Personally, I would lay more blame for any damage to the Swiss banking brand to the fear of the possible compromise of Switzerland’s standing as a tax haven. However, as we will discuss, the giant Swiss bank UBS has lost a lot of prvate banking clients over worries about the bank’s soundness, something completely contrary to the Swiss image of rock solid financial institutions (and equally reliable wristwatches and cuckoo clocks).
Oh, and UBS also was at the center of an ongoing row with the US over bank secrecy. Per Der Spiegel:
After fighting Switzerland’s banking secrecy laws for decades, European finance ministers are about to receive support from the United States. Investigations into major Swiss bank UBS and a proposed law against tax havens are ratcheting up pressure against the system….
Liechti’s former colleague Bradley Birkenfeld, as well as Mario Staggl, an executive with a trust company in Liechtenstein, are under indictment for allegedly helping American billionaire Igor Olenicoff evade taxes. According to the indictment, a fortune of about $200 million (€129 million) was sheltered from tax authorities “in secret bank accounts in Switzerland and Liechtenstein.” Prosecutors allege that Staggl’s attorney in Gibraltar even helped Olenicoff hide the details of his ownership of a “147-foot yacht.”
The accused are alleged to have forged special forms that Swiss banks use to report their US customers’ capital gains to the US tax authority, the Internal Revenue Service (IRS). Both Birkenfeld and Staggl have declined to comment on the charges.
“UBS is walking a thin line. On the one hand, it has to show a willingness to cooperate. On the other, it is trying to protect its customers’ banking secrets,” says Robert Heim, an attorney in New York and a former investigator with the US Securities and Exchange Commission…
According to Heim, the United States is by no means the only place where Swiss high finance and the country’s banking secrecy laws are coming under growing pressure. Foreign authorities around the globe are increasingly taking sharper action against tax evaders. Swiss financial institutions, often in tandem with partners in Liechtenstein, play a central role in helping the ultra-rich avoid paying billions in taxes.
An almost unimaginable fortune of more than €3 trillion ($4.7 trillion) is currently sitting in Swiss bank accounts. The discreet Swiss allow vast amounts of money to disappear into trusts, offshore companies and bank accounts, money that is often protected by Switzerland’s banking secrecy laws.
Because of these laws, foreign officials on the hunt for untaxed riches are often forced to end their quests at the Swiss border…
More than anything, Switzerland’s system of banking secrecy amounts to a very good business. It is considered the most controversial model of success in the history of global high finance. In past decades, the banking secrecy that is protected by law in Switzerland has acted like a magnet, drawing in trillions of euros and contributing to the meteoric rise of the small Alpine country’s financial sector.
Once insignificant boutique banks transformed themselves into banking industry giants. Despite suffering record losses as a result of the US subprime mortgage crisis, banks like UBS and Credit Suisse are still seen as top choices for portfolio managers. The entire industry makes up 15 percent of Switzerland’s gross domestic product…. everyone values the Swiss authorities’ policy of refusing to respond to inquiries from foreign tax investigators. Those seeking a place to park untaxed income have nothing to fear in Switzerland. Their account information is kept under lock and key because tax evasion is not considered a criminal offence in the country.
This story erupted in May, and has retreated to the background. An update from the Financial Times in October:
UBS on Thursday gave its clearest indication yet of how seriously it is treating US probes into its former Swiss-based private banking activities for wealthy American clients by announcing it had set up a special boardroom committee to follow the issue….
UBS is also under investigation by the US Department of Justice and the Securities and Exchange Commission in separate, but linked, inquiries into whether bankers assisted clients in evading tax, or breached US rules on providing investment advice. The bank has said it is co-operating with the inquiries….
Mr [Peter] Kurer’s (UBS chairman] comments come against the background of increasing pressure from the US authorities on the bank to disclose the names of some of the roughly 19,000 US clients holding accounts in Switzerland. UBS has responded by unilaterally closing accounts with no securities holdings and balances of less than $50,000, believed to comprise a substantial proportion of the total.
The bank is also believed to have passed names of some customers suspected by the US authorities of tax fraud to the Swiss government, after formal requests for legal assistance from the US.
However, it is unlikely any such details have yet been transferred across the Atlantic. Bankers stressed that, under Swiss law, a client had to be informed before any such step. Moreover, such an account holder would have the right to appeal to the highest Swiss court before data was provided to the US.
If the general threat of possible compromise of Swiss banking secrecy wasn’t bad enough (but will the Swiss really blink on this one? Doubtful), we have the specter of UBS as being the poster child of unsound banking, running the nasty combination of high leverage and high risks (although where were the Swiss regulators when UBS was running with so little equity?). This article ran in the Swiss press, and reader Marshall provided the link and a synopsis:
After long silence, UBS today had to admit that this year clients of the bank have withdrawn 140 billion swiss francs, or the equivalent of 130 billlion dollars. Those profitting from these transfers of money out of UBS were state and private banks. The escape from UBS did not even stop after the Swiss Confederation granted UBS a package/bailout of 68 billion swiss francs, an unique transaction in history. People simply don’t trust the situation anymore and are afraid they will soon be standing in front of a closed bank.
Private banking is the one sector of the industry is recession-immune, and UBS appears to have messed up its best franchise chasing higher income and (supposed) growth opportunities.