sectors, and banking lobbies on the political process of introducing banking regulation, thereby taking inspiration from political scientists such as William D. Coleman, Pepper D. Culpepper, Michael Moran and Michel Offerlé. 11 Furthermore, the history of Swiss banking regulation is still an underexposed topic, which has not been addressed by recent literature. Given the prominent role played by Switzerland as an international financial centre, our paper aims to bridge this gap. It is divided into four sections. In the first section, we shall briefly describe the general framework of the two bills that we are analysing. In the second section we shall retrace the history of the first draft bill regulating banking, whose rejection we take to be indicative of the growing asymmetry in the balance of power between banks and the State in Switzerland. In the third section we shall deal with the drafting of the 1934 law, as well as with the decisive role the banking sector played in this process. And in our conclusion we shall discuss the basis and main features of the legislation implemented during the 1930s.
I
Share of total assets by categories of banks, Switzerland 1890–1940 (in %).
Source: F. Ritzmann, Die Schweizer Banken. Geschichte, Theorie, Statistik (Bern/Stuttgart 1973), Tabelle I.
The outbreak of World War I gave rise to a second important phase in the history of the Swiss financial centre: namely its growing importance as a hub for international capital and as the continent’s foremost centre of wealth management. This dynamic began during the upheavals caused by the war, which reinforced the comparative advantages and attractiveness of the Swiss financial centre and gathered momentum during the 1920s in the wake of the decline, relative or total, of the main neighbouring financial centres. 15 It carried on during the 1930s, despite the severe banking crisis at the start of the decade. The crisis, which this time struck at the heart of the financial centre, slowed down but did not stop the general trend: Switzerland, prior to World War II, had become a financial crossroads of international import, as well as, according to the vivid expression used by the Government, the ‘bank vault of Europe’. 16
The 1934 banking law, because of its exceptionally permissive and business-friendly nature – in international comparison – took into account this particular development of the Swiss financial centre and even constituted one of the factors of its evolution. Both the adoption of the law and the scuppering of the Landmann bill can be seen in this medium-term context, which in Switzerland constituted an essential chapter in the relations between banks and the State.
II
As we have seen, the gravity of the banking crisis of 1910–1914 was at the origin of the Landmann bill. Until then, fewer than half of Swiss cantons had introduced legislation on banking regulation. The legislation that did exist was different in each of the cantons and applicable only to their respective territories. 17 The magnitude of the crisis demonstrated the limits of such division, especially as – in addition to the huge losses suffered by the financial sector – the list of errors, embezzlement, fraud and scams was getting longer by the month. 18 What made it worse was that many elected centre and centre-right politicians were compromised, and, in two of the cantons hit hardest by the collapse, the crisis took a clearly political turn. In the Ticino the authorities even considered calling out the troops to disperse rioters. 19 In the federal parliament, left-wing representatives fretted about the legal limbo in which negligence and swindling flourished and berated the Government for its slowness in grappling with the issue of a federal law regulating banks. 20 In Zurich, the country’s economic and financial capital, the Chamber of Commerce published an emotional plea stressing the urgency of federal legislation: ‘Today’s banking business has no more cantonal borders, and a series of banks have branches in other cantons. […] This is why legislation can by no means function on a cantonal level, but must absolutely be established on a national level’. 21 The many bank collapses were also commented on abroad, and it was pointed out that Switzerland had to support a rescue attempt led by the recently-founded SNB with the financial help of the big commercial banks in partnership with the cantonal banks. 22
This was the situation when, in January 1914, the Government finally took the affair in hand. The centre-right Federal Councillor (Minister of the Economy) Edmund Schulthess (1868–1944) immediately started the preparatory work, entrusting Julius Landmann (1877–1931) with the responsibility for drawing up the rough draft for a federal law on banking regulation. Landmann was a professor of economics at the University of Basel and a former secretary of the SNB. He thus enjoyed privileged access to banking circles; all the more so as these same circles had participated in the creation and financing of his chair at the university. 23 His seminal role in the founding, two years earlier, of the Swiss Bankers Association (SBA), the most important organization of the Swiss banking sector, was also bound to facilitate contact with the SNB. This was important, since the Swiss political system set great store by interest-based associations (peak associations), particularly in lawmaking. 24
On 15 June 1914 Landmann handed his first draft of the bill to Schulthess, who immediately communicated its main thrust to some members of the SBA committee and confidentially sought their opinion. Their extremely negative reaction led Landmann and Schulthess to revise their draft. With the outbreak of World War I obliging the Minister of the Economy to address more urgent tasks, the issue was only really taken up again in summer 1916. In the meantime, Landmann had put the finishing touches to his work.
