Legal fines forever—big banks’ new “way of life”

The accused.
The accused.
Image: Reuters/Luke MacGregor
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“We assume that 2015 will be the last big year for litigation charges.” This bold prediction comes from the latest analysis of the British banking industry by ratings agency Standard & Poor’s.

Britain’s banks have paid out some £48 billion ($73 billion) in litigation and conduct charges over the past five years, according to S&P. The country’s four largest banks—Barclays, HSBC, Lloyds, and RBS—accounted for nearly 90% of the penalties, which were worth just under 8% of their revenues over the period.

They shouldn’t put their wallets away yet. In what S&P describes as the new “way of life” for the industry, “some form of charge seems probable every year” for these banks. Over the next two years, S&P reckons, Britain’s big four will foot a combined £19 billion bill thanks to their persistent misconduct. This year will be the high-water mark, at nearly £14 billion, before the annual tally settles in the mere single-digit billions in subsequent years.

The moderation in misbehavior costs, S&P says, will result mainly from the exhaustion of claims for the misleading personal insurance and business hedging products that banks sold in the past. Less easy for S&P to forecast are the penalties that banks will pay to settle a “vast litany” of cases tied to alleged market manipulation, sanctions breaches, and violations of anti-money-laundering rules. Thanks to increasingly aggressive regulators—especially this guy—and the difficulty of changing banks’ internal culture, the potential for big legal settlements will hang over the world’s big financial institutions for many years to come.

Even so, the banks’ credit ratings aren’t really at risk, S&P says. After all, regulators haven’t shown the stomach to impose criminal charges that could seriously hamper a bank’s operations, and the stiffest monetary settlements so far have only dented profits for a quarter or two. Arguably, this is one of the main reasons why the misconduct seems set to continue more or less indefinitely.