UBS's bold experiment


Live by FICC, die by FICC. That seems to be where the investment banking industry has arrived.

The biggest banks have fared well in large part because of fixed-income, commodity and currency sales and trading activity, which drove the bulk of the gains in the third quarter, collectively accounting for 55 percent of aggregate capital markets revenues. That allowed banks to offset still-weak investment banking revenue growth, which has been held back by slow equity underwriting and a relative lack of deal advisory fees.

So what to make of banks that are not making the grade in FICC? Well, they have some big issues to ponder. UBS offers some insight into the dynamic.

Breakingviews reports that, "The Swiss wealth manager and investment bank is poised to reveal a radical strategy that could see it pull out of fixed-income trading. Such a plan would be expensive and slow to execute – that's why rivals typically think such moves are impossible. But the decision could prove an industry game-changer. Sergio Ermotti's reported assault on fixed income goes way further than the strategic review he unveiled after being appointed chief executive in November 2011. It's easy to see why. Trading losses have ruined the bank's attempts to bolster risk management. (FICC) has barely contributed to the bottom line in recent years while consuming about half of the group's allocated equity."

Winding down could prove costly.

"Trading books have credit and derivative exposures that would pose risks – and hog capital – for years. Keeping key personnel like investment banking co-head Carsten Kengeter wouldn't be cheap – and there would be no new business revenue to help out. There would be opportunity cost too if markets recover. The cost-benefit analysis may be favourable only on a very long view."

Other banks have also indicated that they would like to diversify a bit, notably Morgan Stanley.

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