Banking symbiosis turning parasitic

European institutions are doing their sums to see if distribution models and management structures are paying their way. Not only do private banks hand over substantial chunks of assets to internal fund management companies – we are told 45 per cent at UBS, and 30 per cent at Credit Suisse – but the fund houses also benefit from being close to a capital markets arm, through access to cheap, on-demand synthetic products. Yet asset manager revenues from third party business are apparently much higher than fees from proprietary networks. This relationship is about to be tested at UBS, where Luqman Arnold, the Swiss bank’s former chief executive and now chairman of private equity firm Olivant, is using his shareholding to call for a sell-off of the lucrative funds house and a straight split between private banking and investment banking. It appears that positions in both capital markets and asset management units were often duplicated and not closely monitored enough. The problems were said to have started when John Costas, who once headed up the investment bank, joined John Fraser’s asset management arm, in the guise of a self-sufficient unit, Dillon Read Capital Management. He took many of the bank’s best traders with him. How closely can trades of such a unit, run by a man and team with huge standing in the bank, be supervised? Pulling their weight These are questions of culture, risk control and management, which ultimately led to financial losses and unprecedented ‘writedowns’ of assets. But even a sale of the funds house will not come close to recouping the $37bn (E24bn) in writedowns. Bank bosses need to calculate the value of synergies. Mr Arnold believes these are in fact limited by the commitment of the wealth management business to an open architecture model. Yes, the individual parts are attractively valued, according to Alexander Notter of Millennium Associates, speaking at the recent FT Business Excellence in Fund Management (BXFM) conference in Frankfurt. But surely each part of the bank needs to be profitable, rather than piggy-backing on a cash cow during lean times. This structure of a fund house in the fashionable multi-boutique format – allowing the creation of autonomous hedge fund units – actually has many drawbacks, says Professor Amin Rajan of Create, also speaking at the Frankfurt event. According to the professor, more than half of fund houses using this structure make no profits or lose money. But the problem is execution, not design. Lack of belief in a new-fangled structure is always felt in the bottom line.