UBS chief warns over lending boom risks

The chief executive of UBS, the Swiss banking group, warned that the growing number of risky loans investment banks are making could lead to lawsuits and damaged reputations.

The warning by Peter Wuffli highlights increasing concern among senior executives that a boom in leveraged finance could drag banks into litigation and damaging disputes with clients if the credit cycle turns.

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Banks that underwrite large loans typically reduce their exposure within a few months by parcelling up the loans and selling them to other investors. But Mr Wuffli said there were broader considerations: "This is potentially risky in terms of exposure to litigation, exposure to quarrels, or just plain exposure to reputation," he said. "So financial institutions that think long-term, such as ours, do perceive a certain responsibility that includes deal terms, leverage, quality of the deals and so on."

His views are shared by other bank executives involved in leveraged finance. "Holding your nose while you're doing the underwriting and lending is fine if you're just passing through town," said the chief executive of one European bank. "But if you plan to be there any period of time, selling duff loans is not a great recipe for good business."