Case Study - Dianand Dial

Assignment

Case Study: United Bank of Switzerland (UBS)

Student Name: Dianand Dial

Student ID#: 35592

University: Texila American University

Program: BBA Bachelor of Business Administration

Subject: Banking & Financial Services

Lecturer: Prof. Visham Budhoo

Date: 25th September 2020

Table of Contents Page #

Executive Summary………............….…………………………………………………….……1,2

Introduction of Subject……………………………………………………………………………3

Question 1:

Identify and discuss the role, type & functions of UBS……………...…………………………4,5,6

Question 2:

Using the banking legislation in India as a guide, identify UBS legislative power, and discuss any
legislative breach, and outlining in detail the contributing factor/s for its current situation
…………………………………………………………………………………………………7,8

Question 3:

Within the context of the central bank of India, identify and discuss the policies structural
framework that can be considered (or was implemented) by UBS as measures to curb any
(purported) fiasco, and outline the impact of these measures ……………………..……….…9,10

Question 4:

Compute the following using the lawsuit settlement sum at UBS as the principal amount, assuming
a 4% interest rate per annum, along with tenure where the accusation of PaineWebber Group Inc.
is the ‘beginning’, and the period when losses were written-down, as the
‘ending’……………………………………………………………………..……..………11,12,13
Question 5:

Using the information/data for Leasing at UBS, discuss and compute the following
………………………………………………………………………...…………...………14,15,16

Question 6:

Using the information/data for Hire-purchase at UBS, discuss and compute the following
…………………………………………………………………………..…………………17,18,19

Question 7:

Considering the UBS fiasco, determine an appropriate insurance mechanism/policy/s that would
have potentially change the dynamic, and discuss in detail the impact of such measures on UBS
overall operation ………………………………………………………….…………………20,21

Question 8:

Within the context of Micro-credit based agencies, identify the type of model appropriate to UBS
and give enough justification ………………………………………..……..……………………22

Comparative Analysis: ……………………………………………..……..……………………23

Limitation in the case: ……………………………………………..…….…..…………………24

Conclusion: ……………………………………………..……..…………………..……………25

References: ……………………………………………..……..……………..…………………26
Executive Summary:

United Bank of Switzerland (UBS) is the world’s largest management firm of a private wealth
asset and the second-largest bank in Europe, UBS has joined with PaineWebber Group Inc in the
year 2000 to become the world’s largest wealth management firm for private clients with an overall
invested assets of $1.3 trillion and has financial centers in 50 countries and 65,000 employees,
UBS is a Commercial Bank that plays a major role in the banking sector for Public Sector Banking,
Private Sector Banking, and Foreign Banking. The major functions for UBS are accepting of
deposits, issuing loans, and foreign trade which made the bank grow financially to be the second-
largest bank in Europe.

In 2008, UBS was suspected by the Internal Revenue Service Investigators to have 20,000
American clients hiding funds as much as $20 billion in an offshore account to avoid $300 million
in taxes.

The U.S. Justice Department filed a lawsuit against UBS for helping the Americans to evade taxes
by opening Swiss bank accounts. Base on the lawsuit UBS has paid $780 million to settle the
lawsuit in 2009. UBS has used its legislative power since the bank does not consider tax evasion
to be a crime in Switzerland if UBS has not used its legislative power, the lawsuits could have
been more penalizing. The offshore accounts are not illegal, but the hiding of the undeclared
account is illegal in the United States with the investor being Americans, which cause UBS to pay
the penalty.

UBS has faced a crisis other than the tax accusations by the Internal Revenue Service Investigators,
who suffers from a loss of $46 billion on bad mortgages and derivatives from weak risk controls
and risky investments, the loss of bad mortgages have arrived from inflation, weak risk controls
and risky investments causing clients to default in payments on mortgages, UBS has put
measurements in place for the new banks to be acquired by having insurance on mortgages.

