There is no doubt the landmark tax deal between the US and Switzerland this week is a success for UBS, Switzerland's biggest bank by assets under management. By averting a lengthy and painful trial and dodging the bullet of another settlement fine which could have rendered the bank's capital ratio dangerously thin, UBS is now facing the difficult question of returning to profitability and regaining clients' trust. But what seems as the end of a troublesome era for UBS may turn out to be the beginning of more headache for the rest of the Swiss banking industry: an important aspect of the tax deal between Switzerland and the US is the agreement to provide account information on other Swiss banks should the IRS suspect any tax evasion practices in those institutions. No bank will be shielded by the famous banking secrecy anymore now that the diplomatic showdown between the US and Switzerland has set an important precedent for future requests. In addition to that, other countries like Germany, Italy or the UK could take the settlement with the US as their cue to make similar requests to Swiss banks and the Swiss government. And this at a time when foreign investors' trust in Swiss institutions (with exceptions) is shrinking: according to statistics from the Swiss National Bank, holdings of securities by foreign investors have fallen around 19 percent or 520 billion Swiss francs ($546 billion) from a year ago. – CNBC
Dominant Social Theme: Swiss difficulties?
Free-Market Analysis: At one point the Swiss depended on their mountains to shield them from outside political and regulatory pressures. Now the Swiss bankers will have to depend on their encyclopedic knowledge of financial jurisdictions. While bank secrecy seems to have been penetrated for good, Swiss banking, especially private banking, will move forward, driven by a marketplace that will see ever higher demand for secrecy and tax mitigation given increasing taxation and anti-privacy regs. Don't take our word for it. The mainstream press sees it the same way:
Many intermediaries still extol the advantages of Swiss accounts, including Swiss political and economic stability, its European base and its high level of client service – and the fact that Switzerland has not traditionally considered tax evasion to be a crime. Micheloud & Cie, which has offices in Lausanne and other Swiss cities, offers to help clients set up accounts at the biggest private banks in Switzerland. … The firm says it will not accept clients who are citizens of various countries that it considers undesirable, including Albania, Uzbekistan, Nigeria – and now the United States. But it also assures prospective clients that "Swiss bank secrecy is not lifted for tax evasion, even upon the request of a foreign government."
Other countries have also pressured Switzerland in recent months for names of suspected tax cheats, including Germany and Italy. The attention has left Swiss bankers perturbed about demands that they ensure that their clients pay their taxes. "The American authorities are trying to use the banks as guardians of the clients' conscience, which is not really what we're here for," said Michel Y. Dérobert, secretary general of the Swiss Private Bankers Association in Geneva, a trade group of traditional private banks. "Priests are better for that." (New York Times).
Banking secrecy is a lot like delivering any other somewhat forbidden but in-demand service. The more difficult the West makes it for wealthy citizens to retain their wealth in a private manner, the more in-demand these services shall become. If Switzerland, with a broad and deep private banking apparatus, pulls out, then the business will move elsewhere. This is highly unlikely to happen.
Swiss private banking (unlike UBS-style commercial banking) has been around for some 200-plus years. It is a Swiss business and part of the Swiss culture as well. Swiss private banking is not going to go away, though its menu of services may change, as will the way that strategies are presented. Seen from a free-market point of view, the West's intention to crack down on Swiss banking will likely increase demand for the very services that are being attacked. Banking these days is a global business after all. The results may well force Swiss private banking into a more globalized and pro-active posture. The law of unintended consequences?