Banks Forced Into Investment Arm Rethink as UBS Slashes Jobs

Terry Flanagan

Some of Europe’s largest banks are being forced to re-evaluate their trading operations, as the latest banking bloodbath takes its toll on the industry.

In scenes eerily reminiscent of the final dark days of Lehman Brothers in September 2008, Swiss bank UBS this week abruptly culled 10,000 jobs, mainly from its fixed income division, as tough new regulatory capital rules appear on the horizon.

This follows on from new rounds of job cuts at many European banks including Deutsche Bank and Credit Suisse, while Barclays and Societe Generale are both shrinking their trading operations. Bankers at Investec are taking cuts of around 15% to their basic salaries to ward off similar actions.

Earlier this week, many workers at UBS—which has been embroiled in the rogue trader scandal in London where Kweku Adoboli has been accused of causing the largest unauthorized loss, of $2.25 billion, in U.K. trading history—arrived up at their offices only to be turned away and placed on ‘special leave’ and told to stay away from UBS offices until further notice.

UBS chairman Axel Weber, though, issued a warning that other banks may be forced to take similar measures.

“Many banks have not yet really understood what the consequences of the new [Basel III] capital rules for business will be when they come into full effect in 2019,” he told German daily newspaper Handelsblatt yesterday.

In a statement, UBS outlined its plans for the future.

“We are ahead of schedule in our plans to build additional capital strength and reduce both costs and risk-weighted assets,” said Sergio P. Ermotti, group chief executive of UBS.

“The investment bank will continue to be a significant global player in its core businesses, and we intend to forcefully compete to increase our market share in these areas of strength. This decision has been a difficult one, particularly in a business such as ours that is all about its people.”

The impending Basel III rules, which are designed to harden the defenses of banks against a repeat of the global financial crisis, are being phased in from this January with full implementation from 2019. Banks will be required to maintain proper leverage ratios and meet certain capital requirements. The rules, which governments around the world must start to implement from the beginning of next year, require all banks to strengthen their capital reserves by raising total core reserves to 7% from current levels of 2%.

“We are in a quite extended transitional phase, whereby the capital buffers of the banks are being increased to the Basel III levels,” Andrew Bailey, managing director of the Prudential Business Unit at the Financial Services Authority, the U.K. financial services regulator, told a recent British Bankers’ Association conference. “This process has around six years to run on the transition timetable.”
Fixed income operations, historically a cash cow for investment banks, especially are being scaled down by many banks due to these tougher capital requirements and a subdued market.

This is on top of the alphabet soup of regulations Europe’s banks are expected to contend with in the coming months and years, including AIFMD, MiFID II, Emir and Solvency II.

“A myriad of regulations have been and continue to be drafted in an attempt to provide more stability, security and transparency,” said Josephine de Chazournes, senior analyst at research consultancy Celent’s Securities and Investments Practice.

“These will have a tremendous impact on the European cash fixed income markets, in terms of both trading volumes and potential revenues.”

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