Geneva’s private banks, money managers for the world’s rich since the French Revolution, may see their numbers shrink after Switzerland agreed to loosen bank secrecy for foreign clients.

Since the government first lifted secrecy rules on Feb. 18, the Geneva banks’ publicly traded rivals Julius Baer Holding AG, Bank Sarasin and EFG International AG lost at least 10 percent of stock market value. UBS AG and Credit Suisse Group AG, the country’s largest banks, gained 1 percent and 14 percent in the period, and the KBW Bank Index of 24 U.S. banks rose 17 percent.

“The smaller players are under pressure,” said Peter Thorne, an analyst at Helvea Ltd. in London. “You will have to spend money to keep clients, and they don’t have the resources” relative to UBS and Credit Suisse, he said.

Switzerland’s March 13 decision to stop protecting foreign tax evaders will force banks to establish branches in countries where they have clients or risk losing them, according to a study published this week by Booz & Co. Geneva, still reeling from losses linked to Bernard Madoff, will be hard-hit because many of its 140 private banks lack the international offices that will help Zurich-based UBS and Credit Suisse retain clients.

The change “reveals which players are adding value and who isn’t really up to the job,” said Cedric Tille, a professor at the Graduate Institute in Geneva and a former Federal Reserve Bank of New York economist. “It’ll be healthy that there is some creative destruction.”

Asset Flows

Geneva’s finance industry, founded more than two centuries ago by the likes of Pictet & Cie. and Lombard Odier & Cie., relied on discretion and confidentiality to attract about 10 percent of the world’s offshore wealth. Today, it employs 34,400 people in a city of less than 200,000 and pays 58 percent of local professional taxes.

The Swiss Private Bankers Association has said the government needs to cut taxes to restore their competitiveness.

Geneva’s private banks may hang onto clients because their partnership structure, with managers owning the banks and investing their own money, has enhanced their credibility, Booz said. The banks also argue that, with offshore financial centers such as Luxembourg and Liechtenstein also curtailing secrecy, the threat of asset outflows is limited.

“There could have been an erosion of client funds six months ago, because there were then some alternatives,” said Steve Bernard, managing director of Geneve Place Financiere, a foundation promoting the city. “But now all those financial centers are announcing that they will play by similar regimes.”

Branches Abroad

Geneva and Zurich have the advantage of being preeminent in wealth management, rather than investment banking or private equity, which have suffered bigger losses from the global credit crisis, said Soren Mose, chief executive officer of Geneva-based Saxo Bank (Switzerland) SA.

Saxo Bank, which specializes in online trading and wealth management, is opening branches this year in Milan, Athens and Dubai to be closer to its clients.

“The model of Swiss private banks waiting for clients to make a deposit is gone,” Carlos Ammann, managing partner at Booz, said in a March 18 interview. “They have to get more proactive than in the past.”

Pictet, Switzerland’s biggest closely held private bank, said last month it’s expanding in Zurich, hiring employees from Boston Consulting Group, HSBC Guyerzeller Bank and Julius Baer. Partner Ivan Pictet told Le Temps in a Feb. 24 interview that the country’s banking industry may shrink by half if Switzerland abandons secrecy.

‘Extremely Unpleasant’

“That’s a bit pessimistic and such a declaration was intended to put pressure on the other side,” said Edouard Cuendet, first secretary of the Geneva Private Bankers Association, which represents Geneva-based Pictet, Lombard Odier, Mirabaud & Cie. and Bordier & Cie. “We received pressure from other countries, particularly from Germany, which was extremely unpleasant.”

Concerns about Swiss private banking may be overdone since Asian, Latin American and Middle Eastern clients invest in Switzerland for safety, not secrecy, Citigroup Inc. analysts including Andrew Coombs and Jeremy Sigee wrote in a March 13 note to investors.

Julius Baer’s private banking business may lose 11 percent of its client assets, the biggest drop among the publicly traded Zurich-based private banks, compared with a 7 percent decline at EFG International and 6 percent drop at Vontobel Holding AG, Citigroup analysts estimate.

Madoff Losses

Pictet, like Mirabaud and Lombard Odier, dodged direct Madoff losses. At least eight Geneva-based firms, including Notz, Stucki & Cie., Union Bancaire Privee and Banque Benedict Hentsch & Cie. placed money with Madoff, who pleaded guilty last week to a fraud that may cost investors as much as $65 billion.

The private bankers group said March 17 that it welcomed the decision to lift secrecy for foreign tax evaders in principle, even though it will deprive the country of a “significant competitive advantage.”

Swiss private banks will lobby the government to cut taxes to help them lure new clients, the association said.

“It is now essential for Switzerland to move fast and adopt other measures aimed at restoring competitiveness,” the association said. “Failing this, the whole country will pay the price.”