Interview with UBS Chairman Axel Weber: 'We Have Learned Our Lesson'

Part 2: 'New Rules for Trading Will Change Investment Banking'

Christmas lights illuminate an office building of Swiss bank UBS in Zurich. Zoom
REUTERS

Christmas lights illuminate an office building of Swiss bank UBS in Zurich.

SPIEGEL: The misconduct was widespread throughout the entire industry when it came to manipulating the LIBOR key interest rate. Was it a case of organized crime?

Weber: There are 150 different rates in the LIBOR system. There were deep distortions within the system. The truth will only gradually come to light, and many investigations are just getting underway.

SPIEGEL: What was especially new about the scandal was the fact that there was collusion among different banks.

Weber: The LIBOR rate is an indicator of the health of each particular bank. And there was apparently an attempt by some to paint themselves in a more favorable light than was actually the case. This may not be organized crime, but in my view the LIBOR scandal poses one of the fundamental risks to the reputation of the entire banking industry. We still have a lot to do to work off this scandal.

SPIEGEL: Did watchdogs turn a blind eye to the problem, precisely because LIBOR was a heath indicator, as you call it?

Weber: I don't think so. At the time, the watchdogs simply had many things that demanded their full attention. When I returned from a vacation in the United States in July 2007, I was immediately asked to attend negotiations to support (mid-sized Düsseldorf-based bank) IKB. Things happened very quickly after that. We watchdogs had to focus on limiting the damage in an acute situation and averting a collapse of the credit system.

SPIEGEL: You have now gone from being a watchdog and regulator to one of the regulated. Is the trimming of investment banking business at UBS a logical consequence drawn from your previous role?

Weber: What helps me the most in reorienting UBS is the fact that, as a regulator, I played a key role in shaping the new basic conditions for banks after the financial crisis. That's why I know that the new rules for trading operations, equity capital and liquidity will fundamentally change investment banking. For complex trading operations, in particular, the capital requirements will be so high in the future that they can no longer be pursued in a profitable way. That's why UBS will no longer engage in certain businesses.

SPIEGEL: So these businesses aren't worthwhile for UBS or any other investment bank?

Weber: Each bank will have to decide that on its own. For a while, one can indulge in the illusion that the new rules won't happen that quickly, or perhaps won't happen at all. But anyone who believes that doesn't understand how determined the regulators were and are. I'm not one to fall for that fallacy.

SPIEGEL: So you would take exactly the same approach if you were now the head of Deutsche Bank, which wasn't beyond the realm of possibility at one point?

Weber: You should put that question one of the co-CEOs of Deutsche Bank. They're more familiar with their bank's capital costs and returns.

SPIEGEL: Is it possible that customers who want certain services will turn away from UBS, benefiting competitors like Deutsche Bank?

Weber: Of course it's possible. But it can also go the other way. The especially high capital requirements in Switzerland exist because taxpayers here are not willing to accept the risks that result from the risky trading operations of investment banks. That's why they want an equity capital ratio of 19 percent, which significantly improves the resilience of banks. I don't think taxpayers in other countries are willing to take on the risks that their own banks assume when they take away business from Swiss banks.

SPIEGEL: Shareholders are also urging other banks, like Barclays, to make drastic cuts to investment banking. Could UBS become a model for the industry?

Weber: They're welcome to imitate us. The reaction in the markets, with a significant increase in the share price, shows that we are on the right track. With our strategy, we are fulfilling the new capital requirements much earlier than others, and we'll also be able to start consistently paying dividends again much earlier than others. When it comes to the strength of their finances, the position of other banks -- including German banks -- is like that of the northern German lowlands relative to the Swiss Alps. Someone who wants to keep a large balance sheet total in investment banking will have to climb a long and rocky path to satisfy the capital requirements.

SPIEGEL: You mean Deutsche Bank?

Weber: No, I'm talking about all institutions and their challenges. I have the luxury of referring to UBS as one of the best capitalized banks in the world.

SPIEGEL: You mentioned the risk to German taxpayers. Would the Liikanen Commission's plans to separate deposit banking and trading operations in European Union banks reduce these risks?

Weber: In Switzerland, they have concluded that deposits are sufficiently protected if the capital ratios are high enough. This is a neutral approach that doesn't require intervening into the structure of the banks. However, I believe that a form of the divided banking system will become the norm outside Switzerland, in various ways. This can certainly make sense.

SPIEGEL: Large banks complain that their investment banking operations would no longer be competitive in a divided banking system.

Weber: It will certainly become more difficult for investment banks to refinance their operations if they no longer have access to deposits from the private customer division. It should be noted that we decided to cut back investment banking even though there won't be a divided banking system in Switzerland. Other banks have yet to see these additional costs.

SPIEGEL: We can't end this conversation without asking how the euro crisis would have gone if the ECB president today were not Mario Draghi, but Axel Weber.

Weber: I'll leave the answer to that question up to your journalistic expertise.

SPIEGEL: Are you happy to be getting your salary in Swiss francs?

Weber: The euro zone was in a difficult situation when I left the Bundesbank, and it still is today. I attributed my departure to the fact that I disagreed with large segments of the ECB Council on key questions of crisis management. The purchase of Greek government bonds in May 2010 gave the wrong incentive, namely to postpone reforms. This has lead to the development of a reform gridlock in the euro zone today that has only made the situation worse. Many today see that the fears some had expressed have become reality. At the time, I wanted to pave the way for a successor who could represent Germany in the ECB with the strength of and eight-year term and a new way of looking at things.

SPIEGEL: For Jens Weidmann, who is still fighting the same fight you fought at the time.

Weber: That's to his credit.

SPIEGEL: Mr. Weber, thank you for this interview.

Interview conducted by Armin Mahler and Martin Hesse

Translated from the German by Christopher Sultan

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