The Tempting Of Switzerland: Financial Confidentiality And Capital Formation

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Delivered At “Financial Center Switzerland In Its International Environment”A Conference Sponsored By Starker Finanzplatz-Starke SchweizRestaurant zum Ausseren StandZeughausgasse 17Bern, SwitzerlandNovember 4, 2002

Executive Summary

Switzerland is faced with a choice between the tradition of bank secrecy and cooperation with EU tax authorities’ demands for transparency. Today I will explore the implications of this choice for capital markets. There is a strong link between financial privacy and capital formation in Switzerland and the world economy as a whole.

The title of my talk is “The Tempting of Switzerland.” In your mind’s eye, picture Switzerland as a lovely Alpine maiden. Now, envision Chancellor Gordon Brown or another EU member representative of your choice. He urges Switzerland to unlace her stays, so that he may take a peek at the distribution of her assets. He promises that he will only look; he only seeks a little transparency, a little information. What will happen if she agrees?

My concern is that the maiden, like so many maidens before her, will soon be a maiden no longer. I propose a thought experiment; what would the likely outcome be if Switzerland agrees to demands for transparency? What demands would follow? What would the long-term impact be for capital markets? I conclude that bank secrecy laws are an essential component of Switzerland’s role in capital formation, as with any financial center. Erosion of banking secrecy to satisfy tax authorities will not simply redistribute wealth to different geographic areas; it will result in the formation of less total wealth.