It seems you can’t open a paper these days without reading that a financial institution is being fined for some discretion, controls failure or mismanagement. This stark reality that all firms face in the post-crisis financial services landscape. Mounting pressure to get on top of regulatory reform has been matched by a frightening escalation in the volume and severity of fines issued by regulatory bodies.
Since 2009, big banks in the US and Europe have paid at least $128 billion to regulators, according to data compiled by the Wall Street Journal, Reuters and The Huffington Post, for issues tied to the housing collapse and other financial misdeeds, including aiding and abetting, money laundering and tax evasion.
This graphic however, only tells half of the story. When we factor in the associated costs connected with these fines, such as legal fees and losses made by the firm from the forced sale of securities or other assets, the price tag for the industry increases substantially and totals well over $260 billion globally in the 2009-2014 period1. This is a figure that is simply incomprehensible … so let’s try to contextualise it a bit:
- If we were to equate these fines to an annual GDP value, it would rank as the 38th richest country in the world – surpassing the GDP totals of Egypt, Greece, Ireland, Peru, New Zealand and Finland, to name just a few
- The fines and associated costs that the financial services industry has incurred since 2009 are enough to bankrupt Bill Gates (arguably the world’s richest man) 3 times over
- If we were to liken the costs of fines to annual revenue, they would rank as the 11th richest company in the world – surpassing the annual 2013 revenues of Total, Samsung, Apple, Toyota, Chevron and Berkshire Hathaway.
A deeper analysis of some of the largest banks’ financial records can begin to reveal the true costs of financial regulation.
Bank of America has incurred the most fines, with their 2009-2013 total at a budget-breaking $61 billion. When we consider their provisional costs and contingent liabilities, it adds a further £27 billion, resulting in an approximate five year total closer to the $109 billion mark2. This figure has shot up in 2014 to around $128 billion, due to the recent record-breaking $17 billion settlement BoA reached with US regulators and the Justice Department relating to the mis-selling of mortgage backed securities in the lead up to the financial crisis of 2008.
J.P. Morgan’s conduct costs (fines plus any associated costs) shot up from $30.7 billion in 2008-2012, to over $44.1 billion in 2009-2013. This increase can be largely explained by the fines and restitutions the bank incurred in 2013 relating to the marketing, packaging, selling and issuance of residential mortgage-backed securities (RMBS) in the US preceding the global financial crisis of 2008. Indeed, over 40% of J.P. Morgan’s conduct costs in the period 2009-2013 (approximately $24 billion) was due to mis-selling. A disturbing sign for the wider market is the fact that JPM’s conduct costs have been increasing year-on-year from 2011 to 2013, with a 160% growth from 2011 ($5 billion) to 2012 ($13 billion) and further 30% growth from 2012 to 2013 ($17.3 billion)3.
It is clear that the previous consensus of years past, that regulators would be ‘moderately lenient’ in their issuance of fines, has been well and truly shattered. Fines for non-compliance, incomplete or poor reported data and, of course, market abuse now pose a potentially critical risk to business balance sheets.
1. LSE Conduct Costs Project, Summary Table and Results: Form CCP4 (2009-2013)
2. LSE Conduct Costs Project, Bank of America Form CCP3 (2009-2013)
3. To see a breakdown and in-depth analysis of the JP Morgan Chase statistics please visit the LSE Conduct Costs Blog, specifically the JP Morgan Chase & co Form CCP1