Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Bove: Regulation Overkill Led to UBS Rogue Trading Loss


Banking analyst Dick Bove sees a straight line from overregulation of banks to the $2 billion loss UBS suffered at the hands of a rogue trader.

UBS announced the massive loss Thursday, a development that underscores the difficult time many investment banks have had because of tighter capital standards and, in the case of Swiss banks such as UBS, the surging franc.

But Bove thinks the capital requirements were an especially important culprit in the UBS case.

The Rochdale Securities analyst diagrammed the probable sequence of events like this:

Swiss authorities pressure UBS to carry even greater capital requirements than Basel III; UBS can’t meet those requirements unless it reduces riskier assets; that in turn cuts into profits, forcing the company into cutbacks that include failure to purchase updated software to monitor risky trades.

“The division is left vulnerable to a sizable problem because it is dealing with disaffected employees and a software system which no longer may be state-of-the-art,” Bove said in a research note. “A big loss slips through.”

Bove has been a frequent critic of increased bank regulation that has come into play since the financial crisis in 2008 and 2009.

While he may be an outlier in making the connection between regulation and the UBS problem, he maintains that there is a link.

“All of the events above are believed to have happened,” he said. “The only issue in question is whether there is a connection from the starting point to the end point. I think there is; others may argue that this is a stretch of logic.”

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