The S&P 500 and the narrower Dow Jones Industrial Average (^DJI 0.69%) were down 0.34% and 0.48%, respectively, at 10:15 a.m. EDT. In company-specific news this morning, Switzerland's largest bank, UBS (UBS 1.50%), has announced a reorganization that could serve as a case study for major U.S. banks, particularly Bank of America (BAC 1.70%) and Citigroup (C 2.82%).
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Along with its first-quarter results, UBS announced a major reshuffling of its legal structure this morning with two key aims: creating a bank that it is easier to break up in the event of a crisis and reducing capital requirements.
These are the broad lines of the changes. UBS will create a group holding company with a share-for-share exchange offer. Within the holding company, it will create a domestic subsidiary encompassing domestic retail and corporate banking and the Swiss-originated wealth management activity, with an intermediate holding company for its U.S. businesses. The U.K. franchise sits on its own and will see increased capitalization in order to match increased risk.
Finally, the holding company will issue debt, the proceeds of which could be allocated to a struggling subsidiary in case of a crisis. In order to sweeten the plan for investors, UBS plans to pay a SFR0.25 special dividend along with the share exchange. The bank said the reorganization does "not require UBS to raise additional equity capital, and [is] not expected to materially affect the firm's capital-generating capability." UBS also confirmed its 15% target for return on equity, but said it may not achieve it until 2016.
Swiss regulators have done an admirable job of reining in the country's bloated banking sector in the wake of the financial crisis (U.S. regulators could take a page from their book), and UBS has been proactive in adapting to the shifting regulatory and financial environment. That's a good example for Bank of America and Citigroup, both of which have stumbled in their dealings with regulators recently. Citigroup was blindsided when the Federal Reserve rejected its capital return program in March; meanwhile, Bank of America received the go-ahead for its plan -- then had to suspend it once the bank owned up to an accounting error that overstated the amount of its regulatory capital.
Although the top U.S. banks have been tasked with drawing up "living wills" that would provide a detailed road map for winding down the institution in a crisis, "too big to fail" remains an open problem. In creating a "bad bank" for noncore assets, Citi has gone further than BofA. However, rather than applauding the bank, the market appears to have tarred it as the problem child of the industry, with shares of Citigroup continuing to trade at a discount to those of Bank of America. BofA's slip up suggests there is not as much to separate the two as investors want to believe. With another European bank, Barclays, announcing its plan to set up a "bad bank" structure of its own, perhaps this is an opportunity for Bank of America to ask itself whether a more ambitious turnaround is appropriate?
