December 3, 2012 4:32 pm

UBS – legacy issues

Libor settlement would strengthen Swiss bank’s investment case
Businessmen walk towards the offices of UBS in London©AFP

Close, but no cigar. UBS is in talks with regulators over alleged rigging of Libor benchmark interest rates. It hopes for a settlement by the end of the year. Fines could top $500m, higher than the £290m Barclays paid for similar offences in June to the Financial Services Authority in the UK and the Commodity Futures Trading Commission and the Department of Justice in the US. Welcome though a settlement will be, the celebrations at UBS headquarters could be brief.

Much as newish chief executive Sergio Ermotti would love to see the back of the Libor matter, one of many issues inherited from previous management, it may be only the first of such settlements. UBS approached regulators, so obtained conditional immunity from some for its disclosures. But the regulatory beast has multiple heads. Settlement with one does not guarantee settlement with all – as Standard Chartered discovered in an unrelated Iran banking case. US regulators are not a homogeneous bunch. Moreover, time-consuming and costly civil cases could ensue.

A $500m fine, though a further embarrassment for UBS, would not – at less than one-tenth of third-quarter operating income – derail it. The bank’s fully-loaded Basel III core tier one equity ratio of 9.3 per cent would hardly be dented. Settlement of what could be the biggest of the fines should bolster UBS’s investment case, however. Its plans to cut staff numbers by 10,000 (over 15 per cent of the total) and withdraw from most fixed income, currency and commodity trading activities – bar those needed by wealth management clients – have underpinned a 30 per cent rise in its shares this year, versus the fall in those of arch-rival Credit Suisse, which sees less need for an overhaul.

Investors have warmed to UBS’s recognition of the profound changes in its markets. Libor fines in the rear-view mirror will sustain that.

Email the Lex team in confidence at lex@ft.com

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