The economic recovery seen so far remains weak when compared with previous recoveries following recessions of the magnitude experienced in In the current market environment, the return to pre-crisis growth rates appears to be taking longer to materialize, mostly as a result of deleveraging in the private and corporate sectors. Secondly, the ongoing economic recovery also appears to be uneven from a geographical point of view. While emerging markets are expected to show the strongest performance, growth in advanced economies is predicted to remain low as the household and.
Unemployment rates are expected to remain high and only begin declining later during the year, as global economic recovery is firmly established in advanced economies. The most relevant factors are described below. The financial services industry experienced massive deleveraging in Banks in the US and Europe continued to decrease their balance sheets and raise capital to reinforce their financial position. While the deleveraging process within the banking sector is likely to continue for some time, and further capital might be raised in the future as a result of ongoing regulatory changes, it appears that financial sector leverage level has fallen substantially from the levels reached just before the crisis erupted.
On the other hand, deleveraging in the overall economy has only just begun. The reduction in household sector debt, which has already commenced in some countries, has been partly offset by an increase in government debt, leaving the overall debt level mostly unchanged. Most of the financial crises experienced in the last few decades have typically been followed by prolonged deleveraging episodes involving a substantial reduction in the debt-to-GDP ratio in the private sector, the public sector or simultaneously in both sectors.
Most past episodes of deleveraging have had a negative impact on growth, and lower real economy returns will negatively impact the profitability of the financial services industry in the next few years. Emerging markets. Emerging markets were also impacted by the global recession in Exporters of manufactured goods were hit by falling global trade volumes and reduced imports in advanced economies.
Commodity producers and exporters were hit by falling prices as the boom in commodity prices in the early s suddenly came to an end. Economic growth slowed markedly, and governments intervened to support domestic demand through public expenditures and increased credit supply to state-controlled and private corporations. Thanks to solid macro fundamentals, most emerging economies were the first to emerge from the slump in the course of the year. This performance is expected to continue throughout , with a return to sustained growth specifically in Asia and other emerging markets.
Therefore, the economic crisis over the last year has been a driving force in the economic and geographic power shift from advanced to emerging economies which was already well under way before the financial crisis hit the global economy. Re-regulation of the financial services industry. International organizations and national regulators have increased their focus on revising the regulatory framework of the financial services industry as conditions within the industry continue to improve and short-term governmental finan-.
As some countries are starting to implement regulatory changes, others are still debating on what is the best way forward.
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While the international organizations are trying to achieve an international level playing field, there is a growing risk that jurisdictions will implement regulations at different times and levels of intensity. This could lead to fragmentation of the regulatory framework and disparities of conditions between countries, with a risk of national ring-fencing tendencies.
The expected significant tightening of regulatory requirements pertaining to the financial services industry, whether globally coordinated or not, will likely reduce the profitability of certain businesses. This will eventually lead to changes in the competitive landscape of the financial services industry. Financial institutions and advisory businesses with low capital intensity that will be faster and more efficient in adapting themselves to the new regulatory environment are likely to outperform in the medium-term.
Rising taxation as public deficits soar.
One of the legacies of the global crisis is higher public debt in most of the developed world. As a result of the financial crisis, there has been a substantial transfer of private debt to the public sector. Higher public debts are most likely to become a dominant policy issue over the medium-term as governments will have to deal with the fiscal structural adjustments required to reduce the debt. The fiscal challenges that have emerged from the financial crisis are further aggravat-. Fiscal restructuring will likely be a long process.
It may be many years before public sector debt is brought back to pre-crisis levels. Governments will utilize a mix of measures, including structural reforms to pension and healthcare eligibility as well as a revision of tax rates and coverage. If this occurs, clients can be expected to become more focused on effective tax planning in hopes of reducing their tax burden. Banks and financial institutions capable of providing this type of expertise may be able to retain or attract more clients.
Global capital flows and offshore centers. In the pre-crisis period, offshore centers benefited from soaring cross-border capital flows as they have been the financial platforms often used by investors for global investments. One implication of the global crisis has been a dramatic drop in global capital flows, as investors were more averse to taking risks and were more domestically oriented.
