France reveals lack of worldliness over banks' appeals

Want to know how to earn a positive return on cash with an implicit guarantee from a G7 government? Thought that might grab your attention. It can still be done, through a little known deposit scheme currently used only by select Swiss bankers. In a week when the Swiss government became the first in history to sell 10-year bonds with a negative interest rate - in effect, charging investors 0.055 per cent a year to deposit cash for a decade - even a small positive percentage is a compelling proposition.

It works like this. First, you fly to Zurich or Geneva. Flights costs about £230 from Europe on a no-frills airline, or $1,200 from the US on Aeroflot. Then, you establish a wealth management business offering clients - ideally Frenchmen - advice on tax planning and cross-border transactions. Allow a few tens of millions for the regulatory capital, but no need to go overboard on compliance costs (although you may also need to provide favoured clients with suitcases full of banknotes worth up to SFr5m).

But here is the clever bit: do all of this in such a way as to attract the attention of the French authorities. Wait a few months for them to raid your offices, and bring charges. You will then be invited by French magistrates to deposit "bail" of about €1bn, on which you will be paid interest by La Republique if it fails to secure a conviction.

This is the deal offered to Swiss bank UBS last July, following allegations by French authorities that it was involved in money laundering. It was asked to deposit bail of €1.1bn, ahead of a trial: a sum meant as security in case of a guilty verdict, which was equal to the maximum fine a French court could impose.

Perhaps not anticipating what a good deal this was, given the imminently yield-depressing effect of the European Central Bank's bond-buying programme, UBS appealed the French court decision in December. It lost, but is winning in terms of returns.

For the past two quarters, UBS's earnings have shown the bail is on deposit with the French court, and the bank has confirmed that it will receive interest on the €1.1bn if the money is returned. It is not sure how much interest, but it will certainly be better than the -0.05 per cent it would have received from the Swiss government, or the even more negative rates paid on shorter-term German, Austrian, or Swedish bonds.

A one-off anomaly? You might have thought so, until Thursday. That was when HSBC was also given the chance to deposit €1bn with the French court, following allegations that its Swiss private banking arm helped clients avoid taxes. Assuming it has been granted the same bail terms as UBS, a non-prosecution will leave the banks at least €550,000 better off than it would have been if it put the cash into those Swiss bonds instead. Or €10.5m better off if interest on the bail is 1 per cent.

While this reinforces the otherworldly nature of negative interest, it also suggests a lack of worldliness on the part of regulators. By wasting time on appeals about bail - when the banks are hardly going to disguise their staff as bicycling onion sellers and make a midnight dash for the border - they are pointlessly delaying the regulatory process. By potentially rewarding banks they suspect of wrongdoing, they appear out of touch with reality.

A shorter process, in which payments benefit only those taxpayers who have lost out, might make the financial system seem a little less the wrong way round.

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