UBS is to explain that it intends to sharply reduce risk exposures at its investment bank. Former chairman Peter Kurer has urged the Swiss firm to spin off this side of its operations.

UBS will explain tomorrow that it intends to shrink its investment bank's balance sheet by half, The Financial Times reported, while a former chairman of the Swiss firm argued that this side of the operation should be spun off. He repeated this advice to Credit Suisse.

The FT cited unnamed sources as saying that UBS will outline its target for return on equity at a meeting with investors due for 17 November. The bank yesterday announced that Sergio Ermotti, appointed over a month ago as interim chief executive of the entire group, will take up the role on a permanent basis. Already, Ermotti and colleagues have signalled they intend to accelerate moves to reduce risk exposures by the investment banking division.

This side of UBS’s operations has come under renewed focus after it was revealed that it had suffered $2.3 billion of losses caused by unauthorised trading. The affair has led to an internal UBS investigation as well as probes by Swiss and UK financial regulators. One of the consequences of the saga was the resignation of Oswald Grübel from his post as group CEO.

Reports said that UBS’s return on equity is set to be between 13 and 14 per cent, which is a range well below previous levels.

The FT said that Carsten Kengeter, the head of UBS's investment bank, will stay on to oversee a sweeping restructuring of the Swiss group.

Separately, Peter Kurer, who was chairman of UBS from 2008 and 2009, called on UBS and its rival Credit Suisse to split off their investment banking operations.

He said these banks’ recent statements that they intended to continue with their integrated banking model was a mistake.

“In the many boom years, when businesses expanded globally and wealth was created hand-in-hand, this was a good model, and the balance of advantages and disadvantages tipped in favor of the one single bank. When the system collapsed, and investment banking went into intensive care, the hidden strings attached became visible,” Kurer, who still owns UBS stock, said in a signed article for Bloomberg.

“Clients, regulators, the wider public, and employees of the retail arm of the bank became concerned about how much risk was transferred from the wholesale business to the more-stable retail bank. In this situation, the only way to regain trust on a sustainable basis, is to separate the investment bank from the retail and private banking units,” Kurer wrote.

“The integrated model may, from an intellectual point of view, still be the superior one, and this may explain why the present managements defend it stubbornly. But it is outdated in terms of what can be sold to customers and the public. Walking away from the integrated model has become a matter of trust now,” he said.

He added: “This doesn’t mean Switzerland’s two big lenders should sell their investment banks. These global wealth management institutions need their own investment banks to serve their client base. Without such a capacity, they would quickly lose some of their private banking prowess. But Credit Suisse and UBS should spin off their investment banks into separate divisions that are independently governed, funded and capitalised.”

Swiss banks in general, meanwhile, are facing tighter margins as the high value of the Swiss franc has hit revenues when booked outside the Alpine state; the erosion of the country's bank secrecy laws is also undermining the traditional, low-maintenance model of such banking.