Developments in the international financial markets are exerting pressure on the Swiss banking system.  Recently, Credit Suisse – in a move to improve its private banking business – expanded its Singapore private banking staff rather than beefing up its Swiss-based operations.  More worrisome to many observers is the fact that offshore funds managed by Swiss banks are declining; while Switzerland still accounts for the bulk of offshore deposits (estimated at around 30 percent or some $2.2 trillion at the end of 2002), this is lower than the estimated $2.6 trillion it managed in previous years.

Pressures on the Swiss Banking System

Pressure is being exerted by foreign governments (especially those in the European Union) for Switzerland to amend its client privacy regulations – a cornerstone of the Swiss banking system – especially on accounts held by foreigners, as well as to assist these countries in collecting taxes on profits generated by non-Swiss account holders. 

Under new regulations on Swiss banks, EU-based clients of Swiss banks are facing a 15 percent withholding tax on interest earned on securities such as European bonds bought through their Swiss bank accounts.  (In Switzerland, banks are allowed to undertake securities and equities trading, under the universal banking concept under which they operate).  The 15 percent withholding tax will be remitted to the tax authorities of their EU-based clients – a cost which many believe will have people shopping around for a more favorable tax haven.

Switzerland also has to contend with competition from various banks, all striving to grab a share of its offshore banking business.  Italy, for example, offered a tax amnesty for Italian citizens to pull out their Swiss bank accounts and deposit it at home; this resulted in an estimated $35 billion being transferred out of Switzerland and an estimated loss of $350 million in revenues to the Swiss private banking industry.

The Long Term View

In spite of pressures on the Swiss banking system, most observers feel that it will remain a major force in offshore banking for some time.  Switzerland’s reputation as a financial hub was built on its stability and financial management capabilities; its reputation for client privacy is a relatively modern development enhanced by fiction and spy thrillers.  Although numbered accounts still exist, most bankers admit that Swiss bankers are among the world’s best in terms of portfolio management and investments.

Its two biggest banks (UBS AG and Credit Suisse) are not only the biggest in terms of Swiss-based deposits, they are also well known as international banks with branch networks worldwide.  Observers also point out that the changes in the Swiss banking system are an effort to align itself with modern banking practices; in the long run, they believe that the core elements of Swiss banking practices will remain intact but will be enhanced by modern banking practices.