Negotiating Over Banking Secrecy: The Case of Switzerland and the European Union

Abstract

Over the period 2002 to 2003,Switzerland and the European Union (EU) were engaged in negotiations regarding banking secrecy. The EU's stated goal was for Switzerland to abolish banking secrecy. Switzerland refused and offered to impose a withholding tax on interest income instead. The two parties eventually agreed on the latter solution. We examine the effect of these negotiations on the share prices of four Swiss banks: UBS, Credit Suisse Group (CSG), Julius Baer (Baer), and Vontobel. Overall, investors believe that bank profitability will not be impacted by the imposition of the withholding tax. The event-by-event response of the share prices differs across banks. Whereas the two universal banks (UBS and CSG) primarily react to the threat of sanctions on their EU-based operations, the private banks (Baer and Vontobel) react strongly to events suggesting that banking secrecy might be abolished.