Mortgages will be placed on an insurance policy for every loan to its clients in case of any default
payments in the future where the insurance will cover the amount loss either by the banker or
client, UBS had appealed to the Swiss government in the year 2008 which doled out a package of

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$59.2 billion to the ailing bank, UBS agreed to forgo $27.7 million to the company’s top executives
and promise payment of bonuses will be paid depends on the performance of the bank, UBS is
now working on striking the right balance between compensation, capital expenditures, and
investors returns.

As a recovery strategy, UBS contemplated to acquire three other banks for 10 years either by
leasing of rent of $700 million for 5 years period or requisite borrowing at 14% to procure for five
banks., UBS would acquire the five banks to continue of its banking business to recover from its
losses.

With leasing, UBS can finance the contemplated acquired banks by finance leasing or operating
leasing whereby once UBS uses finance lease at the end of the lease the lessee can purchase the
assets at a bargain price, whereas operating lease is considerably be terminated on short notice.

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Introduction:

Banks are used for providing financial transactions, they receive deposits, issue loans, pay bills,
currency exchange, and safe boxes for their client. They are several other different banks, but the
world’s second-largest bank in the United Bank of Switzerland manages the private wealth asset
and the second largest bank in Europe.

Since UBS is the second world’s largest bank and has almost 20,000 American clients investments
it was suspected that the bank is hiding as much as $20 billion in assets, the bank was charged by
the U.S Justice Department subsequently, and a lawsuit was filed against UBS, they were charged
them for helping the American clients to open a Swiss bank account to evade taxes, UBS agreed
and pay $780 million to settle the lawsuit in 2009 because UBS does not wish to lose its clients
business.

UBS has been asked to submit the 20,000 names of the American clients that are suspected to be
hiding funds in the offshore bank but In Switzerland, the bank does not consider tax evasion as a
crime, and using undeclared accounts is legal. Base on the legislative power it was agreed to submit
only 4,500 names of the American holder.

UBS has continued its business even after paying the penalty and losing $46 billion in mortgages
and derivatives, the bank appealed to the Swiss government, which doled out an aid package of
approximately $59.2 billion to continue its trade. The bank even considers acquiring 3 other banks
on a leasing arrangement to continue its business and keep its clients.

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Analysis of Result and Discussion:

Question 1:

1. Identify and discuss the role, type & functions of UBS.

• UBS Role of Banking:
Banking plays a major role in the funding of businesses and private individuals, the role of
The United Bank of Switzerland (UBS) is involved in virtually all major financial
activities, including retail banking, commercial banking, investment banking, investment
management, and wealth management.

- UBS facilitates import & export transactions. - (UBS have foreign investors from the
United States of America & 50 other countries, this alone imports foreign currencies
into the country and for its clients to have access to their accounts in the Swiss bank,
also funds are being exported to the client's location for them to have access to the
accounts).

- UBS encourages foreign investors to bank their money into the Swiss account. - (It was
evident that foreign investor banked their money in the Swiss account to avoid taxes as
The Internal Revenue Service Investigator had filed a lawsuit against UBS for illegal
offshore banking).

- UBS provides loans & mortgages to clients. – ( It was evident that loans & mortgages
were issued into a foreign country to its clients since the amount of $46 billion was a
loss due to weak risk and risky investments in over 50 countries).

- UBS encourages commercial banking transactions through payments by wire transfer

rather than currency. – ( The only way most clients can have their funds deposited into
their Swiss bank account is to wire transfer funds rather than posting cash from country
to country).

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 - UBS encourages banking as its name suggests confidence, security, and discretion.
(This was proven as The Internal Revenue Service Investigator requested 20,000
American names but only 4,500 was given due to the legislative power of UBS).

