Swiss banks at post-secrecy crossroads

As Switzerland’s long-cherished banking secrecy practices evaporate, the institutions that helped create the world’s largest offshore tax haven are dramatically rethinking their business models in a bid to survive.

Already reeling from the painful process of making amends for allowing foreign nationals to hide assets from the taxman back home, the secretive sector is now bracing for another seismic shift.

Under heavy pressure from international regulators looking to root out shady practices after the global financial crisis, the wealthy Alpine nation has agreed to phase out its long tradition of banking secrecy and open the way to the automatic exchange of bank data.

The shift from the long-held mantra among Swiss bankers that accounts should be taxed, but that all information about them should remain confidential, is driving “structural change in the sector”, the Swiss Bankers Association (SBA) said this month.

“It must be expected that … a number of institutions in the Swiss banking centre will shut their doors or will be acquired,” it warned.

That trend has already become apparent with the raft of mergers announced in the sector this year.

There was J. Safra Sarasin’s purchase of US giant Morgan Stanley’s Swiss private banking business, while Britain’s Standard Chartered said it is looking to sell its Swiss wealth management business.

Julius Baer, one of Switzerland’s largest banks, also recently announced it would take over the Swiss private banking operations of Israeli lender Bank Leumi.

Rumour even has it that Julius Baer itself could soon be swallowed by Switzerland’s second-largest bank, Credit Suisse.

Last month, auditor PricewaterhouseCoopers estimated around 20 percent of all Swiss banks could eventually go under.

“A lot of banks, especially those of a certain size, are looking forward to positioning themselves on the future private banking model,” said Martin Schilling, head of financial services in Switzerland at PwC.

“All banks will not, however manage, to adjust,” he told AFP, adding that “there will clearly be further consolidation in the market”.

The industry has also been weakened by Washington’s crusade to get Swiss banks to make amends for allegedly helping to cheat US tax authorities out of billions of dollars.

More than a dozen Swiss banks have been placed under criminal investigation by the US Justice Department, with some already hit by crippling penalties.

Credit Suisse swung to a loss in the second quarter after it was slapped with a hefty $2.6 billion (€2 billion) fine.

Many others have signed up to a scheme where they acknowledge they may have unwittingly helped US citizens dodge taxes and agree to pay large fines to avoid criminal prosecution.

Industry giants like UBS and Credit Suisse will weather the storm, but a number of smaller banks are under threat, observers say.

After analysing the annual reports of 94 private banks in Switzerland, KPMG and Switzerland’s University of St. Gallen found more than one third were in the red.

Those that survive will be forced to rapidly rethink their business models, observers say.

As suspicion of the offshore banking model that long served as a cash-cow for Swiss institutions grows, bankers are shifting to managing clients’ assets inside the countries where they reside.

But there is a downside to “onshore banking” too: differing regulatory frameworks mean banks must do three times as much business serving clients abroad to rake in the same profit they make on their Switzerland-based activities.

The Internet is also helping chisel away at the once unshakable standing of Switzerland’s age-old institutions, since clients can easily see how much more they sometimes charge than rivals without always showing better results, Geneva University finance professor Osmond Plummer told AFP.

In a sign of the changing times, three ultra-discrete Swiss private banks — Pictet, Lombard Odier and Mirabaud — late last month published their first results since they were founded some 200 years ago.

“This is a sector that changes very slowly,” Plummer said, stressing that Swiss banks would now need far more than their reputations to get by.