Massive £1.3 billion fraud at UBS - what does it mean for you?

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Kweku Adoboli's homeGetty Images

Trader Kweku Adoboli was arrested in the small hours yesterday on suspicion of 'fraud by abuse of position'. His rogue activities are said to have cost UBS bank a staggering £1.3 billion. So just how was it allowed to happen?

And what does it mean for the banks?


The losses
Adoboli, 31, was arrested at his home (pictured) but has so far not been charged. He is accused of the single biggest loss of any trader based in London. It makes Nick Leeson and his £827 loss look like small potatoes. It is thought that the loss was related to the surprise Swiss currency devaluation last week. At that point he's though to have updated his Facebook status to 'I need a miracle' - which is presumably not the kind of risk management process his bosses thought they had in place.

There have doubtless been some failures within the bank, although it's far too early to point the finger. There will be questions asked as to how one man could have so much money at his disposal and be allowed to take so much risk without being spotted by colleagues.

But what effect will it have on the banks?
UBS is going to face some serious pain. However, it's far bigger and more robust than Barings was when Nick Lesson brought it down with his activities. And although the scandal saw its shares fall 10%, the fact they didn't fall further is a sign the market thinks it can withstand the scandal.

It is already facing challenging times, and had announced the cutting of 3,500 jobs in an effort to save around £1 billion. It's not known what sort of steps it is going to have to take now, but there are no signs of imminent failure. It's worth highlighting that Jerome Kerviel lost French bank Societe Generale £3.7 billion in 2008 through his trading activities, and the bank has soldiered on.

The effect may, however, be more widespread. When the banking reforms were announced this week, there was widespread disquiet over the fact that they will take eight years to be implemented. It means eight years before the retail part of banks is separated from the risk of this sort of thing happening again. There will be serious questions asked over whether we can afford to wait that long.

Business as usual?
Of course, this sort of thing isn't supposed to happen at all, and the fact that it does reveals the real effect it is likely to have - none at all. Banks may beef up their risk management, but the risk team at UBS were thought to be on top of their game and look what happened: there were strict processes in place that Adoboli simply got around.

You could argue that the fact his reward package was so skewed in favour of his bonus was a factor. His basic salary is said to be roughly £2000,000, with up to £400,000 in bonuses. If the reward for taking risk and winning is so great, there's every chance that extreme risk-taking becomes the norm. There may be questions about bonuses, but we've already seen how that goes. Bonuses have been debated for four years now, and still this sort of top-heavy reward was allowed to continue. One more scandal - even a £1.3 billion one - isn't going to make one jot of difference.

Frankly there's nothing stopping this sort of thing happening again, and for eight years there's nothing to stop it putting retail banks at risk.

It's hardly a comfort is it?

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