Accompanied by a lengthy explanatory statement, the reworked draft bill contained 69 articles indirectly revealing the irregularities against which the Government was proposing to act. These included non-compliance with maturity matching, insufficient capital, the falsification and illegibility of balance sheets, deceitful advertising, and the accumulation of powers. General rules were established as to all these points, based on principles of management that the banking community itself recognized as being good and wise practice. The draft bill did propose some new procedures. For example, it intended to establish account controls via external audit firms, chosen by the State and answerable to the courts for the accuracy of the information supplied. Likewise, it proposed providing public authorities with a hitherto unprecedented means of control by instituting a right of concession under the aegis of the Federal Council, as well as a banking commission appointed by this body and seconded by a specialized office attached to the central administration of the State. Lastly, the repressive part of the law provided for prison sentences and particularly heavy fines for improper banking practice, misrepresentation of balance sheets, or communication to unauthorized third parties of information stemming from external audit controls. 25
Technically speaking, the proposed law was in keeping with the ongoing structural reforms in Swiss banking begun at the end of the nineteenth century, and may have constituted the ‘juridical moment’, so to speak, for the emergence of the modern Swiss financial centre. Landmann himself was doubtless quite confident of being in line with this development when he wrote, in the explanatory statement that accompanied his draft bill, that the aim of the law ‘is to impose on those establishments in which it is lacking the rational organisation and management that well-run institutions have adopted through their own initiative’, and that there is ‘no contradiction […] between the goals of the planned legislation and the interests of Swiss banks’ 26 – interests, he insisted, that the proposed law ‘can only support’.
This was not, as we know, the opinion of the Swiss banking sector, or at least a part of that sector: the bill divided bankers and this on two fundamental points. The first was the question of whether it was opportune or not for the State to intervene in their sphere of activity, since the introduction of a law involved, ipso facto, a break with the extremely permissive regime that had prevailed during the expansion of their industry. The second point, perhaps more complex, was the question of how the planned legislation would affect the activities of banks and the conditions of competition? Before examining how the bill itself addressed the issue of State intervention and justified the general nature of the law – that is, its application to the country’s financial institutions as a whole – it is instructive to return for a moment to the ongoing changes in Swiss banking at the time.
Banking in Switzerland was undergoing a process of unification. However, although having accelerated since the end of the nineteenth century, this process abolished neither the dualism nor the polycentrism of the industry as a whole. Two types of banks dominated the organization of the Swiss financial centre. Firstly, cantonal banks (public law entities in tune with the needs of smaller local clients) were in a strong position on the interior market. Secondly, the big banks (dedicated to looking after important industrial and commercial clients) were establishing themselves on the international market, as well as on the market, in full expansion, in Government bonds. Although the banking world was still polycentric and the three centres (Geneva, Basel and Zurich) continued to cultivate their rivalries, their interconnections were increasing, which precipitated substantial regrouping. Geneva, a traditional bastion of private banking and wealth management, was losing its autonomy in the face of the surge of Basel and Zurich, historic home ports of the big banks who were establishing branches all over the country. This decompartmentalization, which was part and parcel of the conditions leading to the emergence of the Swiss financial centre, redoubled the friction inherent in inter-bank competition, friction that the recently founded SBA was in fact meant to contain. Hence the difficulties of the banking community when it came to agreeing on what constituted, as Landmann expressed it, the ‘interests of Swiss banks’ and to defining a common position on the role of the State. Legal codification of practice would undoubtedly have an influence on the overall structure of the system by either speeding up or running counter to the developments taking place.
The explanatory statement that accompanied the proposed bill directly addressed the question of the relationship between banks and the State. According to Landmann, the banking legislation was in the ‘public interest’ because of the specific and growing importance of the banking sector in the Swiss economy, the protection of savings, and even more because of its externalities. 27 The longer the State took to introduce banking regulation, the greater the risk that it would not be able to fulfill this mission of ‘social policy’. Landmann continued: ‘Every year the transactions and the power of banks become greater and, along with this, the resistance that major institutions always offer to reforms that are not completely at one with their usual ideas and their inveterate organization’. 28 The rather substantial administrative and legal powers that this bill was proposing to grant to the Government – powers notoriously more extensive than those that the law of November 1934 would later confer on them – formed, therefore, a logical reply to this ever-increasing power of the banks. Admittedly, between the measures of control envisaged and what would remain of the Government’s real prerogatives at the end of the legislative process, the difference could be considerable, as both bankers and the State well knew. Since the bankers managed to get the draft bill withdrawn before it got to the consultation stage, we cannot know what kind of power of control the State would have had. Let us just say, with reference to Landmann’s considerations on the subject of the power of the banks, that the issue was settled even before it was raised.
Another sensitive issue was that of deciding what types of institutions would be subject to the law. Whereas in his first draft (that of 1914) Landmann had dismissed the idea of including private and cantonal banks in the regulatory system, his new version was broader in scope. According to him, the ‘material conditions’ of the banking community called for the creation of ‘a general law’, 29 applicable to the country’s banks as a whole, including cantonal and private banks. It was for this reason, he added, that the bill could not be modeled on laws practised abroad, since these mostly applied to banking systems strongly specialized in branches of activities and only concerned certain specific categories of financial institutions. Two additional arguments were also cited in support of the rejection of such models: that of the historical particularities of the Swiss banking system, which the law had no intention of modifying; and that of the effective causes of the recent banking crisis, which were not to be sought in the particularities of said system. This brings us to the ongoing struggle in Swiss banking at the time and to perhaps one of the most interesting aspects of the aborted bill.
