UBS AG’s US$1.5 billion settlement over allegations of manipulation of the London Interbank Offered Rate (LIBOR) highlights the political, regulatory and reputation risks facing the major global banks, Fitch Ratings says.
In a new research note, Fitch says that UBS’ LIBOR fine is larger than it expected. It also highlights the sort of outsized risks that these sorts of firms can face, it says, noting that the complexity of trading banks’ business models, and their exposure to large unexpected risk, “make it more difficult to predict and assess the size of losses that can emerge rapidly from unexpected events, such as the LIBOR investigation.”
While this episode does not change Fitch’s current view on the credit ratings of the big global banks, “… if the investigations or any reputational damage result in a notable and lasting business or financial impact that significantly changes a bank’s credit risk profile, we would then reconsider the ratings of the affected institutions,” it says.
Additional impacts include the potential for material litigation expenses and civil settlement costs. “The potential for lasting damage to individual franchises as a result of the scandal is unclear. As the investigations proceed and the involvement of other banks becomes clearer, the burden is likely to be shared amongst a broader group,” it adds.
As for UBS, while the fine was bigger than expected, Fitch says that it can be absorbed by the bank’s 2012 earnings, so it will maintain solid capitalisation. This will be helped by the continuing reduction in risk-weighted assets, it notes.
Additionally, Fitch says that UBS’s recent decision to significantly accelerate the restructuring and reduction of risk-taking in its investment bank should reduce these sorts of risks in the future. “We believe UBS’s strategy to significantly scale down its investment bank should lead to better quality and less volatile earnings, an improved risk profile and a more balanced funding position,” it says.