• UBS Type of Banking:

UBS banking type is identified as a Commercial Bank, a bank that has more than one
branch offices in the world’s financial centers in 50 countries, this bank provides services
to companies and the public by accepting deposits and provide loans to their client.
- Types of Commercial Bank
I – Public Sector Bank – This bank is held by the state government and has zero chance
of defaults on finances since the government would cover any defaults.
II – Private Sector Bank – This bank is held by private individuals rather than the
government; this bank can lose its customer savings on any chance of defaults.
III – Foreign Banks – This bank operates its branches outside of its country.

• UBS Function of Banking:

UBS a commercial bank that is the 2nd second-largest bank in Europe with overall invested
assets of approximately $1.3 trillion, this bank performs several functions that can be
divided as follows:

- Accepting Deposits – Deposit is one of the major function of a commercial bank, the
bank pays interest to its depositors. This bank has two main accounts Savings & Current
Account, thus allowing their clients or company to write checks or withdraw their funds
from the bank by ATM or check payments rather than cash payment.
(eg. USB accepted deposits of approximately $1.3 trillion from its clients that belong
to the 50 countries with American clients being the most invested).

- Advancing Loans – The bank initiative way of making a profit is to advance loans to
its customer, loan payable to customers attracts a high-interest rate on repayments, the
loans given from a percentage of deposit receives from its customer, which is used to
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 pay as a loan. A loan can be given either by:
(eg. UBS has lost $46 billion in mortgages & derivatives due to the weak risk controls
and risky investments, with insurance policy the loss amount would be repaid base on
the sum insured).
a- Cash Credit
b- Call Loans
c- Overdraft
d- Discount Bills of Exchange

- Credit Creations – A bank offer loans to its customer, a new account is being created
with the name of the customer with the loan amount credited into their account, the
bank does not pay the customer by cash but offer them to use funds either by checks
from account initiated for the loan, the bank pays a loan from customer deposits but
keeps reserves for their working capital.
(eg. UBS have issued loans to its client since one of its function of a bank is loans, but
also keeps a certain amount of funds for working capital expenditures).

- Financing Foreign Trade – The bank will buy & sell foreign currencies & finance
foreign trade to another country for its client, by accepting payment in the form of a
different currency.
( eg. UBS has offices in 50 countries, with having banks being in different countries
UBS would need to acquire each currency of every country to transfer of funds to its
client.).

- Agency Services – The bank act as an agency for paying off utility bills for its customer
from their account and even act as an agent for collecting of checks, drafts & bill of
exchange with a small service charge to its customers.

- Miscellaneous Services to Customers – The bank also have other functions, e.g.
Providing Visa, Master, Debit & Credit cards to its customer for easy access to their
savings, they also provide safe services by provided lockers for a customer to store
their jewelry, documents and other valuables in its vault for safekeeping.
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Question 2:

2. Using the banking legislation in India as a guide, identify UBS legislative power, and
discuss any legislative breach, and outlining in detail the contributing factor/s for its
current situation.

• The UBS legislative power - In Switzerland it has a bicameral parliament. The Federal
Assembly is the legislative power of Switzerland which consists of two (2) chambers (The
National Council & Council of States) These two (2) chambers meet separately but have
the same powers. The UBS does not consider tax evasion to be a crime, and using
undeclared accounts is legal in the country, because of the legislative power many people
have invested their assets into UBS which makes this bank the second-largest bank in
Europe with an overall invested assets of approximately $1.3 trillion. Many individuals
have an open bank account with UBS because low levels of financial risk and high levels
of privacy they offer, the law requires that the banks have high capital requirements and
strong depositor protection, which practically ensures that any deposits will be safe from
financial crisis and conflicts. Base on the data protection and privacy are fundamental
constitutional rights protected by the Swiss Constitution, the Swiss Data Protection law is
set out in the Swiss Federal Data Protection Act 19th June 1992 and the accompanying
Swiss Federal Ordinance to the Federal Act on Data Protection of 14th June 1993.

