Is Switzerland the Next Cyprus?

Remember the lady who successfully sued McDonald’s because she spilled a cup of its hot coffee in her lap?

Back in 1994, that controversial case was emblematic of the stunning lack of personal responsibility that was slowly infiltrating our society.

After all, if you try to balance a cup of steaming hot liquid between your knees and fail, no one but you is to blame if you get burned.

I wish I could say that society has learned the proper lessons from that sad episode, but things have only been getting worse.

Fast forward to 2013 and here come the bank “bailouts” in Cyprus, where a similar lack of personal accountability was evident.

But it’s not in the way you think

Re-visiting Cyprus:

You see, in Cyprus, the controversial bank “bailouts” were really just bail-ins. Depositors knew that their deposits were only insured up to a fixed amount – just like FDIC insurance here at home. Any amount above the insured limit was subject to loss, especially if the bank in which they were deposited went belly up.

Now, I’m not arguing that the Cypriot authorities handled the banking mess well. They made many mistakes, the worst being a clear lack of transparency. However, I am stating that Cyprus bank depositors knew that their deposits were only guaranteed up to a certain amount.

If you deposit more than the insured amount in a bank, you are essentially investing in that bank. And with any investment, the investor is responsible for doing research before turning their money over.

And, frankly, a bail-in makes far more sense than a bailout, where all the taxpayers have to pay for the mistakes of a handful of banks and their investors. Unfortunately, many Cyprus bank depositors expected the government and fellow citizens to rescue them because they didn’t want to be held to the terms of their deposit insurance.

Sadly, some have used the chaos surrounding Cyprus to suggest that a similar fiasco could happen in the international banking haven of Switzerland. But those peddling that myth are mistaken. Switzerland remains one of the most attractive offshore banking destinations in the world.

Swiss Banks are Still the Best Regulated

In 2011 and 2012, Switzerland revised its Banking Act of 1934 to provide the Swiss Financial Market and Supervisory Authority (FINMA) with the legal authority to confiscate depositor funds in the face of bank failures. Because of these revisions, some now claim Switzerland is ripe for the same chaos that befell Cyprus. But those that do are missing a critical point.

The revised regulations that are now being sensationalized are much ado about something old. If a Swiss bank fails, FINMA will protect CHF100,000 of each deposit account. Amounts greater than that may be used for the bank under FINMA supervision after owners, bond holders and others assets are exhausted. For years, Swiss banking law has already guaranteed deposits up to a maximum of CHF100,000, which predates anything that happened in Cyprus.

What the authorities in Switzerland have chosen to do now is be transparent about their country’s banking rules and make clear that depositors are responsible for their investments. If investors make an unwise decision, they will reap the consequences. It’s a shame that such a self-evident truth causes controversy these days.

What the detractors of the Swiss banking system don’t mention is that it continues to be one of the most advanced and safest banking systems in the world. Banks not only perform the normal banking functions but also provide services like portfolio management and securities trading, and contain some of the best asset managers in the world.

When all is said and done, Switzerland remains a democratic, affluent country with a stable economy and a strong national currency, and its banking system has held firm over the last 100 years. Its recent efforts at banking transparency and investor accountability should only burnish its reputation as an attractive destination for those seeking offshore banking and investments.

So, is Switzerland the next Cyprus? The answer is no. The Swiss are just bringing back personal accountability and I applaud them.

In Wealth & Prosperity,

Erika Nolan
Executive Publisher, The Sovereign Society