UBS and CS are still two big hedge funds

Bankers betting your savings!

Today, July 7th, 2011, the Swiss news paper NZZ runs an article on page 27 about capital requirements for the two Swiss big banks UBS and Credit Suisse (CS).

•  Capital requirements today are based on risk weighted assets (rwa) according to the international Basel standards. rwa are calculated by models developed and run by the bank. 
  
• the models to calculate rwa rely heavily on Value at Risk (VaR) which takes daily risk in  to account but does not consider tail risk (risk of big negative events ). The result is an understatemetn of risk.
• Banks have an incentive to keep their capital low in order to in increase the shareholder return on equity (RoE), and the means by tweaking the risk models accourdingly

• While the capital ratio based on rwa has increased for UBS and CS, capital ratios based on total assets have not been increased for UBS and CS. They are at 1.63% (UBS) and 1.88% (CS).

• This equals to a hedge fund with a leverage of 60 times its equity. Would you put all your savings in that hedge fund?
  
• UBS total assets are CHF 1.300 billion, or 4 times the GDP of Switzerland. CS has a similar balance sheet. Switzerland could be the next Iceland! 

 The graphs below reflect the diminishing capital ratios of UBS and CS over time: