Another day, another huge fine for banks. But is it justified?
Accusations against banks have been varied and have come from all directions. Regulators have punished them for a host of alleged misdemeanours, several of them relating to subprime mortgages originated before the financial crisis, interbank rates and insurance sold to retail customers.
Many of the penalties are undoubtedly deserved. Mortgage underwriting rules in the US in the run up to the crisis were often treated with disdain by banks, while there is little excuse for bankers manipulating their submissions of Libor to bolster their trading positions.
Despite this, banks have grounds to believe they have been treated harshly in some aspects. The level of the fines they have had to pay often seems to have been decided randomly or based on how badly individual regulators want to get credit for satisfying the public’s thirst for retribution against bankers.
Determining the fines levied on banks is complicated by the fact that, especially in the US, some payments go to the government rather than the victims of banks’ wrongdoings. Of JPMorgan’s $13bn settlement last November with the US justice department for misleading investors about mortgage-backed securities, $9bn will go to the federal government or state entities, while just $4bn will be paid to relieve homeowners.
Regulators and the financial industry should work to end the confusion. This is all the more important given that the surge of litigation is unlikely to recede anytime soon. Banks face the prospect of multi-billion dollar fines once global investigations into foreign exchange trading have been completed. Financial watchdogs are also looking more closely at evidence of money-laundering.
There is no justification for banks breaking rules and regulations for their own financial gain. But equally the financial system is not helped by vague penalties for infringements. Making sure these penalties are clearly defined is one way of ensuring that wrongdoings do not happen in the first place.
