UBS Loss Bolsters Swiss Lawmakers’ Too-Big-to-Fail Cause

UBS AG (UBSN)’s $2 billion loss from what it said was unauthorized trading prompted Swiss lawmakers to call for tougher capital requirements and for other businesses to be protected from riskier investment banking operations.

Switzerland’s biggest bank said today it may be unprofitable in the third quarter after the loss from “unauthorized trading” at its investment bank. UBS tumbled as much as 10 percent in Swiss trading following the announcement.

“It shows that investment banking is a high-risk field and it’s important that we clearly separate systemically important functions from the rest of the banking business,” said Caspar Baader of the Swiss People’s Party.

Swiss rule-makers are running ahead of counterparts in the U.S. and Europe to make sure UBS and rival Credit Suisse Group AG cut risks and hoard capital to avert the type of banking collapse that hobbled Iceland’s economy. The Swiss Parliament is expected to vote on proposals to limit risk-taking by the two banks and impose higher capital surcharge requirements at the end of this month, according to spokesman Mark Stucki.

“For a bank that has made mistakes in the past, it’s absolutely unacceptable,” said Fulvio Pelli, the party president of the Liberals, who later added that Switzerland’s too-big-to-fail bill and tougher capital requirements were the way forward. “I’m absolutely astonished that internal controls didn’t work at UBS.”

Capital Requirements

The Swiss government has recommended changes to banking laws which would force UBS and Credit Suisse to hold total capital equal to at least 19 percent of their assets. That requirement is almost double that of rival banks in the U.S. and Europe.

A government-appointed panel rejected proposals to break up the two Zurich-based banks or directly limit their size and activities, such as proprietary trading.

“This case shows that security systems apparently can fail again and again,” said Marianne Binder, a spokeswoman for the Christian Democrats. “Because of this, higher capital requirements for banks are necessary.”

The trading loss deals a blow to Chief Executive Officer Oswald Gruebel’s attempts to revive the investment bank after the division recorded 57.1 billion Swiss francs ($65 billion) in cumulative pretax losses in three years through 2009.

“We are in close contact with UBS, which informed us immediately about the situation,” said Tobias Lux, a spokesman for the Swiss Financial Market Supervisory Authority. He declined to comment on whether Finma, which monitors risk management at Swiss banks, has started an investigation.

UBS Investigating

UBS is still investigating the matter, the Zurich-based company said in a statement today. No client positions were affected, UBS said, declining to comment further on the matter.

City of London police arrested Kweku Adoboli, a UBS employee, in connection with the loss, according to a person with knowledge of the matter who declined to be identified. London police and UBS declined to identify the man.

The bank had to raise more than $46 billion in capital from investors, including the Swiss state, to make up for the losses during the credit crisis. The investment-banking unit had pretax earnings of 1.21 billion francs in the first half of 2011, while UBS as a whole had net income of 2.82 billion francs in the period.

“There can’t be another state bailout,” Hans Fehr, a lawmaker of the Swiss People’s Party, said in a phone interview. “It can’t be up to the state and taxpayers to rescue large banks that are involved in risky business.”

Capital Ratio

The bank’s Tier 1 capital at the end of the second quarter was 37.39 billion francs, giving it a tier 1 capital ratio of 18.1 percent, compared with 14 percent at Deutsche Bank AG, Germany’s biggest bank.

UBS fell 8.6 percent to 9.99 francs as of 3:50 p.m. in Zurich, bringing this year’s decline to 35 percent.

“We’ve taken cognizance of the news,” Roland Meier, a spokesman for the Finance Ministry said in a telephone interview from Bern. “At the moment the too-big-to-fail draft is being discussed in parliament,” and the UBS loss “fits well” within this topic. He declined to comment further.

To contact the reporter on this story: Carolyn Bandel in Zurich at cbandel@bloomberg.net; Simone Meier in Zurich at smeier@bloomberg.net; Klaus Wille in Zurich at kwille@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net