To be a part of the solution – CEOs in conversation

Since September 2019, two members of the students’ fraternity AV Turicia are holding the highest positions at leading Swiss banks. An extraordinary constellation! Basil Heeb v/o Palü is CEO of Basler Kantonalbank (BKB) and Chairman of the Board of Directors of the subsidiary Bank Cler. Philipp Rickenbacher v/o Alliance is CEO and member of the Executive Board of Julius Baer Group AG and Bank Julius Baer & Co. AG.

The conversation with the two CEOs Heeb v/o Palü and Rickenbacher v/o Alliance should have taken place on Friday, April 17, 2020 – with a delicious dinner and a cool beer. But here, too, the coronavirus made us change plans, and the exchange took place during the lockdown via teleconference (telco) – one sitting in the home office, the other in the office. Pro: Money saved due to skipped fancy dinner; just over one hour time spent, instead of several hours for a whole evening program; no “clouded” mind the next day, given that the participants refreshed themselves with mineral water during the telco. Contra: reduced conviviality and a more formal framework. Are these characteristics of the new Corona reality, hopefully only temporary? What does the Corona crisis mean for banking, for future (non-) coexistence at the workplace and for the Swiss financial markets? We talked about this – as well as tokenized assets,IMF scenarios, and why the time of austerity policy must be over.

Basil Heeb v/o Palü
Basil Heeb v/o Palü, Dr. sc. techn., has been CEO of Basler Kantonalbank and Chairman of the Executive Committee since 1 April 2019 – and was appointed Chairman of the Board of Directors of Bank Cler in mid-2019. At the beginning of his career, Palü worked at McKinsey & Co. as a consultant for financial companies. He then moved to the financial sector and headed the Basel branch of Wegelin & Co. Privatbanquiers before taking over as CFO at Notenstein La Roche Privatbank. Prior to joining Basler Kantonalbank, Palü was active at swissQuant Group AG as a member of the Board of Directors.

Philipp Rickenbacher v/o Alliance
Philipp Rickenbacher v/o Alliance, Dipl. Natw. ETH, has been CEO and member of the Executive Board of Julius Baer Group AG and Bank Julius Baer & Co. AG since 1 September 2019. Since then, he has also been a member of the Board of Directors of the Swiss Bankers Association, Basel. Alliance began his career in commercial support at the Swiss Bank (1996–1997). From 1997 to 2004 he worked for McKinsey & Company in Zurich and London. In 2004 he joined Bank Julius Baer & Co. AG. After two years working for GAM (Switzerland) AG in 2007/08, he returned to Julius Baer in 2009.

The crisis as a catalyst

Rickenbacher v/o Alliance is in his office at Bahnhofstrasse, Heeb v/o Palü dials into the telco from his home office. In order to maintain a familiar daily structure, to meet elected single social contacts and due to the existing infrastructures, both also work during Corona Lockdown times mainly in their offices instead of in the home office. “Today’s home office day is rather an exception,” says Palü. The Federal Council’s code of conduct can be taken into account in the almost empty workplace without any problems. Palü: “I also meet regularly with representatives of the government, which is why working in the office in the city is an advantage for me.”

At BKB and Bank Cler, around 70 percent of the employees are currently employed from the home office – the equivalent of around 900 employees. The rest is present in the offices because of their activities – for example, in the branches, which are all open, or employees working in retail and back-office positions. “I regularly visit the branches in person. We protect the employees who have to continue to come to the bank in the best possible way. They appreciate it when the CEO checks-in himself now and then,” says Palü.

The situation is similar at Bank Julius Baer. Alliance: “We have around 7,000 employees who are equipped to work from home. However, at no time does everyone work in the home office at the same time – among other things, trading, IT control activities, reception and security functions have to be done on site.”