• The UBS Legislative breach - The offshore accounts are not illegal in the United States
but hiding undeclared accounts is illegal, the U.S. Justice Department have filed a lawsuit
against UBS as it has been suspected that 20,000 American clients are hiding $20 billion
in assets to avoid $300 million in federal taxes as a legislative breach by the United Bank
of Switzerland. The U.S. Justice Department filed a lawsuit against UBS with a penalty for
helping American clients to open Swiss bank accounts to evade taxes. UBS has agreed the
pay $780 million settles the lawsuit because UBS has to protect its client deposits from
financial crises and conflicts as a promise, UBS also agreed to provide the Internal Revenue
Services with nearly 4,500 names on the American account holders.
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• Outlines for the contributing factor for its current situations - However, other than tax
evasion accusations UBS also faced the subprime crises due to heavy dependence on
derivatives and mortgage-related securities. This was caused by weak risk controls and
risky investments. Base on the banking restrictions UBS has paid excessive funds to the
CEO, which was a weak control, no advance should be paid to any director, manager,
employee, or guarantor in case of loans and advances. Also, willful defaulters have failed
to honor their payments which are considered as weak risk control by the bank.
Because the breach with the U.S Justice department causing the lawsuit against UBS has
played a massive loss to the bank, this causing the bank to settle a lawsuit of $780 million
which affected the bank funding system, this lawsuit had even cause UBS to lose several
clients. Also, the loss of $46 billion losses on bad mortgages and derivatives had cause
major effects on the banking sector for UBS.

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Question 3:

3. Within the context of the central bank of India, identify and discuss the policies
structural framework that can be considered (or was implemented) by UBS as
measures to curb any (purported) fiasco, and outline the impact of these measures.

The policy structural framework for UBS is as follow:

1- Fixed Fiduciary System – This system is where the central bank can issue currency
notes up to a certain limit fixed by the government. The additional amount to reach
its limits must be issued by a 100% gold reserve.
If UBS has effectively checked the inflation, the system could have not failed by
weak risk controls and risky investments, the risk of loss will cause the clients to
lose confidence in the bank.

2- Maximum Fiduciary System – This system is where the government fixes the
currency limit up to the maximum notes without the backing of the reserves. If UBS
has set aside its reserves for savings the bank could have to use the reserved funds
to continue its business without appealing to the swiss government causing UBS to
forgo nearly $27.7 million in payments.

3- Expanding Currency Supply for Financing Development Plans – The central

bank has the authority to expand its currency to its country for the benefits of its
economy, by expanding the currency it reduces the risk of inflation an expands the
supply of the currency for its growth stability, UBS can benefit from the expanding
currency to have a wider span of growing more into the banking industry by issuing
more loans to larger business rather than smaller business to reduce the risk &
losses.

4- Expansion of Flow of Bank Credit to the Priority Sectors – The central bank of
a developing country has given the opportunities to larger and desired quantities
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 of bank credit to priority sectors, causing the bank to grow with opportunities within
the government sectors for loans to agriculture, export trade, and cooperatives
giving the bank a better growth and stability with the expectation of mortgage
repayment without any defaulters. With UBS taking this advantage of loans it
reduces the default mortgages and better-paying clients.

5- Controlling Inflation and Containing Cost Escalation – The central bank is to

control the inflation within the country for businesses to continue with their plan
and not have escalations. This controls the inflation on the interest rate for the
borrowing of loans rather than having high rates and causing default mortgages.

6- Operating Exchange Control – Foreign exchange is one of the major growth of a

country, this helps the country to develop by purchasing with the foreign currency
from an international country, UBS was benefiting the country by having investors
investing in deposit in the country bank by increasing the foreign currencies.

7- Developing Sound Banking Structure – The central bank has taken positive steps
and adopt various measures by implementing insurance on deposits which can help
the economic growth of the bank, with UBS insurance on deposits would have been
less penalty to the U.S Justice Department since the insurance would have paid part
of the settlement, and with insurance being part of the banking deposits, this will
increase the creditworthiness of clients and have more investors.

