Two billion dollars is a stunning quantity of money to go missing. Plenty of people will be looking askance at UBS’s risk controls and plenty of others will be readying the pitchforks and torches for a march on Liverpool Street. The members of the UK's Independent Commission on Banking will be merrily chuckling to themselves.
But surely, if anything, the scandal shows that the non-ring-fenced model works? UBS shares fell off a cliff when the Swiss bank announced the losses. The bank said the incident could mean an overall third quarter loss. So equity holders take the pain, in the long term as well as the short term.
If you buy UBS shares, you buy into a universal bank. If your view is that universal banks will give better returns than banks that can’t do capital markets, then you’re getting paid for risks like this. If you think UBS has particularly bad risk management (as implied by Adoboli, but perhaps more significantly, by the Sfr13bn recapitalisation that was required at the beginning of the crisis), don’t buy it.
Taxpayer guaranteed depositors (for whose benefit ring-fencing exists) will not see a single franc of losses on the back of this scandal.
That doesn’t mean tough regulation is unwarranted. While equity holders get a kicking, the existence of UBS is threatened by a scandal like this. But this is only because the Swiss regulator is insisting on a bombproof capital cushion for its two big banks. Regulators are also busily looking at ways to build firebreaks between institutions, aiming to keep a lid on contagion and prevent one bank bringing down a financial system.
And there are good arguments for ring-fencing as well. If adopted worldwide, for example, it could mean a competitive landscape for investment banking. If banks cannot rely on depositor muscle, this means fewer barriers to entry and better financial intermediation.
Ring-fencing could also mean a credible end to taxpayer bailouts (although on optimistic assumptions). Markets could play chicken (and win) when a bank’s failure is covered by the fig-leaf of a resolution plan. What regulator now would have the courage to let a systemically important bank fail, trusting the living will to work as advertised? But with a solid ring-fence, that becomes more plausible.
Fine. But neither of these arguments has much to do with UBS’s rogue trading. One trader behaving badly shouldn’t change the contours of the debate.
Regulators and politicians want to see depositors protected, and rightly so. They need to make sure enough capital is available to allow UBS, or any other bank, to absorb unexpected trading losses. They should also make sure risk controls and mitigants are in place (see separate EuroWeek View, "UBS Trading Scandal — Part I"). But beyond that, what’s the problem?