A traditional joke at Wegelin used to suggest that the only two ways of leaving the institution as a relationship manager was retirement or death. In reality, taxes, along with US regulators’ punishment, ultimately dealt Wegelin a death blow. Will Switzerland now capitulate completely on banking secrecy?
Wegelin & Cie, Switzerland’s oldest bank, is closing for good after pleading guilty in a New York court to helping Americans evade their taxes and paying $57.8 million in fines to the US authorities.
This marked an ignominious end to the bank, which confessed to allowing more than 100 American clients to hide $1.2bn from the Internal Revenue Service for almost 10 years.
It becomes the first foreign bank to plead guilty to tax evasion charges in the US. However, Wegelin effectively ceased to function as a bank nearly a year ago, selling off its core Swiss business after US criminal accusations against three of its executives.
Other Swiss banks have been scurrying to prevent US citizens from opening offshore accounts under pressure from US regulators, with 11 of them under investigation by the US for suspected tax wrong-doing.
HSBC, Credit Suisse and Julius Baer are understood to have already given Washington about 10,000 employee names in an attempt to avoid the fate of Wegelin. Switzerland effectively has given in on its attempts to maintain banking secrecy, and is probably more concerned about reaching a compromise with the US, Germany and other nations to meet the latter’s concern over tax evasion by their citizens, experts say.
Sword of Damocles lifted
Indeed, the Wegelin affair could prove a watershed, paving the way for a more general settlement, one which may circumvent the tough criminal charges levied against Wegelin and its bankers. Daniel Senn, a partner at professional services firm KPMG, suggested that the Wegelin settlement and outcome would assure Swiss banks that the "Sword of Damocles" has been lifted and their own negotiations can move forward.
Robert W Wood, who practices law with US firm Wood LLP, agrees that there are signs that the standoff between Switzerland and the US over the former’s traditional banking secrecy, and the tax evasion that can accompany it, could be near a solution.
While there may be fundamental conflicts between disclosure and the traditions of Swiss banking, the Swiss are finding ways to "honour their traditions" and still satisfy the Department of Justice and Internal Revenue Services, he says.
Still, the best outcome for the Swiss banking industry could be a government-led global settlement, ratings agency Fitch suggests. Backing the global settlement proposal which has been pursued by the Swiss government since early 2012, Fitch analysts said: "While potentially costly, in our view it would remove the risk of potential indictments and other legal action, including ultimately the exclusion from US dollar clearing."
Swiss banks’ ratings could come under pressure if they are unable to adjust their earnings or operating cost bases to offset the rising litigation and regulatory costs or if the disputes with US and other authorities structurally damage their competitive position, the ratings agency warns.
Long shadow over Switzerland
Climbing costs and the investment needed to diversify away from the Swiss offshore banking model are already throwing a long shadow over the banking businesses of Zurich and Geneva.
The combination of regulatory pressures, the onset of the financial crisis and a push toward legitimate dealings in taxed white money has meant Swiss private banks have had to fight harder than ever to bolster their bottom lines, according to SNL Financial.
SNL data indicates that it is the smaller banks that are coming under fire. Most banks in Switzerland experienced a drop in managed assets between 2008 and 2009 as a result of the financial crisis, but assets are increasingly moving between institutions within Switzerland.
New research by KPMG and the University of St Gallen shows that profitability is continuing to fall. Their study of 100 Swiss banks, excluding international players UBS and Credit Suisse, found that return on equity declined steadily between 2006 and 2011, to an average of 3.8% from 13.9%. Profits at 78% of the Swiss banks being studied dropped by at least 10% in the same period.
According to the KPMG study, even the most efficient banks are scrambling to keep costs down as a result of the financial crisis and other pressures. Only 60% of banks achieved a cost-to-income ratio of 84% or less in 2011, compared to 95% in 2006.
For analysts, the bottom line of all these negatives will be an accelerated consolidation of Swiss private banking.
A total of 148 institutions dealing in private banking were counted at the end of 2012 compared with 169 at the end of 2008, the KPMG study showed.
Ray Soudah, founder of independent M&A advisory boutique Millennium Associates, contends Wegelin’s closure points to a trend that will see more Swiss private banks mergers. These same banks are reducing their exposure to undeclared client assets in Europe and the US.