Switzerland’s refusal to introduce a United States-style bank tax has drawn speculation about possible competitive advantages for the Swiss financial sector.This content was published on January 19, 2010 - 08:10
Banks UBS and Credit Suisse would almost certainly be forced to contribute to the proposed US levy, but they and other Swiss institutions would not face the same decision-making shackles as US counterparts.
US President Barack Obama announced plans last week to recoup some $117 billion (SFr120 billion) of taxpayers’ money over the next decade with a new levy on banks. Britain and France are already poised to raid bankers’ bonuses with one-off windfall taxes.
If the US plan enters into law, banks that take the greatest risks with the most borrowed funds would be hardest hit.
While some details are unclear at present, experts believe the US operations of UBS and Credit Suisse could well face a hefty bill in future.
Bank Sarasin analyst Rainer Skierka estimates that Credit Suisse would be taxed $560 million by the US next year and UBS $360 million if the scheme is enacted. If Switzerland introduced a similar tax, the total levy could more than double for Credit Suisse and rise by nearly a factor of five for UBS because of the nature of their business in each country, according to Skierka.
Thankfully for these two banks, the Swiss finance ministry was quick to rule out a copycat tax, despite calls from the US to follow suit. The ministry pointed out in a statement that Switzerland had stumped up relatively little cash – SFr6 billion ($5.85 billion) – to bail out only one bank (UBS), and this had already been paid back with significant interest.
“For fiscal reasons this is why a tax of this nature is not required in Switzerland,” read the statement, issued last week. However, a special commission has yet to advise on a separate proposed levy designed to cushion the effects of a “big bank” failure.
So where would that leave the Swiss financial centre in relation to international competition?
News of the French and British bonus taxes have led to a welter of prophesies that bankers will be shortly arriving in Switzerland, like financial refugees, to escape such punitive measures. Proof of these predictions on a large scale remains to be seen.
But Swiss banking expert Teodoro Cocca, a professor of finance at the Johannes Kepler Institute in Linz, Austria, believes that the likes of UBS and Credit Suisse will be relatively unburdened of political interference compared with US or some European competitors.
Swiss regulators are certainly in the process of tightening the reins with bonus restrictions and plans to force banks to hold more cash reserves as a safety buffer. In many instances, these rules would be tougher than international standards, as is usually the case in Switzerland.
But Cocca does not believe such tightening would affect the strategic decision-making process of Swiss banks as much as the proposed US super tax.
“A much more important factor than the size of the tax levied is that state intervention is in itself damaging. Because the proposed tax takes into account the size of risk, it would mean that banks would not be totally free to concentrate on their strategic agenda,” he told swissinfo.ch.
“I predict that this is the start of a long list of episodes when politicians try to influence the strategic direction that banks follow. This will be a topic for many years to come.”
In short: if a bank must pay more tax to take greater risks, it may be dissuaded from taking that action even if it believes this to be the best option.
Cocca believes it would make no sense for Switzerland to introduce a US-style tax to claw back some of the cost of state intervention because it would effectively be a “UBS tax”. In addition, the relatively small cost of state intervention in Switzerland makes it unnecessary.
However, given the relatively huge influence of UBS and Credit Suisse on the economy of such a small country, the Swiss authorities are committed to making changes. It should also not be forgotten that the Swiss National Bank is still sitting on billions of dollars of UBS toxic assets – that may yet incur losses.
Tough decisions that will impede the ability of Swiss banks to generate bumper profits are inevitable. But at the moment it appears that Swiss politicians have no wish to gain a virtual seat in bank board rooms.
Indeed, some politicians have interpreted the US’s request for Switzerland to initiate a copycat banking tax as yet another manifestation of envy of the Swiss financial centre.
“It is clear that the US is fearful that financial business will go elsewhere if they [alone] introduce such a tax,” Hans Kaufmann from the rightwing Swiss People’s Party told the Neue Zürcher Zeitung newspaper on Sunday.
Matthew Allen, swissinfo.ch
Switzerland and the financial crisis
Switzerland coped with the financial crisis better than most countries, according to a recent report from the Organisation for Economic Co-operation and Development (OECD).
The report praised the quick and decisive action of the Swiss National Bank and the government to contain the effects of the global crisis and subsequent recession.
However, Switzerland is not out of the woods yet, with the financial sector still coping with the damage and unemployment set to rise this year.
Of particular concern to the OECD is the powerful influence of the two biggest banks, Credit Suisse and UBS, to the Swiss economy. Both contribute a high percentage of the gross domestic product (GDP) in relation to other countries.
While regulations have tightened, the report says that more must be done to control the banks’ influence on the economy.
“Prudential standards for the two largest Swiss banks will need to be above the average maintained by their peers in other countries,” the report states.
“The existing cooperative arrangements with financial authorities in other countries need to be expanded for the largest Swiss banks and insurance companies and for crisis management in the event of future problems,” the report added.
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