While it would be expensive, a government-led global settlement to resolve allegations by U.S. authorities that certain private Swiss banks helped U.S. citizens evade taxes would be the best option for the banks, Fitch Ratings says.
Prominent Swiss bank UBS AG entered a US$780 million settlement with US authorities in early 2009, and, since mid-2011, Fitch notes, U.S. authorities have 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.
Fitch says that, last week, Wegelin pleaded guilty to helping U.S. citizens evade paying taxes and paid US$74 million in fines and restitution. In January 2012, Wegelin sold its non-U.S. business. Now, following the guilty plea, Fitch says the bank will cease operations.
The rating agency notes that 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 U.S. dollar clearing. This would allow the banks to refocus management attention on their core (non-US) private banking operations,” it says.
Failing that, it warns that the repercussions from inquiries and potential indictments by US authorities could be significant, would take a long time to resolve, and could ultimately damage the banks’ business models.
Fitch says its ratings for Swiss private banks already factor in rising litigation and settlement expenses relating to tax matters. However, it cautions that 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,” it says, noting that many banks, in particular the larger private banks, are already pursuing this sort of strategy.