Finance & economicsOct 30th 2010 edition
Swiss banking
Alpine redoubt
Switzerland tidies up its image
ONLY a few days after Swiss engineers finished a railway tunnel that will allow freight from neighbouring countries to zoom beneath the Alps without disturbing the peace, Switzerland unveiled a financial equivalent to calm the clamour that surrounds the flow of outside money into its banks. On October 25th the Swiss government agreed to start formal negotiations with Britain on a new tax and banking agreement. Two days later it announced a similar arrangement with Germany.
In both cases the Swiss are pressing for a deal to collect taxes on behalf of foreign governments without releasing the names of those who have stashed some $2 trillion-worth of financial assets in Switzerland. "There are reasons why someone wants to hide his belongings from his home country…but there is no reason not to pay taxes," says Konrad Hummler, who heads the Swiss Private Bankers Association. These deals would ensure tax compliance without forcing banks "to commit any treachery with their clients".
In order to keep their money in Switzerland outsiders may also have to cough up penalties to reflect 5-10 years of unpaid backtax. For some, this will be a price worth paying. Despite vigorous investigations by tax authorities in America and Germany, Swiss private banks have still been pulling in cash throughout the crisis (see chart). Much of it has come from people in developing countries who want a stable hidey-hole for their money rather than to escape the taxman.
In any case Switzerland's private banks have for some time been moving away from the business of helping people outside the country avoid their dues. Analysts at Citigroup reckon that "offshore" assets now account for only 15% or so of the money that is looked after by UBS and Credit Suisse, Switzerland's two biggest banks.
As well as polishing its image on taxes, Switzerland is also trying to rebuild its reputation as a financial fortress by beefing up the capital bulwarks of its biggest banks. With new equity buffers of up to 10-13% of risk-weighted assets buttressed by another 6-9% of convertible capital, Swiss regulators are going far beyond the Basel 3 capital accord. The hope is that this will make Swiss banking far more boring than it was in the past (UBS, the bank worst hit by the crisis, this week announced that net outflows of client money had at last turned into a small inflow in the third quarter). That will work so long as bank bosses do not offset higher capital costs by making larger bets in investment banking.
This article appeared in the Finance & economics section of the print edition under the headline "Alpine redoubt"