"The separation of investment banks from commercial banks should be reintroduced"
- Marc Chesney, Professor at University of Zurich
"Customers will not lose trust in Swiss banks"
- Dusan Isakov, Professor at University of Fribourg
Last week Swiss investment bank UBS reported unauthorized trading which caused a loss of $2.3 billion. Kweku Adoboli, a rogue trader from UBS London office who is in charge of the loss is accused of speculative trading in index futures. UBS's CEO Oswald Gruebel notified that the incident will have an effect on the bank's strategy and possible division of the bank into discrete units. Last Wednesday's board meeting in Singapore reviewed defects in risk controls of the bank, as well as its plunging stocks and shares. Dukascopy TV has interviewed two experts - Prof. Dr Marc Chesney, Vice Director of Department of Banking and Finance at the University of Zurich and Prof. Dr Dusan Isakov, Chair of Financial Management at the University of Fribourg. We asked about their opinions on the UBS case.
1) To your mind, what are the main reasons of UBS unauthorized trading case?
M.C.: If, as stated by the bank's CEO in October 2010, UBS should take more risk, then traders have explicit incentives to engage in aggressive deals. The current case is a by-product of the risky strategy followed by most of the investment banks. If traders perceive trading rooms as casinos where mathematical tools are required in order to generate profits, then employees, clients, shareholders of investment banks and at the end of the day, tax-payers, are confronted with a dangerous scenario.
D.I.: I was very surprised to learn that it had happened. I believe that there are several reasons for such an event.
Firstly, it could be that the trader did not have good intentions himself and wanted to use his position to get a better salary or promotion. The second reason might be pressure by the bank. It could be pushing the traders to take unreasonably high risk in order to gain more profits.
2) What is your opinion on supervision and control of traders?
M.C.: Traders have incentives to take excessive risks and risk-controllers do not have enough incentive to control these risks. They should receive bonuses each time they spot dangerous trades.
D.I.: I reckon that significant measures have to be introduced to supervise the traders and prevent them from making high risk investments without the top management's approval.
3) How do you believe this trading scandal will impact UBS in long term?
M.C.: The situation is fragile and there is indeed loss of reputation. I fear that jobs will be cut again. The bank should take the decision to reduce its risk confidence of the customers.
D.I.: The biggest consequences of the scandal are a loss of $ 2.3 billion and the damage of the bank's image that it was trying to recover hoping to regain the confidence of the customers.
Moody's have said that they would consider a rating downgrade of UBS. Do you think that would be appropriate?
M.C.: Unfortunately, it could make sense. Concerning possible remedies, the separation of investment banks from commercial banks should be reintroduced. In the US, the Glass-Steagall Act of 1933 precipitated 50 years of relative financial stability.
D.I.: It is difficult to say, because the rating agencies like to react on the problems of the banks and institutions very quickly. However, it is still unclear for us as we do not know the insight of the bank, not all information on this matter is available.
4) Swiss banking system is considered to be one of the safest in the world. Do you think the situation with UBS could negatively influence the reputation of the Swiss banking system as a whole?
M.C.: Everything is relative. The system will probably remain one of the safest.
D.I.: No, definitely not. UBS bank will be assessed separately because it has subsidiaries in UK and US; it is an international investment bank. I believe that customers will not lose trust in Swiss banks.