8- Solving the Balance of Payments Problem - The central bank should help solve
the balance of payments in a developing country, These economies can face serious
difficulties by having defaulters not paying their balances, which was one of the
major defaults for UBS other than tax evasion accusations.

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Question 4:

4. Compute the following using the lawsuit settlement sum at UBS as the principal
amount, assuming a 4% interest rate per annum, along with tenure where the
accusation of PaineWebber Group Inc. is the ‘beginning’, and the period when losses
were written-down, as the ‘ending’.

a. Simple and compound interest.

SI = Principle * Time * Rate
Principle - $780M
Interest Rate Per Annum - 4%
Start Date Year 2000
End Date Year 2008
Simple Interest = 780M * 8 * 4%
= 249.6M

b. CAGR for the savings account and stock fund (assuming the savings account balance
is 1.5 times greater and the stock fund is 2 times greater than the settlement sum).
CAGR = End Value (1/Year)
Beginning Value -1

CAGR = 780M*2 1/8

780M*1.5 -1

CAGR = 1,560M 1/8

1,170M -1

CAGR = 3.66%

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c. Present Value (assuming the 4% represents the discount rate, compounded semi-
annually, and the settlement to be received after the above tenure).
PV= FV
1+r/m mT

FV = Future value of money

r = Annual interest rate
T = number of years
m = Number of periods based on compounding frequency

PV = FV x (1+ (1+i)n)
= 780M x (1+ ( 1+0.04)-8)
= 780M x (1+(1.04)-8
= 780M x (1/ 1.36857)
= 780M x (0.73069)
PV= 569.94M

d. Discuss what these results are suggesting for UBS.

a. Simple Interest – If UBS had used the settlement funds of $780M as a loan to its
client then the interest profit that UBS would have gained on its mortgage is
$249.6M over the 8 years.

b. CAGR – The compound annual growth rate of 3.66% over the 8 year investment
period, can help an investor compare alternatives for their capital or make a forecast
of future value.

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c. Present Value – The answer $569.94M, tells us that receiving $780M in 8 years is
the same as receiving $569.94M today if the time value of money is 4% per year
compounded annually. (Today is the same concept as time period 0).

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Question 5:

5. Using the information/data for Leasing at UBS, discuss and compute the following.

a. Determined and discuss the type of lease contemplated by UBS in 2009.

Leasing: A lease is a contract agreement between a lessor and the lessee, the lessor is the owner
and the lessee is the user, the lessee will pay the lessor for the use of the asset, building, etc. The
lessor will be paid by the lessee for lease rent.

The type of lease contemplated by UBS is Finance and Operating Leases:

• Finance Lease: The finance lease is where the lessor transfers all the risk and rewards
associated with the asset to the lessee before the lease agreement expires, the agreement is
where the lessee gets the ownership of the asset before the lease expires.

The lease is said to be the finance lease if it satisfies the following requirements:
- The lessee can purchase the asset at a bargain price once the lease is expired.
- After the lease is expired the lessee receives ownership of the assets.
- The lease term is at 75% of the estimated life of the assets.
- The present value of lease payment is at least 90% value if the assets.

• Operating Lease: An operating lease is a contract that allows the usage of the asset but
does not transfer ownership to the assets. If UBS considered the leasing the firm would be
required to pay at the end of the year lease rent of 700 million for 5 years and all
maintenance, insurance and, other costs to be borne by the lessee.

The following are the main features on the operating lease that make it different from other
leases:
- The lease term is considerably less than the life of the asset.
- The lessee can terminate the lease on short notice without any significant penalty.
- There is an ownership transfer to the lessee at the end of the lease.

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 - Risk or benefits remains with the lessor and the lessee pays the maintenance costs.
- Lessee is considered to be renting while the lease payment is treated as a rental expense.

b. Compute the NPV, assuming a discount rate of 6% annually.

