UBS AG plans to split off its investment banking unit and incorporate it as a separate legal entity in London, the Wall Street Journal reported.  The move would parallel similar efforts by banks to soften the impact of new rules that seek to regulate banks more closely around the world.  UBS said in March that it was “evaluating potential changes to our booking model and corporate structure in view of developing regulatory concerns and requirements.” The bank also said its model of holding most of its capital in Switzerland while booking most of its assets elsewhere would probably have to change.

Under the proposal, the investment banking business, whose losses during the financial crisis required UBS to accept government aid, would be capitalized separately.  UBS, however, said on Thursday that the report was speculation and that the bank “doesn’t comment on speculation.”

Guy de Blonay, a fund manager at Jupiter Asset Management, said: “Reading between the lines they’re saying ‘I’ve got some opportunities that I want to exploit, but under the current regulation I can’t do it, so if you’re too strict we go elsewhere.’ And that’s the same with any other bank.”

Other banks, including Barclays in Britain, were reviewing the way they financed themselves and generated earnings, as regulators have started to introduce stricter capital rules. Barclays and HSBC were among the banks that threatened to move their headquarters abroad should new rules at home be too punishing and hurt their competitiveness.

But any decision has to be put off amid continued uncertainty about the details of the new rules, which have yet to go through the British Parliament.

Switzerland is considering asking UBS and Credit Suisse, the country’s two largest banks, to hold capital equal to at least 19 percent of assets from 2019, more than other countries in Europe. The Basel committee proposed capital requirements of 10.5 percent of risk-weighted assets and said that some countries could set a higher level for its biggest banks.

UBS and Credit Suisse previously warned the Swiss government that introducing rules that were stricter than in other countries would put them at a competitive disadvantage and could hurt the Swiss economy.

In Britain, the government is awaiting the final report of a banking commission, due in September, that is likely to propose a partial separation of investment banking businesses from retail operations.

A so-called ring fencing of deposit-taking parts of the business would help avoid a collapse of the entire bank should the investment banking unit get into trouble, the commission argued.    [NYTimes, 5/26/11]