Swiss Private Banks Squeezed by New Rules

When Arthur Bolliger started as a private banker in Switzerland in 1968, he would spend just two hours chatting with a prospective client before deciding whether to give the go-ahead for the opening of an account.

Now, as chief executive of Maerki Baumann & Co. in Zurich, he puts customers through a weeklong screening that includes checking their names against a database of money launderers and foreign politicians.

Bolliger, 56, recalled that choosing clients used to be “a matter of interpretation.... It was not a systematic evaluation of facts and numbers.”

But these days, the Swiss government is requiring the country’s 356 banks to crack down on money laundering by scrutinizing clients and their account activity. They also have to withhold taxes on accounts held by foreigners and send the proceeds to the customers’ home governments.

Those rules hurt the private banks, which cater to clients with at least $1 million to invest and are smaller than commercial banks with private banking units, such as UBS and Credit Suisse Group.

At the same time, Italy, Germany and Belgium have wooed clients of Swiss banks home by offering to forgive taxes on money their citizens repatriate from Swiss accounts.

In response, Geneva-based Pictet, Lombard Odier Darier Hentsch and Banque Syz & Co. are opening branches outside Switzerland to attract clients who wish to keep their money close to home while maintaining ties with their Swiss bankers. Private banks such as Wegelin & Co. and Baumann complain about rising costs and fleeing customers.

Profits at some private banks are falling. Julius Baer Holding, Switzerland’s largest listed private bank, earned $65 million in 2003 -- 55% less than in the previous year.

Profit at Banque Privee Edmond de Rothschild, Switzerland’s eighth-largest private bank, slipped 5% in 2003.

Vontobel Holding, a Zurich-based bank founded in 1936 as a stockbroker for the rich, said last week that it was expanding an alliance with Raiffeisen Bank Group to sell investments to Swiss customers less affluent than Vontobel’s private banking clients, who have at least $1 million to invest.

Earnings at Vontobel, which is facing stiffer competition from UBS and Credit Suisse, both also based in Zurich, have declined more than 50% since 2000. And it took in 27% less in net deposits last year than in 2002.

The Swiss government’s new rules against financial crime, adopted last year, require banks to have computer systems to monitor accounts for transactions that deviate in size and number from a client’s normal account activity. Banks must assign customers to different risk categories, depending on their backgrounds.

About $670 billion, or 73% of the total $920 billion deposited by non-Swiss private clients in Switzerland, isn’t declared to tax authorities, according to a report by Deutsche Bank analysts Matt Spick and Peter Casanova.

Compliance with the rules may cost hundreds of millions of francs for Swiss private banks, which manage a third of the world’s private wealth deposited in offshore accounts, according to Swiss Bankers Assn. spokesman James Nason.

“We’re heading for an over-regulation of the Swiss financial industry,” said Niklaus Baumann, 60, the private bankers association’s chairman and managing partner of Baumann, based in Basel, at a briefing in January.

“This development involves horrendous costs for the banks and threatens the survival of the majority of Swiss banks that are typical small and medium-sized businesses.”