Another fine mess

Bank fines go from irritant to hefty business cost

HSBC has claimed an unwanted crown. The $1.92-billion fine imposed by US regulators for failing to enforce money-laundering rules is the biggest ever for a bank, and two-and-a-half times bigger than the one paid by previous record-holder UBS. Yet, HSBC is not alone: both Standard Chartered and ING have this year handed over a similar proportion of their earnings to settle US probes.

Once a relatively minor irritant, regulatory fines are becoming a major cost. HSBC’s penalty amounts to about eight per cent of the bank’s expected pre-tax profit for 2012. By that measure, it’s not even the biggest culprit: StanChart’s cumulative $667 million fine for sanctions-busting is nine per cent of expected pre-tax profit, while ING’s $619 million payment for similar misdemeanours amounts to a 10 per cent hit. Compare that to JPMorgan and Citigroup’s 2003 Enron-related fines: 1.4 per cent and 0.5 per cent of that year’s pre-tax profit, respectively.

Post-crisis bank-bashing partly explains the inflation: in recent years, US authorities have whacked lenders for mis-selling mortgage-backed securities and structured credit products, and for rigging municipal bond auctions. But UBS’s $780 million fine was for helping US citizens avoid tax before the crisis. And, most sanctions-busting offences, which account for the majority of big-ticket fines, were committed before 2007.

True, fines are only part of the picture. Civil lawsuits arising from Enron’s collapse were far more expensive than paying off regulators: banks involved in rigging the London Inter-bank Offered Rate may find the same. The bill for compensating customers who were mis-sold UK payment protection insurance exceeds already £10 billion. Meanwhile, legal expenses for handling past misdemeanours —and the compliance costs of avoiding future ones — are an ongoing drag.

As the crisis fades, political pressure on regulators to get tough on banks may ease. But until banks can safely be allowed to fail, the threat of indictment — an effective death sentence for a financial institution — is no longer an effective deterrent. That makes large financial penalties the only way to punish past bad behaviour and discourage it in the future. Even if giant fines like HSBC’s are infrequent, the bar has been raised.