Swiss Banks Can Still Say " " [but not really...]

Tue Nov 2 21:04:17 PST 2004

<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 at wsj.com1

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