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UBS Post 2008 Challenges and Post 2020 Risks

Introduction

The financial crisis threated the survival of may financial institutions that had invested nin the various investment opportunities. In particular, UBS’s expansion strategy and the need to earn more revenue saw its operations being launched in the US. Coupled with the rise in housing mortgage demand and the excessive risk-taking of banks led to a global financial crisis. Specifically, it made real estate security values to plummet causing harm to financial institutions, including Swiss banks UBS AG and Credit Suisse. Roeder states that

“recent technological advances, such as computer-driven trading programs, together with the increasingly interconnected nature of markets, has magnified the momentum effect. This has made the financial sector inherently unstable.”

His assertions suggest that firms should take precaution when using technological innovations to spur their growth. In this research paper, UBS AG responses post 2008 crisis are discussed, along with future risks past 2020.

Background

The history of UBS dates back to 1862 when it was founded. It provides financial advice and investment solutions to private and corporate firms around the world and private clients withing Switzerland. The bank has four main business divisions as part of its structure: global wealth management, wealth management, personal and corporate banking, and asset management. The asset management has presence in 22 countries, leading fund house in Europe, and the largest mutual fund manager in Switzerland. It claims on its website that it:

“provides corporate, institutional and wealth management clients with expert advice, innovative solutions, execution and comprehensive access to international capital markets. … The Investment Bank is an active participant in capital markets flow activities, including sales, trading and market-making across a range of securities.” (“What We Do”).

The bank offers a wide range of financial services that make it at risk of making mistakes if caution is not taken while pursuing growth. Banks have limited their workforce due to necessitating conditions of covid 19. Yet, approximately 73,000 people work for UBS, distributed across fifty countries.

The Issue and Effect On UBS

With the current global pandemic and the lasting effects of the financial crisis, inherent risks, operational uncertainties, financial institutions should adopt strategies that help mitigate the risk exposures they are confronted with. This research’s importance cannot be overemphasized owing to the fall of Archegos Capital Management and its repercussions for other banks. Comfort and Jennen state that “there are dangers in the so-called shadow banking sector of financial firms that aren’t subject to the same level of scrutiny as traditional lenders.” This implies that the other financial banks are also at risk provided they are not stringently controlled as their counterparts—the traditional lenders.

Challenges and strengths UBS faced post 2008

UBS, like many other financial institutions adopted some measures to recover from the effects of the 2007 financial crisis. However, the bank still continued to face challenges and risks during its operations. In particular, it was hit by different ethics scandals, such as allgations of tax evasion in US which lead to losses in fines and clients. To be specific, the bank’s wealth management division declined by 60% in 2008 and by 17% in 2009.

One of the strategies the company is utilizing to ensure survival is its investment in technology to develop algorithmic execution strategies. By so doing, the firm will make informed decisions regarding investments in asset classes. Owing to unique challenges posed by each region the bank operates, the Futures algorithmic strategy could provide an improved performance for their clients. Moreover, the bank has dedicated to offer beneficial insights to its customers through its global team of electronic sales traders.

Banks Institutional History and Culture Influence UBS’ Response To The Crisis

Adopting a right business strategy and investing in a strong corporate structure positively impacts the financial performance of corporates. The firm outlines three keys as instrumental to influencing the future performance of the bank. These include Pillars, Principles, and Behaviors. Moreover, the three keys embody the gateway for success and heritage of the firm; hence, determining their work relationship with other stakeholders, recruitment process, and internal business making decisions.

More interestingly, the company hires people to ensure that it has a diverse workforce, which it claims is a competitive strategy (“Our Culture”).

Observable Changes in Firm Post 2008 and Post 2020 Risks

Post 2008, the bank has made some significant adaptations to help cushion it from possible financial crises and provide recovery measures. However, it has been plagued by a myriad of scandals that have threatened to lead to its shutdown. Post 2020, the firm needs to have a change in the business strategies it adopts. Perhaps, focusing its efforts on the investment banking will mean the best turnaround for the bank as it is the investment wing that results in fines, losses, and scandals.

Operational

Some of the changes the company took during the financial crisis of 2007-2009, include writing down more than 50 billion Swiss francs due to the deteriorating market conditions in the United States’ sub-prime residential mortgage market. UBS further states that: “

UBS responded to the financial crisis by raising capital, notably through a 13 billion Swiss franc issue of mandatory convertible notes (MCNs) in late 2007 and through a public write off of approximately 15 billion francs in June 2008. In the same year the Swiss National Bank (SNB) and UBS announced a comprehensive solution to materially de-risk and reduce UBS’s balance sheet.” (35).

The statement reveals that the company is motivated to reduce operational risks to avoid loss making strategies.

Technological

The advancement in technology poses unprecedented uncertainties for the future of banking. More specifically, the use of Fintech, cryptocurrencies, new investment strategies, and crisis prevention strategies continue to cause disruptions in the banking sector. With the widespread acceptance and usage of the cryptocurrencies, the future of brick and mortar is threatened. While it may not be possible to rule out the need for banks, the privacy and security that cryptocurrencies offer brands them as desirable investor choices.

Foreign Market Penetration and Compliance

In the 2008, it was revealed that the bank has been helping its US clients to conceal huge amounts of money from being taxed. Aided by the Swiss bank privacy rules, people avoided taxes. However, the US government demanded that the bank releases details of more than 52,000 customers that were suspected of evading tax. In addition, the bank was charged of a conspiracy to defraud the US.

The US enacted a law requiring foreign banks to reveal and declare any investments of US citizens that are over 50,000 dollars to which it complied. This compliance costs the bank an estimated $100 million annually. Within the UK, the bank has been accused of allowing a rogue trader making investment choices that cost the bank more than $2 billion in losses. This happened as the firm was struggling to recover from a bailout from the Swiss government due to losses the investment wing made in the US due to the sub-prime mortgages.

Legal Suits

The firm has faced numerous legal suits since the financial crisis. In the process, it has loss resources in fines and revenue. In addition, it was fined $1.5 billion in 2012 for committing wire fraud and manipulating LIBOR submissions. In 2012, the US Department of Justice accused the entity of failing to honor its terms of agreement in earlier LIBOR cases. As a result, the earlier fine was voided and another $200 million was added.

Structural and Managerial Changes

Some managers of the bank have been fined, while others have been jailed for their involvement in various ethical scandals. More interesting is the decision for some CEOs to voluntarily resign due to the unethical practices of the company. For instance, when there was a “rogue trader” in the UK, the CEO quit. And, in 2011, the CEO quit for his involvement in a $2.3 billion trading scandal (Bosley). Future managers should adopt measures that stimulate the observance of social responsibility and ethical standards. By so doing, the firm may avoid the numerous scandals that have plagued it for years now.

Conclusion and Future Recommendations

Works Cited