Socialism: How Sweet It Is.
The epicenter of the financial earthquake was actually New York City, but UBS stocks were shaken so badly last week one might have thought Zürichs Bahnhofstrasse was just a block away from Wall Street. Are things so bad for the Swiss banking giant that investors should include it among the endangered species of New York investment banks?
The figures speak a different language: UBS could simply write off 11.6 billion Francs in the 3rd quarter and still be within the capitalization guidelines set by the Swiss Federal Banking Commission, (a so-called Level-1-ratio of at least 8%). The calculation was done for this newspaper by the credit specialty firm Independent Credit View (ICV). They made the assumption that the bank would have no pre-write-off profits and their balance level would remain the same. Its much more probable, however, that UBS would be able to absorb a reduction in assets in the third quarter. At any rate, reducing assets has been one of four important goals for UBS boss Peter Kurer.
On the assumption that the bank can reduce its risk-weighted assets by 10 percent in the third quarter, it would constitute a write-off of some 14.2 billion Francs (nearly $13 billion), says Christian Fischer of the ICV. In comparison, at the end of June the bank had risk-weighted assets of some 54 million Francs. The relatively comfortable level of capitalization of UBS is important. If the bank had to re-capitalize again this year, it would develop into a fiasco.
The composition of the liabilities side of the balance sheet is an almost more crucial factor. One-fourth of UBS gigantic balance of 2 trillion Francs is made up of customer deposits. Investment banks such as the now-failed Lehman Brothers or Merrill Lynch, on the other hand, were financed primarily by loans from other banks. Because banks are now skeptical of trusting other banks, this method of financing has become prohibitively expensive in recent days,
Without its customer deposits, USB would have probably also gone under, because its equity is only about 2.6 percent of its balance and was clearly even lower at the height of the hubris. For customers to storm the bank counters demanding their deposits back, uncertainty would have to be immense.
Because of the massive rescue action launched by the United States government, its now questionable whether UBS will even have to take any further action to reduce their risk-weighted assets at all. Even if, as a Swiss bank with a U.S. license, they were unable to enjoy handing over their bad mortgage loans to the American government, they would still profit from the intervention because as the U.S. buys up mortgages it is also supporting their market price. JP Morgan analyst Chris Flanagan told the Reuters News Agency that the measures undertaken by the United States make it extremely probable that the mortgage index has now reached its low point. As prices for these instruments rise, it will make further write-offs unnecessary.
Whether the Swiss bank will be forced to implement further write-offs in the third quarter cant be predicted with any accuracy at this time. The critical deadline is the 30th of September. Until then, a lot can happen. If the risk positions on UBS balance sheets are worth less then than they were on June 30th, UBS will have to write off the difference. Right now, it looks like the American taxpayer will rescue UBS investors from any painful losses.
Thats how sweet socialism can be for large banks.
The figures speak a different language: UBS could simply write off 11.6 billion Francs in the 3rd quarter and still be within the capitalization guidelines set by the Swiss Federal Banking Commission, (a so-called Level-1-ratio of at least 8%). The calculation was done for this newspaper by the credit specialty firm Independent Credit View (ICV). They made the assumption that the bank would have no pre-write-off profits and their balance level would remain the same. Its much more probable, however, that UBS would be able to absorb a reduction in assets in the third quarter. At any rate, reducing assets has been one of four important goals for UBS boss Peter Kurer.
On the assumption that the bank can reduce its risk-weighted assets by 10 percent in the third quarter, it would constitute a write-off of some 14.2 billion Francs (nearly $13 billion), says Christian Fischer of the ICV. In comparison, at the end of June the bank had risk-weighted assets of some 54 million Francs. The relatively comfortable level of capitalization of UBS is important. If the bank had to re-capitalize again this year, it would develop into a fiasco.
The composition of the liabilities side of the balance sheet is an almost more crucial factor. One-fourth of UBS gigantic balance of 2 trillion Francs is made up of customer deposits. Investment banks such as the now-failed Lehman Brothers or Merrill Lynch, on the other hand, were financed primarily by loans from other banks. Because banks are now skeptical of trusting other banks, this method of financing has become prohibitively expensive in recent days,
Without its customer deposits, USB would have probably also gone under, because its equity is only about 2.6 percent of its balance and was clearly even lower at the height of the hubris. For customers to storm the bank counters demanding their deposits back, uncertainty would have to be immense.
Because of the massive rescue action launched by the United States government, its now questionable whether UBS will even have to take any further action to reduce their risk-weighted assets at all. Even if, as a Swiss bank with a U.S. license, they were unable to enjoy handing over their bad mortgage loans to the American government, they would still profit from the intervention because as the U.S. buys up mortgages it is also supporting their market price. JP Morgan analyst Chris Flanagan told the Reuters News Agency that the measures undertaken by the United States make it extremely probable that the mortgage index has now reached its low point. As prices for these instruments rise, it will make further write-offs unnecessary.
Whether the Swiss bank will be forced to implement further write-offs in the third quarter cant be predicted with any accuracy at this time. The critical deadline is the 30th of September. Until then, a lot can happen. If the risk positions on UBS balance sheets are worth less then than they were on June 30th, UBS will have to write off the difference. Right now, it looks like the American taxpayer will rescue UBS investors from any painful losses.
Thats how sweet socialism can be for large banks.