The legal action that has been taken against banks since the crisis has added a whole new dimension to the way in which they go about their business.

Back in September 2008, even before the Lehman collapse, The Banker ran a cover story called 'Legal Gold – Crisis Turns Law into an Asset Class'. In this article we predicted that the fallout from the subprime mortgage debacle was going to lead to a wave of expensive court cases as borrowers, shareholders and investors tried to recover their losses.

We cannot claim at The Banker that we foresaw the depth and extent of the crisis with banks toppling over, state bail-outs and a regulatory and legal tsunami the like of which had never been seen before. But we did put our finger on the trend for almost all financial losses to be accompanied by a round of legal actions and the need for banks to guard themselves against this as best they can, in the first instance, and set aside reserves in preparation as a second course of action.

Right now these failures are digging deep into profits. In the second quarter of 2013, Deutsche Bank set aside €630m for potential legal costs, bringing its total litigation reserves to €3bn. This contributed to a halving of profits from €656m in the same quarter of 2012 to €334m in 2013.

Commonly, banks lump litigation and compensation costs together. Barclays has a total fund of £3.2bn (€3.75bn) for these, and at UBS provisions for losses from legal, regulatory and compliance risks stood at SF2.2bn (€1.79bn) at the end of June. In the case of JPMorgan, some commentators have chosen to measure the problem in terms of the number of pages of its quarterly regulatory filings – five years ago the list ran to two pages, now it is 10.

Clearly having a stake in a law firm over the past five years would have been a better investment than owning shares in most banks. But the serious question is how banks can avoid facing this kind of exposure again?

The various codes of conduct put in place and the ethical training undergone should help, but not everything resulting from the crisis fall out is completely cut and dried.

Subprime mortgages are a case in point. They were greeted warmly by politicians in the boom times (helping poor people to buy houses) but then became regarded as the root of all the problems when things went wrong. This means bankers have to predict how a product being sold today may be viewed differently in the altered circumstances of tomorrow. Getting your head round that kind of conundrum is never going to be easy.

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