Bank secrecy makes for great controversy—but it’s not the sole reason behind a Swiss bank upheaval

Have challenges to Swiss bank secrecy unlocked a Pandora’s box of problems?
Have challenges to Swiss bank secrecy unlocked a Pandora’s box of problems?
Image: REUTERS/Arnd Wiegmann
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The vaunted secrecy of Swiss banks is gradually being eroded. And that, say analysts polled by Bloomberg, presages a “shake-out” in the Swiss banking industry that could prompt a wave of mergers and acquisitions over the next 12 to 18 months.

But while it’s true that the Swiss banks’ reluctant cooperation with a crackdown on tax evasion by UK and US authorities is poking holes in Swiss secrecy, that isn’t the only—or perhaps, even the primary—thing driving the shake-up in Swiss banking.

Certainly, Swiss secrecy isn’t what it used to be. Agreements with the UK and Austria on tax regulation, called the Rubik Accords, entered into force on January 1. These raise a levy on British and Austrian accounts to cover home-country taxes. They show how much money from those countries is kept in Switzerland, though individual account holders remain anonymous. Last week Swiss legislators rejected a bill that would have allowed banks to turn over information about their clients to cooperate with US investigations; the consequence of that could be US legal action against Swiss banks.

And certainly, those foreign banks that had outposts in Switzerland solely to take advantage of its lax tax laws have been the first to sell off their Swiss private bank subsidiaries. “It should be noted that most of the foreign-owned banks sold had a large number of European non-tax-compliant clients, a segment for which the future outlook is gloomy in view of current developments,” Martin Schilling, head of PricewaterhouseCoopers’ corporate financial services practice in Switzerland, wrote earlier this year (pdf).

But the causes for the shrinking Swiss banking market go beyond secrecy alone, Schilling says. New banking regulations in other rich countries—imposed in the wake of the financial crisis—make it more expensive for those countries’ banks to do business, especially abroad. That’s led those banks to scale back in markets where they aren’t leaders or don’t offer unique services. The Basel III international banking accords—which require banks to hold more capital against borrowing—are just beginning to go into effect, and the easiest way to amass more capital is to dispose of assets, like those operations in Switzerland that just don’t look so profitable anymore. British lender Lloyds Banking Group, for example, sold its Swiss division to local wealth management bank Union Bancaire Privée for £100 billion ($152 billion). The British bank has been selling off assets left and right to meet UK demands for capital.

Moreover, as in many other countries, smaller Swiss domestic banks are being forced to consolidate. For those with assets of less than CHF 5 billion ($5.28 billion), costs were the same in 2011 as in 2007, but income had declined 35% according to advisory KPMG (pdf).

Still, that doesn’t mean the Swiss bank as we know it is over. Even other countries’ pursuit of their tax dodgers succeeds in eroding Swiss secrecy, the country still enjoys a competitive edge due to its stability and neutrality. “As long as there is political and social turmoil or an economic downturn in certain other regions of the world, Switzerland can rely on its safe haven status as a key success factor for its private banking industry,” says Schilling.