Risky ways of global finance

The immense debacle in the international derivatives trading desk of a major Swiss bank in London has once again drawn attention to the risky ways of global finance. The facts of the case, as reported, conceal more than they reveal about the risk-rewards system in large international banks. A 31-year-old trader of Ghanaian origin allegedly indulged in fraudulent accounting practices and concealed trading losses while working at UBS, London, his actions dating back to 2008. When these were detected last week, the “rogue trader” was accused of blowing a $2 billion hole in the bank's balance sheet. It is incomprehensible how a single individual, however well placed, could escape scrutiny by his peers and superiors over such a long period.

Nor is it clear as to how the Swiss Bank will refurbish its tattered reputation, although there is a widely-shared view that UBS is strong and resilient enough to withstand the staggering loss. As with such debacles, the post mortem in this case will lead to making promises to shareholders, depositors, and national regulators of better vigilance and internal audit. Important as these are, they will still not address the basic malaise of today's globalised, international banks.

The globalisation of finance has altered traditional banking's core structure and values and that is why the latest dealing room debacle at UBS will have far wider ramifications. Banks traditionally do their best to match their assets and liabilities — to ensure that the money they borrow from depositors and markets matches the loans they issue. When there is a mismatch — the two could be in different currencies or at different maturities, for example — trouble often follows. Over the past few decades, global finance has been driven by an enormous mismatch between the two. Retail and private bank deposits from several countries have supported the expansion of leading banks into global markets. For all the benefits this meant for global trade and commerce, it resulted in a vast increase in risk-taking and a culture of paying extraordinary sums as bonus to managers that most outsiders find abhorrent.

For its part, global financial regulation sought to put a lid on the quantum of bonus, hoping to reduce the levels of risk-taking by banks. But such efforts have not always been successful. The U.K.-based Independent Commission on Banking under Sir John Vickers has suggested the ring-fencing of the banks' retail operations to protect domestic deposits from being put at risk by the “casino” type culture of investment banks. That recommendation needs to be acted upon by other countries as well.

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