The revelations will also further shake confidence across the troubled European banking sector.
UBS, which dominates the Australian investment banking market, last night gave few details about the incident, including how the losses occurred. However, police in London last night arrested a 31-year-old man in relation to the trading loss.
London police said they had arrested the man on ''suspicion of fraud by abuse of position'' at 3.30am local time. He was in police custody and an investigation had been launched.
UBS last night assured clients, however, that their positions were not affected.
''The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of $US2 billion,'' UBS said in a statement. ''It is possible that this could lead UBS to report a loss for the third quarter of 2011.''
Spokespeople for UBS in Australia and Zurich last night declined to comment beyond the statement. UBS shares in Europe plunged after the announcement. In early trade in Zurich, UBS was down more than 7 per cent.
The rogue trading affair could not have come at a worse time for the troubled European banking sector, which is facing its toughest funding challenges since the collapse of the Wall Street bank Lehman Brothers three years ago.
Banks there are heavily exposed to the problem economies of Greece, Italy and Spain while questions remain over the health of their balance sheets.
''This will be another blow for the confidence for the sector that can least afford it,'' one senior trader at a rival investment bank said last night.
The chief executive of UBS, Oswald Grubel, labelled the loss as ''distressing'' but said it would not change the ''fundamental strength'' of the bank.
The firm was working ''to get to the bottom of the matter as quickly as possible, and will spare no effort to establish exactly what has
happened,'' he wrote in an email to employees.
While UBS does not operate a banking retail business in Australia, it dominates investment banking and equities trading and is a counter-party to every major Australian bank and broking house.
Many Australian UBS employees were yesterday still in the dark about the affair, suggesting the focus around the losses remained firmly offshore.
Extreme volatility in global markets in recent months was likely to have contributed to the size of the losses, traders said.
The affair is likely to stoke memories of the former French trader Jerome Kerviel, who is accused of gambling away billions of euros of at Societe Generale, one of France's three biggest banks, in risky dealings that cost €4.9 billion ($6.6 billion) in losses.
Swiss rule-makers are running ahead of counterparts in the U.S. and Europe to make sure UBS and rival Credit Suisse Group AG cut risks and hoard capital to avert the type of banking collapse that hobbled Iceland’s economy. The Swiss Parliament is expected to vote on proposals to limit risk-taking by the two banks and impose higher capital surcharge requirements at the end of this month, according to spokesman Mark Stucki.
“For a bank that has made mistakes in the past, it’s absolutely unacceptable,” said Fulvio Pelli, the party president of the Liberals, who later added that Switzerland’s too-big-to-fail bill and tougher capital requirements were the way forward. “I’m absolutely astonished that internal controls didn’t work at UBS.”
Capital Requirements
The Swiss government has recommended changes to banking laws which would force UBS and Credit Suisse to hold total capital equal to at least 19 percent of their assets. That requirement is almost double that of rival banks in the U.S. and Europe.
A government-appointed panel rejected proposals to break up the two Zurich-based banks or directly limit their size and activities, such as proprietary trading.
“This case shows that security systems apparently can fail again and again,” said Marianne Binder, a spokeswoman for the Christian Democrats. “Because of this, higher capital requirements for banks are necessary.”
The trading loss deals a blow to Chief Executive Officer Oswald Gruebel’s attempts to revive the investment bank after the division recorded 57.1 billion Swiss francs ($65 billion) in cumulative pretax losses in three years through 2009.
“We are in close contact with UBS, which informed us immediately about the situation,” said Tobias Lux, a spokesman for the Swiss Financial Market Supervisory Authority. He declined to comment on whether Finma, which monitors risk management at Swiss banks, has started an investigation.
UBS Investigating
UBS is still investigating the matter, the Zurich-based company said in a statement today. No client positions were affected, UBS said, declining to comment further on the matter.
London police arrested Kweku Adoboli, a UBS employee, in connection with the loss, according to a person with knowledge of the matter who declined to be identified. City of London police and UBS declined to identify the man.
The bank had to raise more than $46 billion in capital from investors, including the Swiss state, to make up for the losses during the credit crisis. The investment-banking unit had pretax earnings of 1.21 billion francs in the first half of 2011, while UBS as a whole had net income of 2.82 billion francs in the period.
“There can’t be another state bailout,” Hans Fehr, a lawmaker of the Swiss People’s Party, said in a phone interview. “It can’t be up to the state and taxpayers to rescue large banks that are involved in risky business.”
The bank’s tier 1 capital at the end of the second quarter was 37.39 billion francs, giving it a tier 1 capital ratio of 18.1 percent, compared with 14 percent at Deutsche Bank AG, Germany’s biggest bank.
“We’ve taken cognizance of the news,” Roland Meier, a spokesman for the Finance Ministry said in a telephone interview from Bern. “At the moment the too-big-to-fail draft is being discussed in parliament,” and the UBS loss “fits well” within this topic. He declined to comment further.
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