During the early 1900s there was an ongoing debate over the relative merits of the German banking system (universal or ‘continental’) and the English one (specialized in particular banking services). It was to this debate that the explanatory statement in support of the Landmann bill referred at length, so as to push aside the wish, expressed by the private bankers of Geneva – who were traditionally opposed to any state intervention – to introduce, ‘if need be by law’, 30 the English principle of specialization to the operations of Swiss banks. Landmann – drawing on the arguments put forward by Riesser, Jaffé and Weber – argued that such a system would be neither more stable nor more fluid than the continental system. 31 The Swiss banking system, as it had developed from the middle of the nineteenth century onwards, was, in its dominant constituents (big banks and cantonal banks), of the continental kind, composed of banks of the ‘all-in-one’ or universal type, with across-the-board operations. Landmann added that the effect of a law proscribing that ‘the combination of deposit and investment operations […] would not lead to the transformation of the Swiss banking system in the direction of the English system, but rather to a purely external adaptation to the new regulations’, 32 about which he was undoubtedly correct. At any rate, he concluded that such a proposition was futile and again pointed out that it came ‘from representatives of the Genevan banks, probably because the structures [of these banks] bear a very strong similarity to those of English banks’. 33 Nevertheless, he added that the recent branches established in Geneva by the major banks of German-speaking Switzerland had already helped change this particularity of Genevan banks.
The further developments concerning the Landmann bill were the result of negotiations between the parties concerned, according to their interest in the uncertain political situation of the moment, as well as of the State’s financial situation and the expectations of all the interested parties, including the State and the SNB, as to the prospects that the war opened up to the Swiss financial centre.
Let us begin with the question of the negotiations undertaken by the different parties. Landmann’s correspondence with Federal Councillor Schulthess (the minister sponsoring the bill) shows that the two men, while staying in contact on this affair with certain members of the Swiss Banking Association, as well as with one of the leading lights of Genevan private banking, Henri Darier (1850–1931), worked in very close collaboration with a central figure of the Swiss banking world of the day, the president of Credit Suisse, Dr Julius Frey-Gamper (1855–1925). 34 Founded in Zurich in 1856 with strong links to Deutsche Bank of Berlin, Credit Suisse was Switzerland’s most important bank, the one with the most extensive web of affiliated companies and political relations, as well as the perfect model, in its Swiss version, of the big universal bank. In short, it was just the sort of parvenu establishment whose expansion the Genevan private bankers would have liked to see curbed by the State through the adoption of English-style banking legislation. Dr Frey-Gamper, who had a solid legal training, played an important role in the creation of the SNB. He also ranked, after the turn of the century, among the Government’s most influential financial experts. His relations with Federal Councillor Schulthess went back a long way, probably to the time when the latter, prior to his election to the Federal Council, officiated as a legal advisor for the important electrical engineering company Brown, Boveri & Cie, a firm to which Frey-Gamper represented the interests of Credit Suisse and its group. Landmann and Frey-Gamper greatly admired each other and the latter, solicited by both the minister and his adviser, actively participated in the preparation of the Landmann draft bill and had regular discussions with Schulthess. In this way, Frey-Gamper inspired and even altered the final wording of many of the articles of the bill. 35
For Frey-Gamper, the Swiss big banks had the least to lose in promulgating legislation which, while leaving the structure of the system intact, would help discipline the market and oblige local and regional banks to limit their operations or to seek alliances with bigger banks. Certainly, the interference of the State in banking affairs and the powers invested in the public authorities were cumbersome, but the scope of those powers could be reduced by means of the commissions of experts who would have to discuss the draft bill before its passage through parliament and, ultimately, negotiate the rules of enforcement. In this area, as its role at the beginning of the process had already shown, Credit Suisse, and its respective partners in the Cartel of Swiss Banks, had much greater influence than that of private bankers. Founded in 1897 by the Swiss big banks in order to combat French competition, the Cartel had arrived at an agreement with cantonal banks in 1911 to jointly negotiate and distribute the huge loans to the Government amongst themselves. 36 As the war had rid this market of foreign competition, at the same time causing the financial needs of the Government to explode, federal authorities lent an attentive ear to the suggestions of their financial sponsors. 37
Last but not least, Frey-Gamper probably also believed that an open attitude regarding the introduction of a banking law would appease the partisans, themselves divided, of intervention by the State on the highly sensitive terrain of the fixing of maximum interest rates and the export of capital. In June 1914 Frey-Gamper explained to his SBA colleagues, worried about the preparatory work on the bill, that Schultess’s ‘preventative’ 38 initiative had helped block four parliamentary motions on banking. 39 At the cantonal level, many bills launched in the context of the banking crisis of 1910–1914 were at a standstill, waiting for the banking bill to finally be published, which might make them redundant or obsolete. 40
