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BUBBLE

Index points to Swiss property bubble risk

For the first time since the early 1990s, there is a risk of a real estate bubble in Switzerland, an indicator developed by Swiss banking giant UBS shows.

Index points to Swiss property bubble risk

The latest Swiss Real Estate Bubble Index, released on Monday,  inched into the "risk" zone in the third quarter, reflecting "the continued increase in imbalances on the Swiss housing market," UBS said in its index report, pointing out there had been a "sharp rise" in real estate prices compared to the previous quarter.

According to the index, Davos in eastern Switzerland had seen a real estate price increase of 7.6 percent in the third quarter, while prices were up 5.1 percent in Zug, in the centre of the country, and 3.8 percent in Lausanne and in Switzerland's financial hub, Zurich.

The situation had eased somewhat in Geneva, where prices rose only 1.8 percent, UBS said, but stressed: "this is still significant given the high price level."

The UBS index has five categories — slump, balance, boom, risk and bubble —  and the third quarter marked the first time since the early 1990s that it hit "risk", UBS said.

"Although the index only just exceeded the risk zone threshold, further price rises should increasingly be seen as overvaluation," it cautioned.

While population growth made some level of price increases reasonable, UBS lamented that "the high price level is increasingly being supported by the demand for real estate as an investment."

At the same time, "household mortgage debt is showing no signs of abatement, UBS said.

This represents a dangerous trend, as both drivers could easily be thrown into reverse and therefore trigger a price correction."

"Declining consumer prices and stagnating income (. . .) do not form a basis for sustained real estate price increases," it cautioned.

The UBS warning came after ratings agency Standard and Poor's in July lowered its outlook on nine smaller regional Swiss banks, citing the impact they might soon feel from what appeared to be a growing real-estate bubble.

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FRANCE

Switzerland’s UBS faces €3.7-billion fine as crucial court ruling looms

A Paris court will rule Wednesday on whether Swiss banking giant UBS illegally tried to convince French clients to hide billions of euros in Switzerland, charges which prompted prosecutors to seek a record €3.7-billion fine.

Switzerland's UBS faces €3.7-billion fine as crucial court ruling looms
UBS denies charges it helped French clients evade tax and says it will defend itself "vigorously". Photo: AFP

The trial opened last autumn after seven years of investigations, launched when several former employees came forward with claims of unlawful conduct. 

The move came as authorities across Europe cracked down on tax evasion and dubious banking practices in the wake of the global financial crisis which erupted in 2007.

The pressure eventually forced Switzerland to effectively end its tradition of ironclad bank secrecy, by joining more than 90 countries which agreed to automatically share more client account information among each other.

In the UBS case, French authorities determined that more than €10 billion had been kept from the eyes of tax officials between 2004 and 2012.

The National Financial Prosecutor's office urged a €3.7-billion ($4.2 billion) fine, the largest ever sought in France, saying the bank and its directors “were perfectly aware that they were breaking French law” by unlawfully soliciting clients and helping them evade French taxes.

They also sought a €15 million fine for UBS's French subsidiary, and fines of up to €500,000 for six top executives, including Raoul Weil, the former third-in-command at UBS, and Patrick de Fayet, formerly the second-ranking executive for its French operations.

In addition, lawyers for the French state, which is a plaintiff in the case, asked for €1.6 billion in damages.

UBS, which was ordered to post €1.1 billion in bail, has denied the charges and said its operations complied with Swiss law.

It also says that it was “unaware” that some French clients had failed to declare assets in Switzerland, and that prosecutors have not produced any proof, such as client names or account numbers, to back up their fraud claims.

The case is being closely watched by industry executives at a time when Paris and other European capitals are hoping to lure multinational banks from London as Brexit looms.

'Milk tickets'

UBS is accused of organising or inviting prospective clients to prestigious outings such as the French Open or luxury hunting retreats, where UBS's Swiss bankers would meet their “prospects” — something they were not allowed to do under French law.

UBS France directors then used notes called “milk tickets” to keep track of how many “milk cans” – amounts of money – were transferred to Swiss accounts.

They say the system was merely a way to balance out bonuses due to French bankers who were effectively losing a client to their Swiss peers, and the notes were later destroyed.

But investigators claim the “milk tickets” were proof that UBS had a parallel accounting system for keeping the transfers off its official books.

Only one “milk ticket” was found during the inquiry, prompting defence lawyers to argue there was no proof to justify claims of a massive fraud.

Yet prosecutors pointed to the roughly 3,700 French UBS clients who later took advantage of an amnesty offer to regularise their tax declarations with the French authorities.

UBS has been embroiled in a series of similar cases, most notably in the United States, where the authorities said the bank used Switzerland's banking secrecy laws to help rich clients avoid taxes.

In 2009 it paid $780 million to settle charges it helped thousands of American citizens hide money from the Internal Revenue Service, and agreed to turn over information on hundreds of clients, severely denting Switzerland's long tradition of shielding banking clients and their operations from prying eyes.

That case was also prompted by a former American UBS employee turned whistleblower, Bradley Birkenfeld, whose book “Lucifer's Banker: The Untold Story of How I Destroyed Swiss Bank Secrecy” was published in 2016.

Last November UBS was again sued by US authorities, who accuse the bank of misleading investors over the sale of mortgage-backed securities in 2006 and 2007, just before the financial crisis struck.

UBS has denied the charges and said it will defend itself “vigorously”.