Jan 07 - A government-led global settlement would be the best option for all Swiss banks involved in the dispute with US authorities about the private banks allegedly helping US citizens evade taxes, Fitch Ratings says.
A global settlement has been pursued by the Swiss government since early 2012. 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. This would allow the banks to refocus management attention on their core (non-US) private banking operations.
Repercussions from inquiries and potential indictments by US authorities could be significant, take a long time to resolve and ultimately damage the banks’ business models. This is despite US offshore clients typically accounting for a small proportion of the banks’ earnings and assets under management.
Fitch’s ratings for Swiss private banks already factor in rising litigation and settlement expenses relating to tax matters. However, the ratings could come under pressure if the banks are unable to adjust their earnings or operating cost bases to mitigate the rising litigation and regulatory costs or if the disputes with US and other authorities structurally damage their competitive position or business model.
The Swiss private banks will have to continue to centre their business models on fully-declared off-shore client assets and on-shore operations, notably in European markets given the US investigations and also negotiations between Switzerland and several European countries (including Germany) about revised double-taxation agreements. Many banks, in particular the larger private banks, have pursued this strategy since the late 1990s, anticipating continued pressure on undeclared client assets.
Smaller, less diversified private banks would be more susceptible to country-specific developments, such as temporary tax amnesties. For the larger private banks we rate, their operations are geographically diversified, notably in the Middle East and Asia, thereby reducing their reliance on single European markets such as Italy, France or Germany.
Following the prominent USD780m settlement between UBS AG and US authorities in early 2009, US authorities have since mid-2011 started inquiries involving a number of other Swiss private banks including Credit Suisse, Zuercher Kantonalbank, Julius Baer, Pictet & Cie., Basler Kantonalbank and Wegelin & Co. Privatbankiers (Wegelin).
In January 2012, Wegelin sold its non-US business to Switzerland’s Raiffeisen, shortly before the bank was officially indicted by US authorities in February 2012. Last week, Wegelin pleaded guilty to helping US citizens evade paying taxes and paid USD74m in fines and restitutions. Following the guilty plea, the bank will cease to operate.