It was at this point that the bankers hostile to the draft bill reacted. They simply tried to delay the moment of entering into official negotiations and – once the draft bill was published – took a series of off-the-record measures against its publication. Henri Darier, head of the private bank of the same name and president of the Union Financière, which regrouped the flower of Genevan private banking, led this oppositional front specialized in wealth management. It is clear that he and his colleagues feared two things. Firstly, they feared that the introduction of a banking law obliging them to account for their management would provide Swiss tax authorities with a certain means of control over the amount of their profits. They were well aware of the fact that the Federal Council was considering introducing a special tax on these profits. Secondly, they feared that the law would alarm their foreign clients, who, in regard to their own national tax authorities, were very attached to the qualities of discretion of Genevan private banking. It is also likely that, after having seen the bill, Darier and his friends considered that, when published, the scarcely flattering portrait that Landmann painted of the Swiss banking world in his explanatory statement would also have an extremely negative effect on the confidence of that same international clientele. Lastly, coming from a Federal Council expert, the harsh criticism of the frailties of the English banking system, as outlined in the explanatory statement, was hardly going to be of benefit to Swiss bankers, what with London and Paris already suspecting, not without reason, that certain Swiss big banks were working to the advantage of the enemy. 41
Darier had been approached to revise the French translation of the bill. He refused to do so in May 1916, but not before warning Landmann that the bill (which he had not yet seen) ‘will meet with strong opposition in French-speaking Switzerland, increasingly hostile to any attempt at centralization’.
42
Although a traditional aspect of Swiss politics, the threat was less harmless than it might seem, the war having poisoned relations between French- and German-speaking citizens. At the same time, the vice president of the SBA, Alfred Sarasin (1865–1953), persuaded Schulthess to pass a copy of the draft bill on to Darier and himself, assuring him that only confidential use would be made of it.
43
A month later there was talk of handing a copy on to the SBA, which wished to discuss it before publication. Schulthess vetoed this in order not to lose time, but also because he, along with Landmann, wanted the bill to be published before entering into negotiations with the bankers. Darier again warned that French-speaking Switzerland would react badly to the bill and lobbied Schulthess to postpone its publication on the grounds that The foreign press, especially the French press, will present the bill as a Socialist creation and will once again seize the opportunity to invite the French to withdraw their deposits from Switzerland because of the danger of State interference in the running of the banks.
44
There will (naturally) be a [federal] inspectorate whose composition and powers we are far from being in agreement about. […] We have still not been told what treatment the Swiss Stock Exchange will get once the banks have been dealt with. But a rosy future lies ahead for [federal inspectors], and Swiss bankers will continue to suffer.
45
esteem and confidence the Swiss banking world enjoys among its foreign clientele and the wealth which, thanks to this, has arrived in Switzerland, have considerably helped our banks sustain the economic development of our country. This positive general influence has contributed to the fact that, since the beginning of the war and contrary to all expectations the Government has managed to cover its financial needs at favourable terms. It has therefore every reason, at the present time, not to undermine the position of our banks through the publication of a bill with legal provisions on such a delicate matter.
48
At the tactical level, Swiss bankers had initially entered the fray in a disorganized manner. This was in all probability due to the contradictory interests of private banking and the big banks in a period in which the profession’s umbrella organization, the SBA, still had little legitimacy when it came to uniting positions around a common course of action. In this context, the initial work on banking legislation acted as a sort of distraction. It helped to prevent an increase in pressure regarding the introduction of a federal law on the Stock Exchange, requested since 1915, or of State control over the export of capital and interest rates, matters raised by powerful actors such as the Swiss export industry and the farmers’ associations. 50 It was probably because, since spring of that year, the Government had decided in favour of maintaining the freedom of the banks in these last two areas that the adoption of the Landmann bill was no longer opportune, not even for bankers favourable to a precautionary regulation of the financial industry. The concomitant awakening of the labour movement, which emerged out of the climate of a ‘sacred union’ typical of the beginning of the war, certainly helped to persuade the undecided that it was not a good idea to pursue a legislative process that ran the risk of having to make concessions that were hardly favourable to the freedom of the banks. The fact remains that the stand taken by the SNB was what made the Government end discussion of and reject a bill which had at first only been seen as prejudicial to the interests of Swiss banks but was now considered contrary to the very interests of the Swiss State.
The lesson was learnt. Thus, the Catholic-Conservative Federal Councillor Guiseppe Motta (1871–1940), head of the Department of Finance and Customs, would declare in September 1918: Without the organization of our banks, without the strong support they have given to the country [during the war], it would have been impossible for the Government to face up to its difficult financial tasks […]. The credit of the country is bound up with the credit of the banks themselves.
