AP Let's put all of that behind us

“I'D LIKE to see us put more risk on the table and actually trade a bit harder.” In these times, such words from any banker might be enough to cause a little concern. Coming from the chief financial officer of a bank that is still clawing its way out of a $50 billion hole of accumulated losses and write-downs, they ought to set the fire alarms ringing. In fact, the gambling-for-redemption strategy outlined by UBS, Switzerland's biggest bank, is winning the support of shareholders. That it is doing so neatly encapsulates a dilemma for regulators as they try to balance the contradictory goals of making banking safer while also making it profitable enough to attract investors and their capital.

On November 17th UBS's newish boss, Oswald Grübel, a hard-bitten veteran who was hauled out of retirement in February, outlined plans to turn the bank around. Mr Grübel (Ossie to his colleagues) hopes to repeat his success at Credit Suisse where, ironically, he had copied UBS's strategy of combining private and investment banking with asset management. That the pupil surpassed its master and avoided its mistakes is largely due to Mr Grübel's nose for risk and the decision to pull back from the American residential-mortgage market in 2006, even as UBS was upping the ante.

The first element of Mr Grübel's strategy at UBS is to stanch a haemorrhage of funds at its private bank, which has seen outflows each quarter that would put the budgets of many small countries to shame. That will be tough given the damage done to the bank's reputation when it was forced to reveal the names of American clients to their country's tax authorities.

The second is to boost earnings at the investment bank by expanding again into some of the areas of business, such as bond trading, that felled it last year. Investors, once bitten, are anything but shy. With the share price a fraction of what it was two years ago, they have more to gain than to lose by a throw of the dice. Huw van Steenis of Morgan Stanley reckons that more trading by the investment bank is “probably the largest source of upside” in the restructuring plan. Analysts at Credit Suisse reckon that even though UBS will not be able to pay any dividends for the next few years, its shares are so cheap relative to the aggressive profit-targets that it has announced that they are a “free option” on a revival of the investment bank.

Taking a big bet may make perfect sense for shareholders. Yet the thought of UBS doing so again terrifies its regulators. A recent report by the Swiss bank regulator shows just how it had been blindsided by a bank that it had once considered saintly. When regulators asked UBS about its exposure to the dodgy American subprime mortgages that laid it low, they were assured that the bank had a short position, which meant it would profit from a collapse in real-estate markets. Because internal reports failed to account for some of its biggest holdings, not even the head of risk in the investment bank was aware of them. “In retrospect, the figures therefore lacked any kind of precision,” the report notes dryly.

Having been burned once, Swiss banking regulators are crafting new rules. Most are aimed at trying to keep UBS and Credit Suisse out of the casino and focused instead on dull but safe businesses, such as looking after the money of rich people. Rules on how much capital they have to hold have been tightened, a strict leverage ratio has been introduced and Swiss banks will have to hold far more in liquid assets (such as government bonds) than before.

All of this will conspire to reduce the profitability of Switzerland's two big banks. That may not be enough to satisfy regulators, though. Philipp Hildebrand, the vice-chairman of the Swiss central bank, frets that the country's banking assets are seven times the size of its economy and that its main banks are too big to fail. “Political decisions are required…the sooner the better,” he said in a speech in Geneva a day after UBS unveiled its new strategy. Mr Grübel may be counting on a return to the casino, but if regulators have their way, its door will soon be shut.