Switzerland’s largest bank, UBS, has said that it may post a loss in 2011 Q3 due to an unauthorised trading loss of $2 billion (£1.27 billion) in its investment bank.

The market reaction was to drop the Swiss share price by 9.6%, although it did recover slightly thereafter.

"UBS has discovered a loss due to unauthorized trading by a trader in its Investment bank. The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of $2bn." Said the bank.

UBS also added that “no client positions were affected”.

One possibility being put forward is that it occurred as a result of the Swiss franc being pegged to the Euro. Even though UBS is a Swiss bank and should have been talking to the SNB.

The silver bugs also have an unsubstantiated theory [1] that this loss was due to an attempt by the bank to exit a naked silver short position.

UPDATE: 'A 31-year old man has been arrested by City of London police in connection with rogue trading that has cost UBS, the Swiss banking giant, an estimated $2bn (£1.3bn)' – Telegraph.

One wonders what the bank would have done had this ‘unauthorised trading’ led to a gain of $2 billion? You can just imagine the parties and mutual back-slapping that would have occurred. It would then have been very ‘authorised’ trading in those circumstances I imagine.

For the bank to lose $2 billion some other people (probably banks) have presumably made $2 billion. And no ‘client position’ will have been affected, but how about shareholder positions? And who will ultimately pay for it, their customers?

If this is not a stark reminder that we need to separate retail banking as far as possible and as quickly as possible from these casino activities then nothing is. So it comes at a very convenient time for the UK government to bolster its argument to push through the banking reforms recommended by the Vickers report.

[1] http://maxkeiser.com/2011/09/15/breaking-ubs-rogue-trader-was-trying-to-exit-a-naked-silver-short/

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