51
III
Presaging the Great Depression of the interwar years, the crisis that hit Swiss banks in the second half of 1931 gave fresh impetus to the question of State control of their activities. Markedly different from the failures of 1910–1914, this time the debacle took a heavy toll on the country’s big banks, leading to massive intervention on the part of the Government. The adoption in November 1934 of the Federal Law on Banks and Savings Banks formed the counterpart of the bailouts undertaken on behalf of a banking world that was both enfeebled and suffering from a serious loss of legitimacy. Not counting the discount facilities (the refinancing of banks in terms of liquidity) agreed to by the SNB, it would cost the country 200 million Swiss francs in public subsidies, of which half – a sum equivalent to a quarter of Switzerland’s expenditure for that year – went to rescuing the Swiss Popular Bank in 1937. 53 Of the seven other big banks active at the time, four had to be stabilized and reorganized under the aegis of the Government, one collapsed despite an injection of State funding, and only the group’s two heavyweights, Credit Suisse and the Swiss Bank Corporation, managed to get out of difficulties under their own steam. In all, 60 banks would be taken over or shut down during the decade. 54
In classic manner, the crisis commenced with a banking scandal, that of the Bank of Geneva, which recalled, albeit on a larger scale, the gravest irregularities of the 1910s. Involving the canton’s public authorities and the principal centre and centre-right political parties, and occurring in the country’s second most-important financial centre, the scandal besmirched the entire Swiss banking sector. It ended on 11 July 1931 in a climate of great political tension with the shutting down of the Bank of Geneva. 55 Put in a difficult position by the affair and by its own commitments abroad, the Geneva Discount Bank, the only big commercial bank originating in the French-speaking part of Switzerland, in turn suffered heavy withdrawals. The large discount credit the SNB granted it and the 20 million Swiss francs in aid that it was awarded by the Federal Council on 17 July 1931 probably kept it from bankruptcy; however, public confidence was permanently damaged, and the bank was to collapse three years later. The fact remains that this considerable public subsidy, added to the list of fraudulent operations revealed by the Bank of Geneva scandal, exposed ‘a state of corruption reminiscent of the situation in Panama’, as a pamphlet of the Swiss Social Democratic Party affirmed in autumn 1931: ‘Some highly-considered bourgeois politicians have made themselves accomplices to those who misappropriate the savings of widows, orphans, and old folk in order to pay unjustified dividends to their shareholders’. 56 This situation strengthened the position of those in favour of the establishment of State control over the financial sector.
For these reasons, the labour movement and farmers’ organizations requested the Government to protect the savings of the working classes by decreeing a law on the banks that would also permit intervention on the evolution of interest rates by regulating, in particular, the export of capital. Various motions and parliamentary questions were introduced to this effect in late summer 1931, in a year in which national elections were to take place, by different social-democratic parliamentary delegates. Deputees of the Radical Democratic Party also took the floor and demanded that banks be obliged to display greater transparency when drawing up their balance sheets. 57 The Federal Council reacted to this political pressure and instructed the Department of Finance and Customs (DFC) to study the possibility of introducing banking legislation based on the Landmann bill, which was suddenly resuscitated after lying dormant since 1917. The assignment went to a former student of Landmann’s, Eduard Kellenberger (1889–1976), deputy director of the DFC, who compiled a 12-page report on the matter dated 1 September 1931. The tone was very different from Landmann’s, and its spirit immediately hostile to any overly interventionist measure: ‘Once the people have allowed increased state supervision’, opined the expert, ‘State influence will penetrate more and more deeply into the banking system, to the point that it will be practically socialized. And if the banks are in the hands of the State, socialization of the rest of the economy is only a matter of time’. 58
The mounting political pressure worried banking circles, leading them to deploy a defence strategy on two fronts. On the one hand, they tried to satisfy the demand for increased transparency on the subject of balance sheets by concluding parastatal arrangements with the SNB. On the other hand, they agreed that, if the introduction of measures for supervision turned out to be inevitable, then these should not on any account be subject to a special law. Strongly recommended to the SBA by Adolf Jöhr (1878–1953), a former secretary of the SNB who had become general director of Credit Suisse in 1918, the first part of this strategy referred to the policy of so-called gentlemen’s agreements. 59 This policy had shown itself to be highly effective for the banks during the 1920s, when it had been necessary to keep the State from passing legislation on the export of capital. 60 Applied to the issue of balance sheets, the method lived up to its promise once more: even though it was initially agreed that banks would hand in quarterly balance sheets to the SNB, the gentlemen’s agreements finally signed on this matter in 1932 envisaged no more than the half-yearly transmission of balance sheets to the central bank. This outcome was also due to the results of the federal elections of autumn 1931, which took place in the middle of the negotiations on this matter and which did not end in the dreaded victory of the Left. This, of course, strengthened the bankers’ position. Nevertheless, they had to accept that the SNB put in writing the verbal agreement passed in 1927 regarding the export of capital.