NPV of leasing = Cost of the Assets – PV on the after-tax lease payments – PV of the lost
depreciation tax-shield.

Table:

Lease Type True Lease

Cost of Asset $999M
Lease Term 5
Lease Payment (Annual) $700M/5=(140M)
Cost of Borrowing 14%
Corporate Tax Rate 50%
After-Tax Cost Debt 6%

Solution Table:

Year 0 1 2 3 4 5
Cost of Asset 999 - - - - -
Lease Payment -140 -140 -140 -140 -140
Tax Shield 70 70 70 70 70
Depreciation - -249.75 -124.875 -62.4375 -31.21875 -15.60938
Residual Value - - - - - 0
Total 929 -319.75 -194.875 -132.4375 -101.21875 -15.60938
NPV of Cash Flow 929 -301.65215 -173.32875 -111.19453 -80.17537 -11.66489

NPV of Leasing = 250.9843 = (929-(301.65215) -(173.32875) -(111.19453) -(80.17537) -

(11.66489))

NPV of leasing analysis gives positive results, which leasing can be used for its financing.

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c. Compute depreciation using the declining balance method and determine the residual
value at the end of the tenure.

Depreciation Table:

Year Book Rate of Depreciation Accumulated Net Book

Value Decline Expense Depreciation Value
Balance
1 999 50% 499.5 499.5 499.5
2 499.5 50% 249.75 749.25 249.75
3 249.75 50% 124.875 874.125 124.875
4 124.875 50% 62.4375 936.5625 62.4375
5 62.4375 50% 31.21875 999 31.21875
Residual Value 0

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Question 6:

6. Using the information/data for Hire-purchase at UBS, discuss and compute the
following:

a. Differentiate between a lease and hire-purchase.

Leasing – A lease is a contract agreement between a lessor and the lessee, the lessor is the owner
and the lessee is the user, the lessee will pay the lessor for the use of the asset, building,
machinery, and vehicle, etc. The lessor will be paid by the lessee for lease rent. If UBS acquired
the three banks for 10 years, then the rental cost for leasing will be $14 million for 10 years.

Hire Purchase – This type of purchase is being done between the Vendor (Seller) and Customer
(buyer), the sale of the asset is done by an agreement for the buyer to pay an arranged payment
plan for the asset for a period with interest charged. The ownership will only be transfer to the
buyer until the full arranged payment is made in full. UBS will be the owner of the three banks at
the last payment of installment after all debt is settled and the ownership will be transfer to UBS.

Difference between Leasing and Hire Purchase:

Basis Leasing Hire Purchase

Ownership The three Bank ownership belongs to Bank ownership is transferred
the lessor; it is not transferable to the after the last installment is paid in
lessee UBS in case of leasing. full by UBS.
Goods Involved Bank Building & Land mostly leased to Bank Building & Land would be
UBS if they decide to go ahead with high-cost items which are not
leasing. suitable as hire purchase.
Depreciation Depreciation can only be claimed by the Depreciation can be claimed by
owner of the bank If UBS lease the bank UBS at 50% on a declining
they cannot claim for depreciation. balance for the three banks once
they are the users.
Down Payment No deposit/down payment is required A requisite of 14% to procure the
for the leasing agreement for the 5 banks in the case of leasing by
acquiring of the 3 banks for UBS. UBS.
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 Maintenance UBS would not be responsible for the UBS would be responsible for
Expenses maintenance, insurance, and other costs if the maintenance if they
they acquired the bank by operating lease. purchase the bank by hire
purchase.
UBS would be responsible for the
maintenance, insurance, and other costs if
they acquired the bank by financial lease.

b. Compute the cash price for the five banks, assuming a rate of interest of 7% and an annual
installment of 140 million for a five years tenure.

