Swiss Banks: Paradise Lost
Two years ago, Credit Suisse decided it needed to beef up its private banking business. But it chose to look outside of Zurich, the traditional hub for servicing Europe's barons and billionaires. Instead, the bank doubled the size of its Singapore private banking staff. "Singapore is one of the growth markets in private banking," says Martin Somogyi, a Credit Suisse spokesman. And Switzerland itself, it seems, is not. Indeed, Singapore is now Credit Suisse's largest private banking center outside Switzerland.
Credit Suisse is not alone. These are hard times for almost all Swiss bankers, at least in their home country. Industry observers say the Swiss market is saturated with too many banks chasing too few Swiss francs. Worse, banks in Switzerland, a holdout that never joined the European Union, are facing constant demands for more disclosure concerning their non-Swiss clients and for heightened cooperation in making sure European account holders pay taxes on some of their Swiss earnings. The Swiss government and the EU are working out the last details of a new agreement that will require banks to withhold tax payments on offshore interest income and send them to clients' home tax authorities.
In addition, banks around the world, including those in places as distant as Singapore and as close as Germany, are competing for Switzerland's banking business. Two years ago, Italy offered a tax amnesty to all those who pulled their money out of Switzerland and redeposited it at home. Germany and Belgium are about to launch tax amnesties of their own. Meanwhile, the Organization for Economic Cooperation & Development is openly challenging Swiss tax practices and wants to put an end to tax loopholes used by individuals and companies. The Swiss banking Establishment acknowledges it's under competitive siege. "International financial centers are engaged in a no-holds-barred struggle to create the most favorable conditions," says Urs Roth, chief executive of the Swiss Bankers Assn.
Switzerland remains the leading offshore money manager, with about a third of the cross-border wealth in the world. And the biggest Swiss banks should weather any difficulties, since they manage money in offices globally, not just Zurich. But the amount of private money managed by Swiss banks is shrinking. It fell to $2.2 trillion at the end of 2002, from $2.6 trillion at the end of 2001. While bear markets clearly played a role in the decline, some bankers worry that the new regulatory regime will only make matters worse, since it makes investing with the Swiss more expensive.
Switzerland has a 35% withholding tax on income earned on Swiss securities and deposits. But that doesn't apply to foreign securities bought via Swiss accounts. Under the deal struck between the EU and Switzerland in June, EU-based clients starting in 2005 are expected to face a 15% tax on the interest they earn on securities such as German bonds purchased through their Swiss bank accounts. Most of the tax collected will be passed on to the authorities of the clients' home countries. Eventually the withholding will reach 35%. That's still less than, for example, the 50% levied on those in Germany's highest tax bracket. But it's more than many tax havens exact.
Analysts say Switzerland agreed to the tax because it feared that if it didn't, the EU would go after its cherished banking secrecy laws, which allow investment with few questions asked as long as there are no allegations that the money was obtained illegally. Tax evasion is considered a minor offense in Switzerland, and a charge of evasion is not considered enough to justify a breach of the secrecy laws.
An even bigger headache for Swiss bankers is the spread of tax amnesties. IBM Business Consulting Services estimates that when Italy issued its latest amnesty in 2001, $35 billion was repatriated. Although Roth points out that some of the money ended up in Italian branches of Swiss banks, IBM says the amnesty cost the Swiss private banking industry $350 million in revenues. A German amnesty program, German banking association officials say, could cost Switzerland $40 billion.
Switzerland can't blame outside pressure for all of its woes. Some of them are a product of the country's own efforts to polish its image in international banking circles. For several years, Swiss officials have been busy passing new laws and regulations on everything from corporate governance to money laundering to accounting. "No other branch of the economy is as strictly and comprehensively regulated and monitored as the banking sector," boasts Roth, who speaks with pride of the banks' cooperation in freezing suspect accounts after the September 11, 2001, terrorist attacks on the U.S.
So Swiss banks are resigned to accepting the new EU and other rules, but fret about the heavy costs in new technology and personnel. Regulators aren't sympathetic. "The banks are always moaning," says Tanja Kocher, a spokeswoman for the Swiss Federal Banking Commission in Berne. "But that's life. We are looking [to maintain] a proper financial market."
Swiss bankers also worry that the agreement with the EU puts them at a disadvantage to other non-EU territories, like Monaco and Liechtenstein, that don't withhold such taxes. And then there's Singapore, which, according to a recent survey of European bankers, may replace Luxembourg as the world's second-largest offshore banking hub by 2005. That's bound to resound through the deepest bank vaults in Zurich.
By Laura Cohn in London, with David Fairlamb in Frankfurt