The second part of the defence strategy was to prevent the passing of a special law on banking, by favouring – in case it proved impossible to avoid the adoption of certain controls – the insertion of new provisions in the Classified Compilation of Federal Legislation (the ‘Code des obligations’ that is a central part of Swiss private law) already in force. The establishment of a specific law on banking would be worrying to the banks’ clients, who would certainly prefer a mere addition to the existing legislation. In addition this course of action would, as Jöhr explained to his colleagues of the SBA in September 1932, limit the risk of having to introduce too many new regulations, since the Classified Compilation of Federal Legislation could not ‘include a lot of regulations about details inapplicable to other companies [besides banks]’. 61 The Catholic-Conservative head of the DFC, Federal Councillor Jean-Marie Musy (1876–1952) shared this view and in summer 1932 pronounced himself in favour of introducting very limited measures in the framework of the existing federal legislation. 62 In order to keep new bankruptcies from poisoning the atmosphere, in July 1932 his department pressed for the creation of a loan fund, responsible for granting payments to banks in exchange for securities that were difficult to sell. The fund was financed to the tune of 75 million Swiss francs by the Government and in the amount of 25 million by the banks and insurance companies. It was received coolly by the Social Democratic Party, which saw in it a way of making the State responsible for losses suffered by banks 63 – a criticism that did not stop it, however, from appointing party delegates to the board of directors of the fund.
In 1933 all these evasive strategies came up against the worsening of the banking crisis, which prioritized the issue of setting up a special law on banking. The situation of the Geneva Discount Bank, which had become the Swiss Discount Bank following its fusion with the Union Financière, had continued to deteriorate, despite the backing of the public loan fund. The Government wished, therefore, to grant it a new subsidy of 20 million Swiss francs. Pressed by the Left, which called for the introduction of banking regulation along the lines of the Landmann bill, Musy considered that this new financial aid could be presented to parliament only if the Government made concessions on the question of banking regulation at the same time. In his eyes this would have to be done by presenting an ad hoc law on banks, and not merely by suggesting amendments to the ‘Code des obligations’. The deputy director of the DFC, Kellenberger, in collaboration with banking circles and the SNB, prepared a bill for a new law on banks that foresaw the introduction of auditing measures, without, however, creating an advisory body, the SNB having categorically refused to assume this role. Moreover, the banks were to be obliged to transmit their detailed balance sheets to the SNB, which would also win the right to inspect any export of capital. This was a matter which had so far simply been dealt with by a gentlemen’s agreement between the banks and the SNB. 64
In order to draw up the new law on the basis of this bill, Musy named a committee of experts, which met for the first time in mid-March 1933. Its composition left little room for doubt as to the largely conservative intentions of the Federal Council: among its 19 members were one delegate of the Swiss Farmers Union, one delegate of the Swiss Federation of Trade Unions, one delegate of the SNB, three delegates of the main employers’ associations, and 13 bankers. The bankers – not before energetically protesting the change in the department’s attitude and the fact that it had given up the solution of merely amending the ‘Code des obligations’ – decided to participate in the drawing up of a new law they saw little chance of preventing. 65 During the first consultation phase, they nevertheless continued to repeat their principled opposition to the projected law, declaring that at most they would accept the systematizing of the measures for regulation already in force. The representatives of cantonal and private banks even demanded that their establishments ought not to be subject to the law. 66 The delegate of the Swiss Farmers Union, Dr Oskar Howald (1897–1972), and the representative of the Swiss Federation of Trade Unions, Dr Max Weber (1897–1974), mainly took a stand on matters relating to the regulation of the export of capital, the independence of the audit firm that was to be created, or on the problem of controlling interest rates – themes which, however disputed, fell far short of the nationalization of all banks inscribed in the programme of the Swiss Social Democratic Party. 67
In April 1933, notwithstanding the lack of any concrete advance on the issue of banking regulation, parliament accepted a new rescue attempt on behalf of the Geneva Discount Bank. This public aid of 35 million Swiss francs did not prevent the definitive bankruptcy of the bank, which occurred a year later. 68 In May 1933 the discussions of the commission were adjourned: it would take a new big bank in difficulties to come knocking at the doors of the SNB and the Federal Council for work to get under way again. This time it was the rescue of the Swiss Popular Bank, which would demand the trifling sum of 100 million Swiss francs.