Total
Amount Due amount
Principle or
at the end of Amount of due to the
Interest @ amount due at
Installments yr. after installment end of yr.
7% the beginning
paying paid (before
of the yr.
installments paying
Instalment)

5 - 140 140 10 130

4 130 140 270 19 251

3 251 140 391 27 364

2 364 140 504 35 469

1 469 140 609 43 566

Total 1,214 700 1,914 134 1,780

Cash Price = $1,780M

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c. Compute the cash price for the five banks, assuming a rate of interest of 7% and an annual
installment of 140 million for a five years tenure, with a deposit of 20%.

Cash Price = $1,780M + Cash Deposit 20%

Cash Price = $1,780M + $356M

Cash Price = $2,136M

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Question 7:

7. Considering the UBS fiasco, determine an appropriate insurance mechanism/policy/s

that would have potentially change the dynamic, and discuss in detail the impact of such
measures on UBS overall operation.

Insurance:

Insurance is a contract between the policyholder and the insurance company, they are several
types of insurance policy that provide a guarantee of compensation for financial losses such as
Property Insurance, Mortgage Insurance, Guarantee Insurance, Life Insurance, Marine Insurance,
Fire Insurance, Personal Insurance, and Liability Insurance. With any of the policies
incorporated any damages or loss occurs in the insurance company with compensating for the
insurable damaged items.

The insurance policy which would have potentially change the dynamic and the impact of
UBS overall operations:

Mortgage Insurance Policy – protects a mortgage lender or titleholder if the borrower defaults
on payments or cannot fulfill their financial obligations that were issued by the Bank. This
insurance policy compensates lenders or investors for losses due to the default of a mortgage
loan.

UBS has suffered from the subprime crises due to its heavy dependence on derivatives and
mortgage-related securities causing the bank to be forced to write-down over 46 billion in losses
on bad mortgages and derivatives. The Mortgage Insurance Policy will compensate for the
financial losses insured by the bank.

Characteristic of Insurance for UBS:

 Sharing of Risk – Insurance is a device to share some of the financial losses e.g. The
deductibles and premiums you pay for the insurance.
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  Cooperative Devices – Insurance is a cooperative device to spread the loss caused by
several persons exposed to mortgage risks.
 Value of Risk – Higher the risk, the higher the premiums based on the cost of the
insurance premiums by UBS mortgage loss.

Functions of Insurance for UBS:

 Primary Functions-
- The certainty of Compensation of Loss – Insurance provides the charges for the
certainty of the bank loss on mortgages.
- Insurance provides Protections – The insurance provides compensation for actual
loss suffers by the client; the functions of the insurance protects against the risk of
losing this policy would cover the loss of the mortgages of UBS.
- Risk Sharing – Insurance spread the loss over several clients who are exposed by the
same particular risk.

 Secondary Functions-
- Prevention of Losses – The Insurance company will help its clients to engage in
prevention measures which will help UBS to reduce losses over its mortgages.
- Insurance Increase Efficiency – Insurance helps businesses to put away their
worries and miseries losses, so that they can focus on achieving their goals and
making a profit and even feel motivated, rather than focuses on any loss.
- Encouragement of savings – Insurance not only protects risk but it also encourages
its client to make a premium on time and even entitle to discounts, causing the clients
to save more.

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Question 8:

8. Within the context of Micro-credit-based agencies, identify the type of model

appropriate to UBS and give enough justification for your answer.

Types of Micro-Credit Formation Group:

1. Bank Guarantee Model – A bank guarantee model is used to acquiring a loan from the
commercial bank, it can be used for various purpose including insurance claims and loan
recovery, loan recovery would be the best claim for UBS since the mortgage crises of 46 billion
losses on bad mortgages. Once USB uses this model the bank can recover billions of dollars
from their loss on mortgages.

2. Community Banking Model – A community bank is a locally owned and operated financial
institution by offering loans to small-business owners. The Community Banking is also part of
larger community development programs which use finance as an incentive for actions, this bank
will play a major role for UBS in helping with a mortgage to small clients, rather than UBS offer
mortgages to small clients they can focus only on bigger clients reducing their risk of losses.

