Could Glass-Steagall Make A Comeback In Europe?

Includes: CS, UBS
by: Dana Blankenhorn

The Glass-Steagall Act, separating investment from commercial banking, was repealed here in 1999 but may now be making a comeback in Europe, specifically Switzerland.

The reason is the latest UBS (NYSE:UBS) scandal, in which a single trader dropped $2 billion. This does not threaten UBS directly, but is causing a major rethink of policy within the nation's ruling party.

Despite its name, the Swiss People's Party represents that country's right-wing. It was built by billionaire Christoph Blocher on a platform of traditional values. The point is this is not some left-wing nut case saying “whoa,” but a representative of the business community.

Even absent such a move, the government plans to limit risk-taking and impose capital surcharges on both UBS and Credit Suisse (NYSE:CS), possibly requiring they hold 19% of assets as capital, twice what U.S. banks have to hold.

UBS was hit hard by the 2008 crisis, with the investment bank totaling losses of $65 billion over three years and being forced to seek new capital from both investors and the government.

The loss is being blamed on Kweku Adoboli, who worked in the same equity derivatives division of his bank as Jerome Kerviel, whose $6.7 billion loss for Societe General remains the record for such losses. Kerviel, now appealing his conviction, insists that superiors know all about the practice of “rogue trading,” that it's not a problem unless someone loses a lot of money, as Adoboli did, at which point superiors claim to be "shocked, shocked that gambling is going on in here."

The problem is that investment bankers trading for the accounts of the bank is usually very profitable, but when it blows up lots of people get hurt who never knew they were in the line of fire.

For investors, a UBS break-up or a requirement that Credit Suisse get out of investment banking could have serious impacts. In addition to making the commercial banks less attractive as investments, it would put pressure on other European regulators to follow suit.

More importantly, it would put a lower limit on the amount of capital available for speculative trading, reducing liquidity and volatility. Would that be a good thing? Or a bad thing?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.