And so once more it was in order to sugar the pill of an injection of public funds into the financial sector that discussions on the banking law got under way again at the end of November 1933. The head of the DFC asked Kellenberger to come up with a new bill, specifying that ‘the content and effectiveness of the measures must be strengthened, due to the new events that have occurred in the banking sector’. 69 The main innovation proposed by the new bill drafted by Kellenberger in order to beef up the legislation was the creation of a federal Banking Commission, responsible for supervising the implementation of the law. 70 Moreover, the committee of experts which, since 28 November 1933, had been examining the new bill was extended to include four social-democratic parliamentary delegates and three representatives of the Party of Farmers, Traders and Independents. 71 These social-democratic and agricultural delegates pleaded in vain for a lowering of the limit of 10 million Swiss francs – the figure above which the export of capital had to be authorized by the SNB – and for the adoption of guarantees of genuine independence of audit firms towards the banks they were to supervise. 72 The demands made by the representatives of private and cantonal banks would meet with more success: the banks obtained the granting of a special status for their establishments, sparing them, in particular, from having to communicate their balance sheets to the SNB. 73
The final bill was adopted by the committee of experts on 18 January 1934. The modifications that would be made during later stages of its elaboration – the adoption of the bill by the Federal Council, its discussion by parliamentary committees and the practically unanimous vote for it in parliament, all between February and November 1934, plus its definitive implementation on 8 November 1934 – did not alter the fundamentally business-friendly nature of this new legislation. 74 The SBA committee even considered that the deliberations of the Council of States (the upper chamber of the Swiss parliament) had improved the bill in favour of the interests of the banking community. 75 The commission to supervise the export of capital that the Social Democrats had wanted was deleted from the bill on the grounds that such action would be superfluous and would ‘hinder the rapid and discreet handling’ of international business. 76 As for the project of getting a provision concerning the admission of foreign investments quoted on the Swiss Stock Exchange written into the law, it was also ruled out on the pretext, as Musy explained in February 1934, that this ‘matter must be reserved for a law on stock exchanges, a law which is, moreover, in preparation’. 77 It would take more than sixty years for such a law to see the light of day, its final adoption taking place in 1995. Likewise, the old idea – energetically defended by farming representatives and fought against by bankers – of granting the State or the SNB the right to intervene on the interest rates applied by the banks was rejected: ‘We would be entering the realm of utopia’, argued the head of the DFC. 78 The SNB did however obtain a few extra powers regarding the increase in interest rates on medium-term notes issued by banks, which the SBA deplored. For all that, Jöhr, general director of Credit Suisse, was highly satisfied with the results obtained, notwithstanding the more political nature of the deliberations conducted by the parliamentary commission of the National Council (the lower chamber of the Swiss parliament). 79 It is true that a few changes were introduced (mainly to do with the extension of maturities and deferments), which would lead Jöhr to say: ‘There appears to be little understanding in Berne [the seat of the federal government] of the psychology of capitalists’. 80 All the same, the SBA did manage, by way of a request made to the parliamentary commission, to get these measures struck out of the final text.
The law came into force on 1 March 1935, after the expiry of the referendum deadline. Nevertheless, the die had not yet been completely cast: clarification of the rules of enforcement of the law could prove, as the director of the Union of Swiss Banks recalled at the time, to be ‘more important that the law itself’. 81 The bankers again proceeded with great skill. To begin with, they managed to keep the draft bill for the implementing regulation prepared by the DFC and the SNB in autumn 1934 from being discussed in a plenary commission. Next, Jöhr of Credit Suisse and Max Staehelin (1880–1968), president of the Swiss Bank Corporation got the Government, at their request, to ‘profoundly transform’ (according to Jöhr) 82 the bill before it was submitted to a smaller committee of experts. Deliberation took place almost entirely among the interested parties: of the 14 members present, 10 commissioners (five of whom were connected with the big banks) represented the interests of the banks, while two were from the SNB and two from the government. 83 The result of this procedure was discussed within the SBA and, save for a few reservations, led to a consensus among both private and cantonal bankers. The content of the implementing regulations followed what could be called a Jöhr line: it consisted in having the text counter ‘the possible intervention of the [federal] Banking Commission’ 84 on the essential points, such as that of the annual balance sheets and accounts. It also limited, as far as possible, the authority and the powers that the Banking Commission might claim for itself, while compromising on less important articles and on those that would not provide a pretext for the State to meddle in the banks’ internal affairs. The implementing regulations still had to be discussed in the plenary commission, which was more of a headache for Jöhr. It seems that this was not so much because some delegates of the farmers’ associations and the labour movement would have to be included among the some forty members that were to be convoked, than because it was essential for banks to present a united front within the commission. 85 Success came in February 1935, with the plenary commission ratifying the proposed implementing regulations without major changes. 86 Future Federal Councillor Max Weber (for the time being a Swiss Federation of Trade Unions expert delegated to work on the commission) commented that same month, expressing more a sense of impotence than of credulity: ‘Once again bank representatives have attempted to draw up implementing regulations in a way that means we are dealing in fact with a law that aims to protect banks rather than a law that aims to protect depositors’. 87
IV
