Source: The Malta Independent¸ Article published on 18 September 2011
by George M. Mangion

It does not rain but it pours when financial scandals erupt. Little did we expect that with the introduction of strict banking regulation¸ including the implementation of new stress tests and Basel 111 rules¸ another bank would bite the dust? Reference is made here to the shock news that police in London had arrested a “rogue trader” in connection with allegations of unauthorised trading in UBS. At a time when the markets and shares show unprecedented losses¸ one could hardly believe that this trader at UBS bank caused an estimated $2 million loss. It was immediately reflected in an 8.00 per cent drop in UBS’ share value. Luckily¸ no client positions have been affected so far¸ yet the news came as a bolt out of the blue for FINMA¸ Switzerland’s financial regulator.

Ironically¸ at a time of such austerity¸ global banks are under stricter supervision and hence they will struggle to recoup the fat returns they had grown used to¸ prior to the credit crunch¸ by trading anything from complex bond derivatives to gold and currencies they made millions. It is obvious that after the balmy pre 2007 days when bank profits flowed so copiously in their Balance Sheets they now face an escalating debt crisis and heightened uncertainty both in Europe and more so in the US where we are seeing banks’ share value dip in market trading.

ZKB trading analyst Claude Zehnder said of the UBS scandal¸ “They obviously have a problem with risk management.” The Swiss taxpayer had bailed out this top Swiss bank in the 2007/8 banking crisis¸ following huge losses on toxic assets held by its investment bank. Recently¸ UBS made 3¸500 workers redundant leaving 65¸000 staff worldwide. It hoped to save $2.3 billion in wages and salaries and now¸ paradoxically¸ it lost them in this last scandal that rocked the UK branch. Furthermore¸ it was associated with a serious tax evasion dispute with US authorities and was forced to disclose over 300 client names and pay a $780 million fine. In another instant it agreed with the US authorities to reveal data on 4¸450 American clients. All this echoes the risks that Swiss banks in post sub-prime crisis are facing. British economist Professor Chris Roebuck said UBS has tightened its compliance and rules¸ but this latest breach “is a staggering demonstration that all the clever systems that the banks now have still cannot stop a determined individual getting round them if they want to”.

Sadly¸ this reflects poor corporate governance and lower audit oversight in sensitive sectors such as currency trading where millions are made or lost in a trade. This “casino” style trading is a lucrative edge of each international bank but while it lays the golden egg when things go wrong it conjures visions of ugly days. Just remember when we saw other rogue traders¸ including the one at Société Générale¸ rogue trader Jerome Kerviel¸ who was arrested in 2008 over unauthorised trades that cost the bank €4.9 billion. Following his arrest¸ a court sentenced him to three years in prison in October 2010. Records show it was one of the largest investor losses in France’s history.

So what is the solution that can plug a bank’s defences against such expensive fraud? Can effective risk management process result in zero risk occurrences? Hardly¸ as