The relocation of the workplace from the office to the home office for such a long time and for so many workers demanded solutions for new circumstances such as the handling of customer data at home. Palü: “Our employees are not allowed to take home physical documents due to the security regulation. Telephone calls with customers must be conducted confidentially. A digital signature has been set up for physical signatures.” Via VPN, employees have access to the company’s internal networks from home. The implementation of such changes usually requires multi-stage processes. But in Corona times, responsible shortcuts had to be chosen to switch from normal operation to crisis mode within a useful time. “This involves risks that must always be kept in mind,” explains Palü. Alliance adds: “Within a very short time, solutions for such and other temporary realignments had to be knocked out of the ground. The most frictionless transition from a physical, paper-based world with joint work in open-space offices to a remote mode, in which teams and colleagues work separated from each other, was subject to operational complexity. The crisis has catalyzed solutions to this. These steps, which we have taken within a few weeks and which we are now constantly optimizing, would probably have taken years in implementation without the given crisis situation.”

Business Continuity first

On 16 March 2020, the Federal Council classified the situation in Switzerland as an “extraordinary situation” in accordance with the Epidemic Act. Some cantons, such as Ticino, the Jura and Graubünden, already adopted measures in the weeks before, which largely shut down public life. The banks Julius Baer and BKB also began preparations for crisis mode before the lockdown. Alliance: “We have offices in Hong Kong and Singapore, among others. With the first wave hitting Asia, we were able to anticipate the emerging problems quite early and the internal preparations then began in a timely manner. When the coronavirus reached Europe, we didn’t have to set up an organization first.” For the quick change to the home office, it proved to be of significant use that infrastructure for working out of office was already established or prepared at BKB in many areas – many employees were already equipped with laptops and no longer had a fixed workplace.

A Pandemic Task Force was convened at BKB in the second half of February. Palü: “We started with initial preparations, such as increasing internet bandwidth, so that later all employees could easily access our servers from the home office without overloading the network. From the end of February we went into the extraordinary mode. Since then, the members of the task force have met virtually every day to determine the current state of the pandemic.”

Initially, the activities focused on business continuity and on the health of employees and customers. Palü: “It’s a busy time. Initially, it was the change from normal to extraordinary mode. Now it’s about mastering extraordinary mode. The next step is to slowly exit this extraordinary mode again. This will bring the need for innovations anew on a daily basis.”

Home-Office as a model for the future?

During the Corona lockdown, many Swiss employees had a to commute for less than a minute. From the bed to the office in the room next door or in the living room – ideally taking a shower in between. No commuting, fewer traffic jams, no business trips. Teleconference software vendors have seen an exponential influx – for example, the US company Zoom Video Communications, whose mad-dash upswing ended abruptly due to massive security concerns (see, among other things, NZZ’s reporting of April 9, 2020).

The banks BKB and Julius Baer did not have to deal with zoom concerns, as they have their own software solutions for virtual conferences. Alliance is gaining positive aspects from virtual working behavior: “I currently have a lot more contact with my colleagues from company management [April 17, 2020] than in pre-corona times when everyone was engaged in their daily meeting routine and therefore was not reachable for ten to twelve hours a day. Currently, accessibility is much better, which gives you more possibilities, including the broader and deeper involvement of people in problem-solving processes. The current virtual conferences have a different participant composition than in case of physical meetings. In this more uninterrupted exchange possibility and the cross-functional collaboration I see the magic. It sets the precedent of moving away from the rigid cascades.”
BKB’s handling of the current situation also offers exciting insights: “We pursue the goal of reducing the number of physical workplaces to 0.8 per employee. Even before Corona’s time, for example, it was not appropriate to have one fixed workplace per employee because of part-time work. If we now take into account the situation during the current Corona situation, I believe that 0.8 is not only possible but that we can also find new ways in which we can work together efficiently in more flexible working models in the future.”

The end of the Corona crisis is not yet foreseeable. In addition, the exit from the lockdown will take place in several phases. Alliance: “We need to work to ensure that the relevant parts of current developments are consistent. There needs to be further development, not only in terms of the workplace but also in the way in which future interaction is taken. How to efficiently use the time at hand. Even now, I’m using my time in a very different way than I did back then with the many physical meetings. This new way of working has to be defined and tested and the Corona crisis offers an interesting opportunity to do so. We must now continue the developments that have been initiated and not wait for the crisis to be over. After all, if the situation has returned to normal as possible – the real end of the crisis will be a long time coming – we will quickly fall back into the old trough and then it will be way harder to continue the initiated development.”

