<http://online.wsj.com/article_print/0,,SB109943463679262716,00.html> The Wall Street Journal November 3, 2004 HEARD ON THE STREET DOW JONES Swiss Banks Can Still Say " " Confidentiality Remains Intact, But That Might Derail Mergers With Firms Outside the Country By EDWARD TAYLOR Staff Reporter of THE WALL STREET JOURNAL November 3, 2004 FRANKFURT -- The famed Swiss bank account is still open for discreet deposits, and that might become a problem for some Swiss banks. Despite concerns within the European Union that banking secrecy encourages tax evasion, Switzerland retained its right to client confidentiality by signing agreements with the EU last week. That move could dim the prospects for Swiss banks to participate in mergers with financial firms outside the country. While the accords secure the small Alpine country's status as a banking haven -- Swiss banks manage about 3.2 trillion Swiss francs, or about $2.7 trillion, in assets -- they also could handicap the likes of Credit Suisse Group, Julius Baer Holding Ltd. and Vontobel Group if those companies decide to participate in pan-European banking consolidation. The EU was pushing hard for the Swiss to abolish Switzerland's extreme version of confidentiality during the bilateral accords -- a raft of proposals aimed at easing the movement of goods, services and people between the EU and Switzerland. In the end, a compromise was reached. The Swiss agreed to impose a withholding tax on interest payments made to EU citizens with deposits in Switzerland, beginning in mid-2005. The Swiss also agreed to lift the veil of banking secrecy in the event of a criminal investigation for fraud and money laundering. The Swiss Bankers Association says the agreement will help Switzerland attract more funds, most of which already come from outside Switzerland. Around 56% of the assets held in Swiss banks come from outside the country, Swiss bankers say. But, with banking consolidation finally under way, Swiss banks are faced with a tough choice: Stay put and watch as European banks consolidate around them or take the plunge with a cross-border deal and risk compromising banking secrecy. If a Swiss bank was engaged in a merger or was taken over by a foreign bank, it could end up having to hand over confidential client data to a foreign regulator, particularly as tax authorities gain increased powers to seek out money launderers and tax dodgers. So far the Swiss have successfully defended their home turf. "There are no examples of a major merger or acquisition between a Swiss and a non-Swiss bank that wasn't arranged according to Swiss terms," says Ray Soudah, founder of mergers-and-acquisitions boutique Millenium Associates and a former managing director of UBS AG. Indeed, just the idea that client data could wind up in the hands of a foreign regulator makes Swiss bankers shudder. "The proportion of foreign assets would suffer" as clients closed their accounts, says Thomas Sutter, spokesman of the Swiss Bankers Association. But not doing a cross-border deal could see Swiss banks left on the sidelines as European banks consolidate in an attempt to keep up with U.S. giants such as Citigroup Inc., which has a market value of $230 billion. Among those that could be left behind: Bank Julius Baer, whose parent, Julius Baer Holding has a market value of 2.95 billion Swiss francs; Credit Suisse Group, with a market value of 45.9 billion Swiss francs; and Bank Vontobel, whose parent, Vontobel , has a market value of about 1.64 billion Swiss francs. UBS, the other giant Swiss bank, likely wouldn't be affected as much as other financial institutions in Switzerland. With a market capitalization of 95.8 billion Swiss francs, it may be large enough to be an acquirer rather than a merger partner or takeover target. If so, UBS would be able to continue abiding by Swiss confidentiality requirements for operations located in Switzerland. Already, fears that client data could be compromised have proved a deterrent for cross-border deals, says Merrill Lynch analyst Jacques-Henri Gaulard. "Banking secrecy is one of the things that prevents an alliance between Credit Suisse and Deutsche Bank," he contends. Spokesmen for Germany's Deutsche Bank AG and Credit Suisse declined to comment. Both banks have pledged to pursue a strategy of concentrating on organic growth and improving profitability. Concern over the sanctity of client data also undermined a proposed deal earlier this year to combine Deutsche Boerse AG, operator of the Frankfurt stock exchange, and SWX Group, operator of the Swiss stock exchange. SWX supervisory-board members worried that a German supervisory authority would be in a position to ask which Swiss client had instigated a share trade, potentially breaching Swiss client confidentiality, people familiar with the matter say. The need to protect Swiss client data may also prove to be a deterrent to creating economies of scale if a merger or takeover deal is reached, because a newly merged entity would have trouble centralizing risk management, implementing an overall technology system and maintaining a centralized customer database, unless it was done in Switzerland, a high-cost location. Swiss banking-secrecy laws make even domestic mergers a chore, says Hans Geiger, professor of banking at Zurich University's Swiss Banking Institute. When Credit Suisse took over Schweizerische Volksbank in 1993, customer data couldn't be exchanged. Switzerland's insistence on secrecy could put it on a collision course with European regulators. "International pressure on Switzerland's financial center should ease off, and this is likely to foster renewed faith in Switzerland's stability and legal security among clients, whose confidence may have been shaken over recent years as a result of the repeated verbal attacks from the EU," says Pierre G. Mirabaud, Swiss Bankers Association chairman. Write to Edward Taylor at edward.taylor@wsj.com1 URL for this article: http://online.wsj.com/article/0,,SB109943463679262716,00.html Hyperlinks in this Article: (1) mailto:edward.taylor@wsj.com Copyright 2004 Dow Jones & Company, Inc. All Rights Reserved This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com. -- ----------------- R. A. Hettinga <mailto: rah@ibuc.com> The Internet Bearer Underwriting Corporation <http://www.ibuc.com/> 44 Farquhar Street, Boston, MA 02131 USA "... however it may deserve respect for its usefulness and antiquity, [predicting the end of the world] has not been found agreeable to experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'