Op risk will help determine bonuses, UBS promises

Ermotti promises culture that "safeguards and reinforces our reputation"

UBS is to cut its investment banking arm in half in the wake of September's rogue-trading loss, which pushed the division into the red for the third quarter of the year. Speaking on Thursday evening, chief executive Sergio Ermotti refused to give more details on the loss, but said the bank would be overhauling its operational risk management framework, with emphasis on culture and compensation issues.

"Our objective is to reinforce the operational risk framework. Staff need to live and breathe a culture that safeguards and reinforces our reputation every minute of the day," Ermotti told investors. "We acknowledge there is a desire for clarity on the incident, but we are restricted in what we can say. We are committed to addressing the causes of the incident and disciplining those ultimately deemed responsible." 

Ermotti added that operational risk would be given more influence in assessing performance and pay. "We are further enhancing the performance management process to ensure operational risk has a strong weight in our assessment of individual, team and business performance – the assessment will be fundamental to the success, career prospects and compensation of all UBS employees."

Discussing the cuts, which will see 2,000 UBS employees lose their jobs by 2016, Ermotti said that the investment banking arm had been providing too little return to justify the risk it entailed. "The investment bank consumed more than two-thirds of risk-weighted assets (RWA) but delivered only 26% of profit," he pointed out. "We will reduce group RWA by a third and investment bank RWA by 50% – mostly from fixed income, currency and commodities."

Equity prop trading will also be eliminated. "From a purely financial perspective, we should be maintaining prop trading, but a strategic decision was taken to withdraw over time due to the lack of direct client relevance," commented investment bank chief executive Carsten Kengeter.

The bank lost SFr1.85 billion ($2.3 billion) to a rogue trader in its London delta one trading team in September. Ermotti's predecessor Oswald Grubel resigned shortly afterwards. Since then, Yassine Bouhara and Francois Gouws, co-heads of UBS Investment Bank's global equities division, have left the bank after taking responsibility for the loss. One of the division's two chief operating officers, Niraj Gudka, has also resigned. The trader believed to be responsible, Kweku Adoboli, was arrested and will appear at Southwark Crown Court in London next week.