Three major Swiss banks accused of hiding funds that belong to Holocaust victims are mired in a public relations nightmare that threatens the business dealings of their U.S. subsidiaries.

Despite the sudden lifting of a formal boycott threat by the World Jewish Congress early last Friday, the American units of Credit Suisse Group, Swiss Bank Corp., and Union Bank of Switzerland still face the possibility that some government institutions and private customers will withdraw assets.

For months, the three Swiss institutions have been facing a growing barrage of public attacks and embarrassment, both here and abroad, concerning their activities during World War II.

The banks and the Swiss government have been accused of cooperating with the Nazis by storing and transporting stolen gold and of stalling efforts to uncover unclaimed funds and other assets belonging to victims of the Holocaust.

Now, officials of the three banks are working feverishly to mollify concerned and outraged U.S. customers, even as they're battling to defend themselves against lawsuits and government action in New York. New York has the largest Jewish population of any U.S. city, and many of its residents are either Holocaust survivors themselves or relatives of victims.

The New York City Council will hold a hearing today to discuss proposed legislation that would bar the city from depositing or investing overnight funds with the Swiss banks' subsidiaries. And on Thursday, the state Assembly will convene a hearing to look at what regulatory action state officials can take to prod the Swiss banks into action.

Formal legislation has also been introduced in the New York Legislature that would require the banks to submit to an audit and turn over so-called dormant accounts to survivors.

And last Thursday, New York Gov. George E. Pataki announced he was sending Banking Superintendent Neil Levin to Switzerland to meet with officials of Swiss Bank and Credit Suisse. Mr. Levin plans to search the banks' records relating to assets and deposits of their New York offices, which opened in 1939 and 1940 respectively, as part of a four-month-old investigation.

"At this point, I feel the banks are worried. They want to settle this issue," said James Hyde, a Merrill Lynch & Co. analyst in London. "This is bad PR, whatever happens, and above all the PR can hurt them."

Swiss bank officials wouldn't disclose what financial impact they've felt from the allegations, but said they are working hard to reassure customers and head off any outflow.

"We've been very up-front with our clients, talking with them about the steps that the Swiss banks are taking to get to the bottom of the issue," said David Walker, Union Bank of Switzerland's spokesman in New York.

"We let them know the seriousness with which we take this issue. We find that generally they're supportive of those steps."

Matthias Beckmann, spokesman for Swiss Bank Corp. in New York, said his bank constantly updates employees so they can respond promptly to inquiries. "It is an issue, it is brought up in discussions," Mr. Beckmann said. "We are undergoing efforts to find a solution."

The World Jewish Congress, which had planned to discuss a boycott this Friday, lifted its threat last week after the three banks announced they would establish a fund at the Swiss National Bank to benefit Holocaust victims. The fund will start with 100 million Swiss francs, or about $70 million, but the banks have invited further contributions from other banks and the Swiss government.

However, plaintiffs' attorneys in one of three class actions filed in federal court in New York on behalf of victims promptly blasted the Swiss action as inadequate and inappropriate.

The boycott threats and government actions here followed recent nonconciliatory statements made by the former Swiss president and the former ambassador to the United States.

Senior officials at the three banks have expressed concern about the damage that the controversy is wreaking on the banks' image and client relationships. According to Zurich-based Neue Zurcher Zeitung, Credit Suisse Group chairman Rainer E. Gut said the country's "international credibility has never been lower since the end of the Second World War."

Bank officials and analysts agreed that the main threat to the three banks lies in institutional management and private banking, their primary businesses in the United States.

The three companies, which are the only Swiss banks with operations in the United States, have expanded their efforts here significantly in the last 10 years and now have a total of almost $150 billion in U.S. assets under institutional management.

Mr. Hyde speculated that a boycott could have cost the banks as much as $8 billion to $10 billion of their management business, causing a loss of $80 million in income. And the end of an organized boycott threat still doesn't relieve the banks from pressure by customers acting individually.

Bank officials wouldn't indicate if they've already lost any private banking business from the uproar. So far, however, no major institutional client has announced a pullout from the Swiss banks, and several consultants to institutional funds say their clients haven't broached the issue.

However, some public fund managers, most notably New York City Comptroller Alan Hevesi and officials of the New York State Teachers' Retirement System, have publicly urged Swiss bank officials to act-and quickly.

"The appropriate time to resolve this issue has long passed," wrote George M. Philip, executive director of the Teachers' Retirement System, in a letter last month to Swiss Bank chairman Georges Blum.

A Credit Suisse subsidiary, BEA Associates, manages $1.7 billion from five New York City pension funds, while Brinson Partners, a Swiss Bank Corp. subsidiary, manages $800 million in state teachers' retirement funds.

Earlier this month, New York city and state officials turned up the heat. City Council Speaker Peter Vallone introduced legislation that would prohibit overnight investing at the Swiss banks until an adequate fund is established for Holocaust victims. The city currently has $118 million invested with CS First Boston, a subsidiary of Credit Suisse.

At their hearing Thursday, state officials plan to discuss how a foreign bank's charter can be revoked.

Officials could also require the Swiss banks to open up their archives and provide information to New York regulators about their World War II activities.

New York State law currently allows foreign banks to manage municipal deposits and public pension fund investments.

New York City pension funds hold $48 million in shares of the three Swiss banks.

"Swiss bankers must provide a full and honest accounting concerning these unclaimed funds and return these assets to their rightful owners," said New York State Assembly Speaker Sheldon Silver. "Our obligation clearly extends to ensuring that all banking institutions operate in New York according to the highest ethical standards."

Mr. Beckmann said Swiss banking officials have taken the threats "very seriously." Swiss banking officials plan to attend the Assembly hearing Thursday to defend their position, he said.

"These are ultimately the entities that regulate you, so how can you not be concerned?" Mr. Beckmann said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.