Financial institutions reduced their exposure to foreign markets proportionally more than to their domestic markets. In the course of , global capital flows began to recover as investors gradually increased their risk appetite, particularly in relation to assets located in emerging markets. However, it could take many years for global capital flows to return to pre-crisis levels. Offshore centers are also under increasing policy pressure, as governments around the world are urging for more transparency concerning income produced on assets held by investors abroad.
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Banks with an established broad presence in onshore markets are likely to be impacted less than other banks relying exclusively on offshore business. Risk factors. Certain risks, including those described below, can impact our ability to carry out our business strategies and directly affect our business activities, financial condition, results of operations and prospects. Because the business of a broad-based international financial services firm such as UBS is inherently exposed to risks that only become apparent with the benefit of hindsight, risks of which we are not presently aware could also materially affect our business activities, financial condition, results of operations and prospects.
The sequence in which the risk factors are presented below is not indicative of their likelihood of occurrence or the potential magnitude of their financial consequences. Our reputation is key to the success of our business. Our reputation has been severely damaged by our very large losses during the financial crisis and by the US cross-border matter.
This has resulted in client attrition in different parts of our business and has negatively affected our financial performance. Restoring our reputation is essential to maintaining our relationships with clients, investors, regulators and the general public, as well as with our employees.
Accordingly, it is critical to the success of our strategic plans. Reputational damage is difficult to reverse. The process is slow and success can be difficult to measure. We have taken what we believe are very important steps to restore our reputation, but it is possible that it will take longer to repair than we expect, particularly if further events were to occur that cause additional damage to our reputation.
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Any failure to restore or further damage to our reputation could have a material adverse effect on our operational results and financial condition. Even if our reputation is restored, we may not progress quickly enough to achieve our medium-term goals. Regulatory changes may adversely affect our business and ability to execute our strategic plans. In the wake of the recent financial crisis, regulators and legislators are actively considering a wide range of measures designed to address the perceived causes of the crisis and to limit the systemic risks posed by major financial institutions.
Potential changes include:. Notwithstanding attempts by regulators to coordinate their efforts, the proposals differ by jurisdiction, and enhanced regulation may be imposed in a manner that makes it more difficult to manage global institutions. Swiss authorities have expressed concern about the systemic risks posed by its two largest banks, particularly in relation to the size of the Swiss economy and governmental resources. This may lead to more stringent regulations applicable to major banks headquartered in Switzerland in comparison with those based elsewhere.
The potential regulatory and legislative developments in Switzerland and in other jurisdictions in which we have operations may have a material adverse effect on our ability to execute our strategic plans, on the profitability or viability of certain business lines globally or in particular locations, and on our ability to compete with other financial institutions.
They could also have an impact on our legal structure or our business model. We are exposed to possible further reduction in client assets in our wealth management and asset management businesses. In and , we experienced substantial net outflows of client assets in our wealth management and asset management businesses.
This resulted from a number of different factors, including our substantial losses, the damage to our reputation, the loss of client advisors and developments concerning our cross-border private banking business. As some of these factors can only be addressed over an extended period of time, we may continue to experience net outflows of client assets. This may adversely affect the results of our wealth management and asset management businesses.
We hold proprietary risk positions that may be adversely affected by conditions in the financial markets. UBS, like many other financial market participants, was severely affected by the financial crisis that began in The deterioration of financial markets since the beginning of the. Strategy, performance and responsibility Risk factors.
We have drastically reduced our risk exposures, in part due to transfers to a fund controlled by the SNB. We do, however, continue to hold sizeable legacy risk positions that are exposed to the general systemic and counterparty risks that were exacerbated by the financial crisis.
The illiquidity of most of these legacy risk positions is likely to make it increasingly difficult to reduce our exposures to them. During the market crisis, we incurred large losses realized and mark to market on our holdings of securities related to the US residential mortgage market. Although our exposure to that market was reduced dramatically in and , we remain exposed to a smaller degree to such losses, most notably through monoline-insured positions. Monoline insurers have been adversely affected by their exposure to US residential mortgage-linked products, and we have recorded large credit valuation adjustments on our claims against them.
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If the financial condition of monoline insurers or their perceived creditworthiness deteriorates further, we would have to record further material credit valuation adjustments on the CDSs bought from them.