Signs sit outside branches of a Lloyds TSB bank, part of the Lloyds Banking Group Plc, a Barclays Plc bank, a NatWest bank, part of the Royal Bank of Scotland Group Plc (RBS), and an HSBC Holdings Plc bank in Staines, U.K., on Tuesday, Dec. 18, 2012. Photographer: Chris Ratcliffe/Bloomberg

A couple of years ago Roger McCormick, a law professor at London School of Economics and Political Science, assembled a team of researchers to track the penalties being imposed on the 10 largest western banks, to see how finance was evolving after the 2008 crisis.

He initially thought this might be a minor, one-off project. He was wrong. Last month his project team published its second report on post-crisis penalties, which showed that by late 2013 the top 10 banks had paid an astonishing £100bn in fines since 2008, for misbehaviour such as money laundering, rate-rigging, sanctions-busting and mis-selling subprime mortgages and bonds during the credit bubble. Bank of America headed this league of shame: it had paid £39bn by the end of 2013 for its transgressions.

When the 2014 data are compiled, the total penalties will probably have risen towards £200bn. Just last week Bank of America announced yet another settlement with regulators over the subprime scandals, worth $16.9bn. JPMorgan and Citi respectively have recently settled with different US government bodies for mortgage transgressions to the tune of $13bn and $7bn.

It is not just American institutions that have been hit. US regulators have recently imposed a $9bn fine on BNP Paribas for sanctions busting, a $1.9bn fine on HSBC for money laundering and hefty penalties for Standard Chartered too. Lawyers expect to see more mortgage settlements emerge soon with other banks, and potential penalties now loom as a result of foreign exchange manipulation. Those foreign exchange scandals could even dwarf the Libor debacle.

“The numbers are getting bigger and bigger,” observes Prof McCormick, who has been so startled by this trend that last month he decided to turn his penalty-tracking pilot project into a full-blown, independent centre. A former leading European regulator says: “What is happening now is astonishing. If you had asked regulators a few years ago to predict how big the post-crisis penalties might be, our predictions would have been wrong – by digits.”

Is this a healthy development? Many outside banking would undoubtedly shout “yes”. No wonder. In recent years, the sector has earned hefty profits, which means most banks can easily absorb those penalties.

And the transgressions that have sparked these penalties – say, in relation to subprime mortgages or Libor – have often been egregious, flouting both the law and any sense of ethics.

To make matters worse, many people think that bankers have hitherto avoided any real punishment for their role in the 2008 crisis. When America’s savings and loan crisis erupted three decades ago several thousand individual financiers were prosecuted, and hundreds went to jail; this time, barely a handful of bankers have been hauled away in handcuffs.

It is a striking contrast, and it means there has been little sense of closure. Thus, it is not surprising that, while European politicians have complained about the sanctions-busting fines against BNP Paribas, there has not been any wider outcry about the total hit, least of all from voters.

But as the zeroes keep mounting, there is a darker side to this trend, which ought to worry bankers and non-bankers alike. Back in 2008, when the credit crisis erupted, investors fled from banks because they could not judge just how big their bad loans might be. These days, the balance sheets of most banks look healthier and – crucially – more predictable. The banking sector has thus become “investible” from a credit perspective, as asset managers say.

But, “legal risk is now replacing credit risk” as the key uncertainty, as one western central banker notes, and this “raises questions about investability of the banks”. By late 2013, according to Prof McCormick’s data, the top 10 banks had posted £50bn reserves to absorb legal hits. But nobody knows if that will be enough. For the regulatory framework is so fragmented that different branches of government on both sides of the Atlantic are imposing different fines, with little co-ordination. The resulting pattern thus feels competitive – and capricious. This is not conducive to rebuilding a healthier financial world.

Perhaps this is a passing phase. The whole point of fines is that they are supposed to force banks to clean up their act and avoid future transgressions. And as the 2008 crisis ebbs from memory, the unpopularity of banks may fade too. Indeed, some bank executives think – or hope – that the BofA settlement is the high water mark.

But it is possible to imagine another scenario, where a type of regulatory inflation sets in, as branches of government keep competing. And it is still far from clear whether the banks can actually change how they behave. Either way, the one sure bet is that Prof McCormick’s centre will have plenty to study; and not just from a legal or economic standpoint but from the prism of political sociology too.


Letter in response to this column:

More is more when it comes to fines / From Mr Harvey Cole

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