The compromise legislation is at heart a debate over the Alpine nation's vaunted banking secrecy which is now threatened by the U.S. crackdown on tax evaders.
But the odds are now increasing that the clock will run out on the bank and more U.S. criminal charges will be brought against Swiss banks.
By 126-67 with two abstentions, Switzerland's National Council voted not to discuss the measure, which is intended to let Swiss banks sidestep secrecy laws so that they can pursue settlements with U.S. prosecutors. It instead sent the plan back to the upper house for reconsideration.
The vote was a blow to the Swiss Cabinet—the group of seven ministers and president that run the country—and notably to Finance Minister Eveline Widmer-Schlumpf, who had presented the legislation as a way for Swiss banks to turn over confidential client data to U.S. prosecutors without breaking Switzerland's strict client secrecy laws.
By doing so, the banks would be able to cut deals that may include the payment of fines to avoid criminal charges. Many opponents in the lower house, however, argued that the proposal either violated Swiss sovereignty or failed to provide enough detail about the potential consequences, such as how it would affect Swiss bank employees.
With Parliament's summer session drawing to a close this week, the odds are diminishing for an imminent compromise. A second refusal by the lower house would effectively kill the bill, which was supported by several centrist and Green parties but strongly opposed by the nationalist Swiss People's Party.
"The draft law is an act of surrender," said a member of that party, former Justice Minister Christoph Blocher.
Widmer-Schlumpf told lawmakers that the U.S. is planning to bring criminal charges against some Swiss banks and that without the legislation there is "real danger of an escalation" in the standoff between the two countries. More than a dozen Swiss banks are being investigated by U.S. authorities.
"Rejecting the bill will lead to a difficult situation, threatening the economy and undermining the reputation of Switzerland's financial center," she warned.