UBS and the Swiss Banking System

A reputation once broken may possibly be repaired, but the world will always keep their eyes on the spot where the crack was. - Joseph Hall (1574-1656)

Incoming Chairman Peter Kurer calculates it will take UBS (UBS) three years to get its reputation back. That could be an optimistic timetable based on the bank’s own assessment of its shortcomings during the subrime crisis. And of course the bar is that much higher for Swiss banks, whose reputation for stability, discretion and prudence has stood them in good stead for centuries.

The UBS shareholders’ report on the subprime crisis lists a litany of failings, summarised well by FT Alphaville. Elswhere, the Financial Times provides a comprehensive timeline analysis of where UBS went wrong. Among other factors, the FT cites increasing pressure from former chief Marcel Ospel for the fixed income division to grow.

“Some analysts questioned the pace of expansion. UBS’s own supervisory board also asked the executive board why the balance sheet was expanding so quickly, according to a banker with knowledge of the situation.”

But the board – a collection of Swiss and foreign business dignitaries that until recently did not include a single banker – found it easy to be convinced by the noises of reassurance. After all, UBS was making record profits.

It remains to be seen whether UBS can survive in its current form, the FT says. “Luqman Arnold, who left in 2001 after losing a power struggle with Mr Ospel, has acquired a 1 per cent shareholding and is pushing for wide-ranging changes. Whatever happens, it will be a long time before UBS can reclaim its reputation for caution and prudence.”

In its analysis of the bank’s problems, Bloomberg notes that Arnold objects to Kurer, the bank’s top lawyer and an executive board member for six years, as chairman. Arnold urged the board to seek someone such as Deutsche Bank AG Chief Executive Officer Josef Ackermann, a Swiss native with experience managing risk and running a bank. Investors will vote on the one-year appointment of Kurer at the annual meeting in Basel in two days.

“They have to do something quickly to restore confidence,” said Raoul Paglia, a fund manager at BSI SA in Lugano, Switzerland, which oversees $100 billion and held about 470,000 UBS shares at the end of last year. “They have to restructure investment banking, make it more profitable and then do something broader like a sale or spin off.”

One large question the UBS affair raises is whether the problems are symptomatic of a broader failure of the Swiss banking system. Fitch Ratings does not think so. In a special report Fitch says the Swiss banking system is in a relatively good position to operate in a more challenging market, despite the sizeable write-downs affecting at UBS and, to a lesser extent, Credit Suisse Group.

The sector continues to benefit from generally sound asset quality, solid capitalisation, healthy revenue generation and a comprehensive regulatory framework.

“The asset quality of most Swiss banks is sound and benefits from the stable credit standings of Swiss corporates and a low bankruptcy rate. In addition, Swiss banks remain among the best-capitalised European banks,” Fitch says.

In a separate report, Fitch says Swiss banking regulation has since the early 1990s adapted well to various challenges, notably the increasing internationalisation of the country’s big banks and wealth managers, the introduction of Basel II, IFRS and corporate governance standards and the Europe-wide trend towards a single regulator.

Following the lead of other European countries, Switzerland has decided to establish a single regulator for the whole financial sector (the Eidgenoessische Finanzmarktaufsicht; FINMA), which will become operational in 2009.

The reports, The Swiss Banking System and Swiss Prudential Regulations are available for purchase.

Comments

[venividivici]

God knows why anyone would give these dunderheads at UBS their money to invest. It amazes me how many people are good at making money doing other things but then give the money to complete idiots to invest for them.