THE cost of bank misdeeds and poor conduct has multiplied to levels comparable to gross domestic products of Singapore, Greece and several other nations.
Between 2008 and the end of 2012 ten leading banks had to pay £148 billion ($243 bn) in fines and provisions for extra litigation and penalties, according to a study of the London School of Economics. The conduct costs, however, don’t include costs of rogue traders as described in Trader Jack- The Story of Jack Miner
The size of payments and fines will increase further this year because of scandals relating to the London Interbank Offered Rate (Libor), mis-sold products and allegations into foreign exchange manipulation.
Yesterday EU antitrust regulators fined six financial institutions including Deutsche Bank, Royal Bank of Scotland and Citigroup a record total of €1.71 billion ($2.33 bn) for rigging financial benchmarks.
The penalty is the biggest yet to be handed down to banks for rigging the benchmarks used to determine the cost of lending, one of the most brazen violations of conduct since the financial crisis.
It is also the highest antitrust penalty ever imposed by the commission, the EU’s competition regulator.
The other banks penalised are Societe Generale, JPMorgan and brokerage RP Martin. Deutsche Bank received the biggest fine of €725 million ($986m).
The European Commission said it would continue to investigate Credit Agricole, HSBC, JPMorgan and brokerage ICAP for similar offences.
Roger McCormick, who is a former partner with City law firm Freshfields Bruckhaus Deringer, is leading a team of seven in the Conduct Costs Project of the London School of Economics.
So far, the calculations from regulator and bank reports, legal and other public information has involved only ten banks which were given the opportunity to assess and comment on the calculations.
The budget from the UK Higher Education Innovation Fund was a shoestring £37,000 ($61,000), but Prof McCormick wants to broaden the study to include a larger number.
The aim is to keep it rolling over for a five-year period and possibly include other costs, for example, rogue trader losses which are generally the result of poor compliance and management.
Bank of America has paid the price for being the “worst offender” and has had to fork out £30.4 billion. Including provisions for future costs, amounting to £23.6 billion, the total expense between 2008 and end 2012 is calculated at a whopping £54 billion.JP Morgan, which recently received considerable publicity over a settlement of US$13 billion, had total costs of £24.7 billion at the end of 2012 and UBS a similar amount.
Lloyds Banking Group heads UK banks with conduct costs of £9.24 billion followed by HSBC at £6.3 billion and Barclays, £5.1 billion. Standard Chartered is not included but it made a settlement of $667 million (£407m) with the US authorities for alleged unacceptable finance and relationships, notably entities in Iran.
“The fundamental question is whether these costs will start going down soon, if these banks now have sound ethical cultures? If not, why not?,” asks Prof McCormick. “Banks are required by regulators to ‘know your customer’, but do we know as much as we should about them?”
“Despite ongoing scandals, they say they are, at last, trying to be more ethical than in the past and determined to restore public trust. How can we test that? Is it just the latest PR message or is there some substance to it?”
Prof McCormick advises customers to change banks if they do not perform as promised even though it could be a time consuming administrative hassle to move.
For the full table and details see: http://blogs.lse.ac.uk/conductcosts/bank-conduct-costs-results/
Neil Behrmann is author of financial thriller, Trader Jack-The Story of Jack Miner