There have been no staff reductions at Julius Baer or BKB as a result of these developments. The same with BKB, according to Palü: “We do not notice a decline in demand. Not even on the funding side. On the contrary, due to the financial support for small and medium-sized enterprises and the numerous loan requests from even larger corporate customers, we are currently seeing greater demand than before.” Alliance adds: “In February, I made public my strategy for the next three years and this provides for a lower staffing level in the medium term. But this has nothing to do with Corona.”

Swiss financial markets after Brexit…

Swiss financial markets can be considered healthy. The banks are well-capitalized and can lean on a high level of liquidity. With the recently put together “rescue packages”, the Federal Council has shown that it can face the challenges ahead in order to support the Swiss economy. But the financial system is highly global. If financial systems in Europe or in other countries have to face pressure, then Switzerland will also be affected. Alliance: “We are linked to foreign countries at all levels: economically and financially. In Europe, French President Emanuel Macron says that the Corona crisis requires incredible solidarity all over the EU (see NZZ of 17 April 2020), otherwise the European Union as a project is doomed to failure. Any relative weakness in the euro leads to the relative strength of the Swiss franc and may require further intervention from the Swiss National Bank. These effects will continue to affect us in the future.”

And since we are already talking about the EU, the young members of the students’ fraternity, Adrian Schmidli v/o Leiter and Reto Manuel Camichel v/o Pinsel, ask to what extent Brexit could affect the economic relations between Switzerland and the EU. Here Palü and Alliance do not see many quick dynamics for a long time. Alliance: “Until Brexit is finalized, and that is likely to take years to come, Swiss concerns will tend to be postponed until later. And shifts from the major financial market places – perhaps away from London and towards Paris or Frankfurt – or from talent pools are usually slow, if at all. I do not expect a complete tectonic shift in the European landscape in the context of Brexit.”

… and to Corona

The Swiss financial market has had a long upward trend. Voices have been heard, as Leonardo Ravaglia v/o Flitz has written as a discussion point for this conversation, that a correction will soon occur. Alliance: “What is currently happening in the financial market is more than a simple “correction”. And this is not over. We will see where this development leads as soon as the real economic consequences become more foreseeable.”

Statements about the winners and losers of the Corona crisis cannot yet be made. But Palü and Alliance are looking ahead to any structural changes in the financial industry. Palü: “I don’t think that the new digital players in retail banking will gain substantial growth due to the Corona crisis. I am more likely to hear from online banking circles that they are currently recording fewer new customers than before the Corona crisis. I also see this with us: Zak [a banking application of Bank Cler] has fewer new customers as opposed to the classic store-linked business model that we have at Cler or BKB. At most, there will be an evolutionary step towards digital forms of trade, but in the industrial structure, I do not expect a real break, at least in the near future. What can be clearly stated is that less cash is being used. In other words, a card industry could benefit from the current situation.”

Alliance sees possible changes in the way it works: “Based on the experiences gained, there could be a race in the industry towards modern, digital ways of working. If you have already missed this developement, you could be left behind in the future. But here we are talking more about medium-term developments. I see less short-term structural adjustments due to the Corona crisis.” But possible changes in the financial markets: “This is also a time when interventions in the financial markets are taking place. One even hears discussions about government-directed interest rates on bonds. That would be enormous state interference in the markets. This could lead to structural adjustments.”

Hopefully, there won’t be a financial crisis

The headline of this article focuses on the fact that this time the banks are “part of the solution” and want to remain so. Alliance: “For the first time in decades, banks are seen as part of the solution. Moreover, the global financial system is much more stable and banks are better capitalized. This is very different from 2008, and this is also reflected in the interaction with customers. I feel this as a wealth manager, we are needed by the clients – we make investment recommendations and help to structure the assets, manage the risks. This assistance is now necessary and will be in demand even after the crisis when investment opportunities arise again.”

In April, many bridging loans were issued to small and medium-sized enterprises to help them overcome revenue difficulties due to the lockdown. Palü: “Whether this will lead to an increase in bankruptcies that require an increased need for provision from the banks is not likely to become apparent until the autumn of this year. It depends heavily on the way the market recovers – whether there is a U-shaped, a V-shaped or an L-shaped recovery. As a result, conclusions can be drawn on the recovery of the real economy and thus also in the aftermath of the impact on the banks. If the Corona crisis becomes a financial crisis, that would be problematic. If liquidity in the banking system is no longer flowing in six months or a year due to massive credit defaults, and banks skid into insolvency problems, central banks would have to intervene massively. It would be important for banks to remain part of the solution and not become part of the problem, as in the case of a financial crisis. Unfortunately, we are not entirely immune to this, even if the Swiss financial markets are currently in a solid position. As I said, we are strongly connected globally.”

