Bank lit­i­ga­tion costs hit $260b with $65b more to come

The Pak Banker - - COMPANIES/BOSS -

The wave of fines and law­suits that has swept through the fi­nan­cial in­dus­try since the 2007-08 cri­sis has cost big banks $260bn, new re­search from Mor­gan Stan­ley shows.

The anal­y­sis, which cov­ers the five largest banks in the US and the 20 big­gest in Europe, pre­dicts the group will in­cur another $60bn of lit­i­ga­tion costs in the next two years.

Bank of Amer­ica, Mor­gan Stan­ley, JPMor­gan, Citi and Gold­man Sachs have borne the brunt of the fines so far, col­lec­tively pay­ing out $137bn. They have another $15bn to come in the next two years, Mor­gan Stan­ley said.

The top 20 Euro­pean banks have paid out about $125bn and have about $50bn to come "al­beit with a wide range", the anal­y­sis said. "In the States?.?.?.?there have been more prece­dents on set­tle­ments and so as more banks have set­tled, the mar­ket's abil­ity to make a guessti­mate of the amount for other banks has im­proved," said Huw van Stee­nis, man­ag­ing di­rec­tor at Mor­gan Stan­ley.

Mr van Stee­nis said the fines, which cover ev­ery­thing from for­eign ex­change rate rig­ging to US mort­gage-backed se­cu­ri­ties and mis-selling of pay­ment pro­tec­tion in­sur­ance in the UK, are hav­ing a pro­found im­pact on the banks.

"Lit­i­ga­tion not only takes a bite out of your eq­uity but has a much longer last­ing im­pact on the amount of cap­i­tal you need to hold," he said.

The fig­ures in­clude fines and penal­ties banks have al­ready paid, plus any pro­vi­sions taken by June 30 for is­sues the groups see com­ing down the tracks, such as US mort­gage fines that Euro­pean banks ex­pect to pay.

The re­port also charts what banks have done to re­duce the risk of fu­ture lit­i­ga­tion, but con­cludes that "lack of dis­clo­sure means it has been dif­fi­cult for us to say defini­tively which firms have de­vel­oped the best prac­tices over­all".

Bank of Amer­ica is spend­ing $15bn a year on com­pli­ance, Mor­gan Stan­ley said, while JPMor­gan is spend­ing $8bn or $9bn. Mr van Stee­nis and his col­leagues said they "strug­gled to ob­tain con­sis­tent data" on ex­tra com­pli­ance costs in Europe.

The im­pact goes be­yond the fi­nan­cial. "A lot of man­age­ment time and IT bud­get has been fo­cused on rec­ti­fy­ing malfea­sance rather than be­ing able to po­si­tion the bank for the fu­ture," said Mr van Stee­nis."Banks' abil­ity to re­spond to new tech­nol­ogy and new chal­lenges gen­er­ally has un­der­stand­ably been slowed down.

"In Europe, there's still a ner­vous­ness on some mort­gage set­tle­ments be­cause no Euro­pean bank has yet set­tled with the DoJ [Depart­ment of Jus­tice] on mort­gage," he added.

Af­ter the ma­nip­u­la­tion of Libor is rig­ging for­eign cur­rency mar­kets the next big scan­dal to hit some of the world's big­gest banks?

So far, US mort­gage is­sues ac­counted for $110bn of lit­i­ga­tion costs across the banks fol­lowed by PPI at $43bn, for­eign ex­change rig­ging at $15bn, money laun­der­ing at $15bn and Libor/Euri­bor at $10bn. Other fu­ture costs in­clude civil suits on for­eign ex­change rig­ging, which lawyers have warned could cost tens of bil­lions.

Bank of Amer­ica has taken the most lit­i­ga­tion charges, with $65.6bn so far, fol­lowed by JPMor­gan's $42.4bn and Lloyds £26.6bn.

Ac­tions taken by banks to pre­vent fu­ture lit­i­ga­tion is­sues in­cluded ev­ery­thing from chang­ing re­mu­ner­a­tion poli­cies to a greater fo­cus on "non-fi­nan­cial met­rics", adding com­pli­ance staff, to el­e­vat­ing chief risk of­fi­cers to boards and us­ing "robo sur­veil­lance" in trad­ing rooms.

The US banks were more forth­com­ing than their Euro­pean peers on changes they have made. An ap­pen­dix showed that Bar­clays, Lloyds and RBS all failed to an­swer four of the seven ques­tions posed by Mor­gan Stan­ley. "What our re­view has shown is there isn't an aw­ful lot of dis­clo­sure," said Mr van Stee­nis. "There were ar­eas where quite a few peo­ple strug­gled to pro­vide dis­clo­sure."

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