The tax fraud charges against UBS in the United States could have threatened the very existence of Switzerland's biggest bank, the Swiss financial markets watchdog revealed in a reprimand published Thursday.
The official regulator, FINMA, said in a statement that the $780-million(627-million-euro) settlement the bank agreed with US Justice authorities on Wednesday avoided criminal charges that could have dried up the already troubled bank's liquidity.
"Such charges could have had drastic consequences for UBS and its liquidity situation and ultimately put its existence at risk," FINMA said in a statement.
Switzerland's banking flagship posted an annual loss of $17 billion in 2008, the largest in Swiss corporate history, and received a state aid package worth almost $60 billion after it was battered by the financial crisis and credit squeeze.
The regulator said it had "ordered UBS to surrender a limited quantity of client data and handed it over to US authorities."
Swiss President and Finance Minister Hans-Rudolf Merz said Thursday that between 250 and 300 names were provided.
But he insisted that "banking secrecy remains intact," adding that it "doesn't protect tax fraudsters."
UBS chairman Peter Kurer also justified the move, saying that client confidentiality "was never designed to protect fraudulent acts or the identity of those clients who ... misused the confidentiality protections ... by providing false declarations regarding their tax status."
Under the banking secrecy law, banks in Switzerland are prohibited from divulging any information to authorities or any third parties on their clients, except in cases involving recognised criminal investigations.
FINMA also issued a reprimand to UBS after its investigation concluded that the bank had not only violated US law but also "severely breached" Swiss banking regulations.
"Specifically, the manner in which it captured, limited and supervised the legal risks associated with the cross-border business with US private clients was ultimately deficient," the regulator said.
The investigation concluded that staff at the bank had accepted statements from clients "which they knew or should have known" were not accurate and ignored some US supervisory rules "for an extended period of time.
The bank admitted that it had been involved in a "fraudulent sham."
"UBS sincerely regrets the compliance failures in its US cross-border business," chairman Peter Kurer said in a statement.
"We accept full responsibility for these improper activities," he added.
The Swiss Bankers' Association regretted that US authorities has not waited for legal procedures to run their full course.
"Nothing changes the fact that the cases in question are, according to UBS, cases of 'tax fraud and the like' within the meaning of the Double Taxation Agreement between Switzerland and the US and such cases have never been protected by Swiss bank-client confidentiality," the association said.
The settlement nonetheless sparked renewed debate in Switzerland about the country's banking secrecy.
The dominant centre-right parties largely defended secrecy, but there was criticism of UBS and the banks.
Christian Democratic Party president Christophe Darbellay said politicians should not be doing the work for banks to get them out of the "hornet's nest."
But the Greens and Socialists cast doubt over secrecy.
Socialist Party president Christian Levrat said Switzerland had to improve cooperation with other countries and adapt its secrecy.
"The Federal Council (cabinet) and the financial services industry have hidden behind banking secrecy like a holy cow," Levrat added.