THE latest annual report of UBS, Switzerland's biggest and most error-prone bank, states that “disciplined risk management and control are essential to our success.” That assertion has been proved right in the most embarrassing way, after allegedly unauthorised bets cost the bank a whopping $2.3 billion.

Kweku Adoboli, a 31-year-old trader (pictured), has been arrested and charged with fraud. Mr Adoboli has not yet entered a plea. The case bears striking similarities to that of Jérôme Kerviel, the man who almost laid low Société Générale, France's third-largest bank, in 2008. Both men started their banking careers in the back office and then moved on to trading desks, working in an area known as Delta One, a part of the bank meant to provide clients with derivatives and other exposures to shares without risking the bank's own money.

Like Mr Kerviel, who used his knowledge of the bank's plumbing to create fictitious trades to cover his tracks, Mr Adoboli is alleged by sources close to an internal investigation of the affair to have bet the bank's money on the future price of various stock indices and to have then hidden these moves by creating offsetting fake transactions. These sources claim that Mr Adoboli took advantage of a loophole in securities law by using exchange-traded funds (ETFs) to book these fake transactions, since ETF rules do not force brokers immediately to produce confirmations of trades. “He was reasonably smart in an operational sense,” says one source. “But not in a trading sense given how he got the markets so wrong.”

The excuses wear thin pretty quickly, however. Most other large investment banks double-check all big trades, even when not forced to by regulation. “I thought it would have been impossible for this to happen at any bank after SocGen,” says the head of investment banking at a large bank. “It couldn't happen at ours.”

For UBS and its shareholders, the immediate questions should be why it was still vulnerable to this sort of alleged manipulation more than three years after Mr Kerviel's loss. It is not clear, for example, how such a large position was allowed to build up over the three-month period that the activity was said to be taking place. Assuming a loss of 10-15% on the bets that went wrong, which seems reasonable given market movements over the past three months, Mr Adoboli would have had to have made fictitious trades with a face value of more than $15 billion, bankers say. That sum should surely have come to the attention of his colleagues. “There's something that doesn't smell right,” says a former UBS executive of the company's explanation of the trades. The motives of a banker who would have lost his job even if bets like these had paid off are also unclear.

The answers to these questions will not just determine the fate of Oswald Grübel, the bank's chief executive, but also the future of its investment bank. Mr Grübel had already planned to scale back the division, which saddled UBS with huge losses during the financial crisis, but that process will now speed up. Successful traders will be tempted to leave if, as seems likely, no bonuses are paid for the year. Shareholders are likely to press for the bank to focus on its safer wealth-management businesses. Swiss regulators and politicians say this strengthens the case for forcing the firm to shrink its investment bank. The argument for a “ring-fence” of the sort proposed in Britain to separate the racier kinds of banking from the retail sort is less solid. Similar desks to Delta One, like those intended to hedge interest-rate risks, would probably still exist even within ring-fenced retail banks. Having lots of capital to absorb losses matters more (see chart).

For the industry as a whole the affair is a reminder that risk control is a bit like counter-terrorism. Compliance officers have to win every encounter, errant traders just need to get lucky once. More money will go into control functions, at a time when banks are already facing sharp falls in income. And managers may now avoid promoting people from the back office to trading desks, for fear that they just know too much about the plumbing.