What, then, was the result of the banking regulation developed since spring 1933 under the strict control of the banking sector? The main change introduced by the new law was the creation of an independent supervisory authority, the Federal Banking Commission, elected by the Federal Council and responsible for enforcing the law. 88 In addition, it introduced obligatory verification of the accounts of each bank by an independent audit firm. Certain principles to do with the organization and management of banks were likewise decided upon, but no restriction on the type of their operations was imposed. The SNB was given, as we have shown, a veto right over the export of capital whenever it exceeded a certain amount, as well as the right to monitor any increase in the interest rates of a bank’s medium-term notes (fixed-interest debt securities). Banks had to submit their balance sheets twice a year to the SNB, big banks three times a year; and rules – essentially stipulations about the different types of moratories for the payment of their liabilities – were adopted to govern future assistance given to banks in difficulty. The Federal Banking Commission’s authorities in terms of assistance to failing banks were extended in 1936, when it was awarded direct discretional powers in this area. Aiding banks in difficulties came to represent such a large part of its undertakings (40% of its activities during its first year of existence), that the main assignment it was originally given – to enforce the new federal banking law – probably suffered as a result of this. 89 Lastly, and this was a central point, which had been introduced into the law without provoking any debate in the committee of experts or in parliament: Article 47 made the violation of banking secrecy a crime, prosecuted ex officio, even if the injured party did not press charges. These provisions thus turned banking secrecy into a sort of ‘public good’ protected by the State. 90
A general observation is called for here: the banking supervision introduced in Switzerland in the context of the Depression was not intrusive and made no provision for direct State control of banks. Four features underline the permissive nature of the law. Firstly, its limited scope: excluded were most finance companies, stock exchange traders, wealth managers and agents that did not pursue a banking activity in a narrow sense, while private as well as cantonal banks benefited from a privileged status. Secondly, the powers granted to the Federal Banking Commission were derisory, if only at the level of personnel: a mere five people worked for the commission, with a general secretariat of two to three members. The commission had no access to the information it needed in order to exercise proper control of banking activity. At the Banking Commission’s first meeting on 8 April 1935, the managing director of the SNB bluntly announced the SNB’s refusal to pass on the information it received from the banks: The law has consciously made provision for a demarcation line between the two institutions [SNB and Federal Banking Commission]. The SNB is not a supervisory body of the banks. It is itself a bank, it has knowledge of all sorts of professional secrets on the part of other banks […]. It does not have the right to divulge these professional secrets to other bodies.
91
Ultimately, the Federal Law on Banks and Savings Banks adopted in November 1934 largely reflected the interests of the Swiss financial centre, especially the big banks, by limiting the intervention of the State as much as possible, and by legitimating, to a large degree, practices resulting from a parastatal regulatory framework already in force.
94
Ever lucid, the first director of the Federal Banking Commission’s general secretariat, Paul Rossy (1896–1973), concluded in 1936: This law does not have any characteristic of a governmental measure: control is only exerted by private circles, and the Federal Banking Commission created by the law is not part of public administration, and in reality has no right to monitor either the internal affairs of the banks or the reports of the auditors.
95
Another notable feature of this law is that it did not envisage any restriction of the type of operations a single bank could engage in. Whereas abroad the principle of the universal bank was under criticism and the legislation introduced called for the separation of business banking and investment banking operations into different institutions, the 1934 law preserved the Swiss banking system’s universal character. 96 As we have seen, in 1916 Landmann himself had already arrived at this conclusion, and we may assume that neither the cantonal nor the big banks, whose representatives exerted (in 1916 as in 1934) a direct and powerful influence on the legislature, would have lent a hand to a law that would have suppressed that character. The power of the big banks of German-speaking Switzerland is based on these factors that distinguish Swiss legislation from almost all banking legislation adopted during the 1930s.
V
As we suggested in the introduction to this paper, the history of banking regulation is best understood as the product of a struggle between political forces rather than as the simple outcome of the evolution of technical and legal rules designed to resolve real or imagined faults of the banking system. International comparisons in this area can be very illuminating, but they can also miss their mark if they simply consider and compare the different legislations as such, without relating them to the specific or even idiosyncratic historical and political configuration of which they are the products. It is certain that the particular dependancy of the contemporary State on financial intermediairies constitutes a structuring and transversal element of surveillance regimes and banking regulation. However, the very important place that was given to financial circles in Switzerland in the elaboration of the Federal Law on Banks and Savings Banks of 1934, which can be explained by their weight in the national economy and the particularities of the political system, constitutes, beyond the particular case study presented in this article, an almost perfect example of capture of the regulator by the regulated.
Finally, it can be noted that the adoption of the Federal Law on Banks and Savings Banks in November 1934 undoubtedly helped to keep the Government, under the political pressures of the moment, from having to intervene more directly in the highly conflictual field of capital export and the evolution of interest rates. Furthermore, while it had been excluded from the discussions relating to the Landmann bill, the labour movement did play a certain role in the debates that led to the adoption of the 1934 law. One of its historic leaders, Robert Grimm (1881–1958), once imprisoned for his role in the general strike of November 1918 (an event that traumatized Swiss political and economic authorities), played an important part in the process of drawing up this law, to which, in a way, he gave the backing of the labour movement. Like Max Weber, his colleague from the Swiss Federation of Trade Unions, he did not hesitate to recognize the overall limits of the adopted law. He observed in August 1934: Nobody can have any illusions about the effects of the law. The banks themselves have accepted the bill, which shows that they do not particularly fear it. We are thus not dealing with a radical banking reform, but rather with a law of appeasement.
97
Footnotes
Acknowledgements
We would like to sincerely thank Olivier Feiertag, Michel Margairaz and Yves Sancey for their precious help and insightful remarks, as well as Paul Hammond and Kristina Mundall for their work on the translation.