Swiss Banking Model Threatened by Legal Rows, Jordan SaysCatherine Bosley
Legal battles have cast serious doubts on Swiss cross-border private banking activities, Swiss National Bank President Thomas Jordan said after the U.S. fined Credit Suisse Group AG for helping Americans dodge taxes.
“Disputes with other countries have called the Swiss banks’ cross-border wealth management business into question in a fundamental manner,” Jordan said in a speech at a financial markets conference in Bern today. “Great efforts are required to ensure that the Swiss banking center can remain successful in the global arena in the future.”
Swiss banks have been the focus of U.S. probes into tax evasion, with the Credit Suisse $2.6 billion settlement coming after a similar deal by UBS AG, the country’s biggest lender, in 2009. Other banks including Julius Baer Group Ltd., Basler Kantonalbank and Zuercher Kantonalbank are still under investigation.
“I think the agreement between the U.S. Justice Department and Credit Suisse allows the line to be drawn under a long story that weighed very much on the bank,” Jordan said, adding that he believe the country’s second-biggest bank has learned from this episode and “won’t do it any more.”
A worldwide change in values and the disclosure of cases of assisted tax evasion have discredited bank secrecy, Jordan said.
“Banks need to assume that bank secrecy in cross-border operations will be replaced by the automatic exchange of information,” he said. “However, for honest tax-paying customers, protection of privacy and the associated legal certainty remains a legitimate concern,” Jordan said. He added that clients should be informed in advance what information would be shared with which authorities, and for what purpose.
Switzerland’s banking sector is bracing for the end of bank secrecy. The government last year announced it was willing to participate in the automatic sharing of bank client information with foreign tax authorities, provided it became the standard within the Organization for Economic Cooperation and Development. It signed an accord on the matter on May 6.
The success of Switzerland’s financial sector hinges on authorities tackling the challenge of institutions that are too big to fail even as banks adjust to the disappearance of secrecy, Jordan said. The SNB has been a proponent of tougher rules for big banks after UBS AG had to take a government bailout at the height of the financial crisis in 2008, spinning off risky assets into an SNB fund.
Too Big to Fail
“The most decisive factor for the long-term importance of the Swiss banking center is the alleviation of the too-big-to-fail issue,” Jordan said. “We have not yet achieved our objective.”
Switzerland now requires its two big, internationally active banks to adhere to a capital standard more stringent than that set out in Basel III rules. Jordan supported the stronger Swiss standard when he was the SNB’s vice president and responsible for financial stability.
“The current legal and organizational structures of the two global big banks do not yet ensure an orderly wind-down in the event of a crisis, although the measures they have already announced are all steps in the right direction,” Jordan said, referring to UBS and Credit Suisse.
Moreover, global rules need to be laid out for ensuring sufficient resources are available for winding down a systemically important bank in a crisis and that “bail-in” rules for the participation of creditors are in force, he said.