Recession or depression?

On 14 April, 2020, the NZZ reported that the IMF was expecting “the worst recession since the Great Depression,” with the global economy expected to contract by 3% in 2020. What are we heading for? Palü: “I consider these figures to be exaggerated. The blackest scenarios are now shown without scruples, probably linked to the hope that they will never happen. In my opinion, it is not yet possible to estimate how profound the recession will be. It will certainly be useful to observe and analyze developments in Asia or to wait to see how quickly the exit from the lockdown can take place there and what this could mean for us.” This is where Alliance continues: “I heard this morning that the outputs of individual Asian companies are around 10 to 20% below the pre-crisis level after production has resumed. And that is likely to remain the case for a while. In Switzerland, the emergency measures have stalled around 30% of the economy. Extrapolated to the country’s gross domestic product, it is clear that this will have significant consequences. We must not play this down. There will be a deep recession [see NZZ of 23. and April 24, 2020], probably even a depression in some countries.”

With regard to the distinction between recession and depression, Palü explains how this could have a regionally different impact: “Developments will be different depending on the region and the country. For example, if we rethink our supply chains and outsource less, or if we change our consumption patterns, the impact is different from a regional impact. In the context of clothing, for example, the impact is likely to be much greater in Bangladesh, where clothes are produced on a large scale, than in Switzerland. This can lead to massive economic downturns in Bangladesh, while it is simply registered as a change in consumer behavior. Supply chains can result in far-reaching transfers of economic problems.”

With a looming recession, the question arises as to how to counter such a situation. Flitz points to the possibility that a rate cut could be beneficial. Alliance said: “The fundamental question is whether this recipe is still useful. We have seen years of trying to make up for deficits in the real economy through money market policy. Mario Draghi’s ‘Whatever it takes’ in Europe, but also what all the other central banks around the world have done with interest rates, was also a substitute for fiscal measures. The scope for this is much smaller today than it was after the last crisis.” Alliance, on the other hand, does not see a scenario with globally rising interest rates. “There are very different problems in Europe at the moment. This also forces the Swiss National Bank to keep interest rates low for a longer period of time. A proper fiscal policy is needed. The time of austerity is probably over for the time being, as uncomfortable as this might seem. It always sounds reasonable to save and be careful and this was certainly a recipe for success in Switzerland. This has helped us to work out our current clout – and now we have to use it.” That’s why Palü considers agility to be especially important for mastering future challenges, and Alliance adds: “As an entrepreneur, you can never prepare 100% for the worst-case scenario. It’s like you want to put emergency food and water supplies in the basement for 10 years. You can do that, but it costs too much. You have to have an element of flexibility and reaction speed in the company.”

Investing in Bitcoins?

As you know, we Swiss love physical money. But in Corona times, this is stigmatized as a virus slingshot. The government recommends paying with the card. In this context, the question of where cyber currencies such as Bitcoins have actually remained is increasingly popping up in the media. Alliance: “I always thought Bitcoin was an interesting phenomenon, but I was always skeptical. Bitcoin developments over the last few weeks have shown that cryptocurrencies are not the new gold. However, I firmly believe in the long-term potential of the tokenization of assets. For this development, however, a few more years will have to pass by.”

Investors would also be subject to the tried and tested investment rules even in the current turbulent and uncertain times: “In the spirit of Warren Buffet: Never change the investment strategy in times of crisis. For high-risk investments, take into account a long investment horizon, take diversification into account,” says Palü. Alliance adds: “If you have never invested before then this would probably be the wrong time to invest your savings and hope that you will succeed in buying the dips [cheap deals according to heavy exchange losses] . If you are already invested, then you have to actively follow the markets, but is also well-considered to maintain a certain continuity. Of course, there may be buying opportunities – and if the implicit volatility is 80 or 100%, then the time for selling volatility is probably favorable – but these are specific opportunities. Otherwise, you must always keep your own overall risk in mind.”