Banks cannot die but can be fined

Press conference by Michel Barnier, Member of the EC, on the new framework for bank recovery and resolution. (EC Audiovisual Services)

The oldest Swiss bank was forced to temporarily shut down its US subsidiary yesterday, after its lawyers accepted that it has being helping at least 100 American citizens to avoid taxation. The bank Vegelin, of St Gallen, established in 1741 is accused by the US tax authority, the famous IRS, that it has directed those citizens to hide incomes of at least $1.2 billion for ten years.

The bank accepted the accusation and agreed to pay a fine of $58 million. This is the first Swiss bank forced to shut down its US branch.Over the past few years the American economic authorities have being very active in monitoring and exposing tax evasion and other illegal activities practiced by foreign banks. Only last month British bank HSBC accepted to pay a huge fine of $1.9 billion and cut down its American business in a settlement with the American Justice Department. By the same token UBS the giant Swiss bank recently accepted to pay fines to US, British and Swiss authorities of up to $1.4 billion on Libor setting fraudulent activities.

It is interesting to notice that over the past three years and more precisely after the big credit crunch destroyed Lehman Brothers, sending the world to an unseen before financial crisis, economic authorities all over the developed world discovered that a number of big banking groups are “systemic” and cannot die. As a result they had to be refinanced with taxpayers’ money and zero cost loans from central banks.

At the same time however economic authorities in the US and Europe discovered also that all those banks were implicated to a series of fraudulent and lucrative activities, from tax evasion to organised criminal schemes aiming to set prices in various markets according to their interests. However those major banking firms cannot be shut down, because they have managed to hold hostage the very function of modern economies.

Given that, authorities have now embarked on a series of investigations and penal procedures against those bank activities and try to contain them. The aim is to force lenders to return to their basic functions, which are to accept and safeguard deposits and give loans. This is not an easy task given that banking firms are now spending a lot of money on public relations to influence the authorities and their political bosses.