A Country Report on Switzerland issued by International Monetary Fund (IMF) has pitched for enhanced supervision and transparency of banks after factoring in Swiss banking secrecy.

According to the report on 'Detailed Assessment of Compliance on the Basel Core Principles for Effective Banking Supervision on Switzerland,' the Swiss banking system is very large relative to the size of the economy, conducts significant transactions with non-residents, and contains two G-SIFIs with large international operations and a number of banks that are systemically important in domestic terms. The sector faces a number of challenges to parts of its business model as expectations related to transparency and tax authorities increase.

The Report says: "Major Swiss banks are also adjusting to the new international prudential standards. More recently, several material issues have arisen in domestic or cross-border markets that have indicated weaknesses in controls or practices that are being dealt with by banks and the authorities. Given the nature of the Swiss banking system and its importance to the country and globally, it is essential that the supervisory system meet the highest standards for effectiveness. To reach that goal, Swiss authorities need to go farther along the path they have already started and aim for a higher level of intensive supervision."

It has noted that Switzerland has recently made major enhancements in the practice of banking supervision and now has a high level of compliance with the Basel Core Principles for Effective Banking Supervision (BCPs). This observation comes with a caveat: "Not all the results of improvement to date are embedded in the system or yet observable."

As put by the Report, "various observers have noted that disclosure under Swiss accounting rules is less in general than under international standards. The philosophy of complete bank secrecy related to individual account holders is being altered in some circumstances under international pressure and as a result of specific situations of questionable behaviour. Market participants believe these trends will have implications for the business model of certain institutions."

It says that effective market discipline is promoted by the design of key policy measures, such as those related to resolution of banks, and by a transparency in disclosure of financial accounts.

Swiss Financial Market Supervisory Authority's (FINMA's) Code of Conduct provides for protection of the confidentiality of official matters. FINMA also has rules on the appropriate use of information. In case of violation of these rules, sanctions such as dismissals can be imposed by FINMA. A breach of official secrecy is liable to prosecution under Swiss Criminal Code Art. 320.

Regarding cooperation with domestic authorities, the legal provisions stipulate that FINMA is authorized to transmit confidential information and documents to another domestic authority if they require the information to fulfil their duties.

The Report says that FINMA treats information from other supervisors as confidential and uses the information only for the direct supervision of the regulated institutions. Members of FINMA Board of Directors and FINMA employees are bound by official secrecy. This duty applies not only with regard to third parties outside the government but also towards other offices of the federal or cantonal administration.

In addition, FINMA must comply with the Data Protection Act that imposes restrictions on the processing of personal data. A violation of official secrecy may lead to administrative disciplinary measures and a prison sentence or a fine under the Criminal Act. As a result, FINMA may in principle neither disclose confidential information nor transfer such information to third parties. However, FINMA has the competence to decide whether to waive official secrecy, according to a decision of the Swiss Supreme Court.