Less Friction

UBS recently announced a new strategic direction, one that effectively ends its tenure as a universal bank. The move now holds its investment bank independently accountable – no longer able to source cheap funds from its cash generative private bank and asset management franchises.

Will other universal banks soon follow, and likewise end cross-segment subsidization? How then will investment banking operations survive on costlier risk capital?

Since UBS first announced its purchase of Paine Webber on July 12, 2000, its shares have declined 19% in US dollar terms. Shares are down nearly 60% excluding the lavish currency effect. Over the same period, the S&P 500 is 13% lower.

By comparison, the AMEX broker-dealer index, featuring purer-play banks (asset management divisions partly subsidize some), is 37% higher. The relative effect underscores just how badly management got it wrong.

For the equally unfortunate Citigroup (down 51%), the UBS move might serve as the right template: a framework for more transparency in risk-taking, which itself probably means less risk-taking.

Once it balances with return, expect risk pricing to hold these large financial players to account, and capital markets to become more efficient as a result.

This more open and competitive environment ultimately will enhance the flow of assets between issuers and investors, unleashing capital that has become far too concentrated.

The investment banks themselves will survive, but on smaller fees, though with less volatile profit margins.