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Which Swiss Gnomes Attract Money? Efficiency and Reputation as Performance Drivers of Wealth Management Banks


Birchler, Urs; Hegglin, René; Reichenecker, Michael Rudolf; Wagner, Alexander (2017). Which Swiss Gnomes Attract Money? Efficiency and Reputation as Performance Drivers of Wealth Management Banks. Swiss Finance Institute Research Paper 16-28, University of Zurich.

Abstract

Wealth management constitutes an important aspect of today's banking world, but very little is known about what explains the differences among banks in their ability to attract new assets under management. Using a unique panel database of Swiss private banks, we test the hypothesis that the performance of a bank in attracting new money depends on two input factors: skill and reputation. Relatively skilled banks -- that is, banks that are more cost-efficient than predicted by their input factors -- also perform better in attracting net new money. We also find that negative media coverage (such as in the context of fraudulent business practices related to tax evasion) strongly diminishes the future ability to attract assets under management, especially at small banks. The present value of lost profits is 3.35 (0.73) times the median annual net profit of a small (large) bank. Thus, adding to the explicit fines that many Swiss banks had to pay in the course of the U.S. Department of Justice's investigations, there are substantial implicit and reputational costs to banks of having negative media coverage. Investment performance for clients seems not to explain future net new money growth. In sum, these results underscore the importance of trust in money management.

Abstract

Wealth management constitutes an important aspect of today's banking world, but very little is known about what explains the differences among banks in their ability to attract new assets under management. Using a unique panel database of Swiss private banks, we test the hypothesis that the performance of a bank in attracting new money depends on two input factors: skill and reputation. Relatively skilled banks -- that is, banks that are more cost-efficient than predicted by their input factors -- also perform better in attracting net new money. We also find that negative media coverage (such as in the context of fraudulent business practices related to tax evasion) strongly diminishes the future ability to attract assets under management, especially at small banks. The present value of lost profits is 3.35 (0.73) times the median annual net profit of a small (large) bank. Thus, adding to the explicit fines that many Swiss banks had to pay in the course of the U.S. Department of Justice's investigations, there are substantial implicit and reputational costs to banks of having negative media coverage. Investment performance for clients seems not to explain future net new money growth. In sum, these results underscore the importance of trust in money management.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scope:Discipline-based scholarship (basic research)
Language:English
Date:17 December 2017
Deposited On:14 Aug 2023 14:06
Last Modified:27 May 2024 15:24
Series Name:Swiss Finance Institute Research Paper
Number of Pages:39
OA Status:Green
Free access at:Publisher DOI. An embargo period may apply.
Publisher DOI:https://doi.org/10.2139/ssrn.2738806
Other Identification Number:merlin-id:13243
  • Content: Published Version
  • Language: English