3. Credit Unions Model - This type of model is a self-help financial institution, this is an
organization that saves their money together who give loans to each other when in need at a low-
interest rate. If UBS had invested in credit union the need now for mortgage crises would have
been a great help. This would have been a greater help for acquiring the 3 additional banks rather
than on leasing.

4. Intermediaries Model – This type of model of credit lending position go-between the
borrowers and lenders. These activities help towards raising the creditworthiness of the
borrowers to make them attractive to the lenders. This model is lenders who can lend loans to
others, UBS can follow these measures to reduce weak risk controls and risky investment dealing
for its loss by following the guidelines of the following lenders, Non- Government Organization,
Microenterprise, and Commercial Banks,

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Comparative Analysis:

This study examines the different sources of finance it can either be a short-term loan, long-term
loan, leasing or hire purchase.

The best source of finance is based on the type of companies that need funds to operate-
Long-term loan can be share capital, retained earnings, equity share, preference shares. A short-
term loan can be debentures, institutional loans. Leasing can be financing, operation, conveyance,
etc. And hire purchase is done when the buyer purchase asset from the vendor on terms.

All these lists can make the company runs smoothly with borrowed loans for the cash flow of the
business.

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Limitation in the case:

The world’s largest financial institution is The United Bank of Switzerland (UBS) this bank has
been the world 2nd largest bank but have a major weakness of being unable to manage its main
sector mortgages, this bank has failed to carry out risk and investment controls causing the
company to write-down over $46 billion in losses on bad mortgages & derivatives.

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Conclusion:

It is concluded that the United Bank of Switzerland (UBS) is the world’s largest financial
institution and the world’s largest manager of private wealth assets and the second-largest bank in
Europe.

The first scenario is that UBS had acquired PaineWebber Group Inc to become the world’s largest
wealth management firm for private clients, three years later, all UBS group rebranded under USB
name as the company and began to operate as one large firm.

UBS took a $1 billion write-down for loss of goodwill associated with the retirement of the
PaineWebber brand. The logo of three keys stands in confidence, security, and discretion.

It was captured that the world’s largest bank had defaulted and was fine by the revenue services
investigators for having Americans invested their assets into an offshore account to avoid taxes,
avoiding taxes in Switzerland is not illegal but for the U.S Justice Department, it is illegal.

In 2008, UBS appeal to the Swiss Government which doled out an aid package of approximately
$59.2 billion to the ailing bank, in exchange, UBS agreed to forgo nearly $27.7 million in payments
to the company top three executives, the bank promised bonuses would depend more on the
performance of the bank.

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 References:

1. Cornett, S, Anthony, (Year 2007, 2009, 2012), Financial Markets & Institutions, the Mcgraw
Hill Companies Inc 1221 Avenue of the Americas, New York, NY, 10020, 5th Edition.

https://www.academia.edu/38024383/Financial_Markets_and_Institutions_Anthony_Saunder_an
d_Marcia_Millon_Cornet_5th_edition

2. Damodaran, Aswath, (Year 2011), Applied Corporate Finance, McGraw Hill Education, New
Delhi. Wiley, 3rd Edition.
https://www.investopedia.com/terms/h/hire-purchase.asp

3. Heffernan, Shelagh (Year 2005) Modern Banking, John Wiley & Sons Ltd Atrium, Southern

Gate, Chichester, West Sussex PO19 8SQ, England. 1st Edition.

http://www.untag-

smd.ac.id/files/Perpustakaan_Digital_1/BANK%20AND%20BANKING%20Modern_Banking.p

df

4. Rose, S, Peter (Year 2005), Mcgraw Hill Companies Inc Avenue of the Americas, New York,
NY, 10020, 6th Editions.

https://www.amazon.com/Bank-Management-Financial-Services-Educational/dp/0071239316

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