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Moody's could downgrade UBS rating after %242bn trading loss

Moody's said the primary focus of its review, which also encompasses the bank's C/A3 standalone financial strength rating, was the "ongoing weaknesses in the group's risk management and controls that have become evident again".

UBS shares fell 11% yesterday after it emerged the firm's London-based trader Kweku Adoboli had been arrested on suspicion of fraud and abuse of position.

The incident is a major blow for the bank and comes at a time when financial institutions across Europe are already facing severe challenges from the sovereign debt crisis.

Although UBS should be able to absorb the loss - the Zurich-based bank saw profits of $2.1bn in the first quarter alone this year - Moody's said ongoing problems with its risk controls would likely damage its reputation with private banking clients in its wealth management business.

Moody's said it would also consider the impact of the losses on the bank's future ability to grow investment banking revenues "in an appropriately risk contained way".

The review was unlikely to lead to downgrades of more than one notch, Moody's said.

"Such losses are also a reminder of the complexity and opacity that is inherent in capital markets businesses," a statement said.

"Moody's has commented on various occasions regarding the risks to which such complexity and opacity give rise. We continue to review how best to reflect those risks in bank ratings."