Attestation Update – A&A for CPAs

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What is behind the record $56 billion in bank fines in 2014?

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Here are a few possibilities for the record level of settlements for bank in ’14: Wrapping up the legacy issues from the financial crisis. Regulators are getting serious about pushing big banks to improve their operations. Or maybe regulators just want more money. Or maybe banks are getting worse at obeying the law.

Some articles for you to ponder:

12/30 – Wall Street Journal – For Banks, 2014 Was a Year of Big Penalties – Here’s my interpolation of the fines and legal costs for the largest banks, as presented in the article’s graph:

  • $  3B – 2009
  • $  3B – 2010
  • $23B – 2011
  • $44B – 2012
  • $46B – 2013
  • $65B – 2014

The explosion in settlements starting in ’11 is due to the portion of responsibility for the financial crisis regulators have assigned to the big banks. We can debate elsewhere whether the TBTF banks deserve every bit of the blame allocated to them and how much blame has yet to be allocated to a long list of blame-worthy parties who have been able to evade their responsibility.

The growing list of settlements that aren’t related to the financial crisis (i.e. money laundering before and during the crisis) or that are related to behavior in place well after the financial crisis ended (i.e. money laundering, Libor manipulation, and forex manipulation in last few years) indicate a deeper issue. One money laundering settlement involved having done so for the last 90 years.

Those increasing amounts of recent penalties reflect something deeper according to the article: the regulators are pushing harder to force the big banks to change their ways. Multiple comments in the article point to this. There is an expectation that large settlements will continue and more cases will be brought for actions after the financial crisis. The article suggests the days of light slaps on the wrist may be over.

A person who serves as a bank monitor said:

“This was the sea-change year … It was different. The banking regulators are doing this systemically, industrywide, in greater depth and more broadly. And it’s not going to stop.”

BNP Paribas not only paid a roughly $9B fine, but also fired 13 employees. I trust people with hiring authority in the industry know the names of every one of those individuals.

Citicorp announced in December they expect a $2.7B charge to income to settle three different types of issues:  money laundering, manipulating interest rates, and manipulating forex rates.

Regulators are going after systems and programs, not just specific rule violations, according to people interviewed for the article. Another person said:

“You have to change your operating model, change your products, change the legal risks now. … Nothing is changing business models as much as the regulatory issues. That is the biggest strategic challenge.”

Perhaps, maybe, just possibly, there might be industry-wide, systemic improvement in compliance a few years from now.

12/26 – Financial Times – Bank settlements hit $56bn in most expensive year on record – Settlements by banks around the world passed the $56B mark.

Article cites an unquantified number of unidentified bankers whispering this record amount is due to two factors:

  • left-over clean up costs from the financial crisis, and
  • “fine inflation.”

My translation of that spin:  The slight increase in fines is not a big deal because those are just mopping up the residual damage from the financial crisis and, besides which, those greedy regulators are increasing their fines just because they feel like it.

Missing from that rationalization is any ownership of the systemic ethical, moral, and legal failures.

Article points out the bad behavior in forex ran from January ’08 through October ’13. Late ’13 is well after the financial crisis ended. Also, I don’t think anyone is suggesting that forex manipulation is in any way a cause the financial crisis.

Large fines will continue into 2015 as the US DoJ, NYDFS, and EU wrap up negotiations for manipulating forex rates, according to the article.

To the extent the rationalization attitude continues in play, I’m guessing there will be a lot more ‘fine inflation’ to go along with a lot more new cases. The unnamed bankers interviewed for this story won’t understand why they are getting picked on. Bankers with more wisdom and less rationalization will be focused on changing their culture.

12/30 – Financial Times – BP probes in-house foreign exchange traders – Forex fiasco is spreading. Oil giant BP is looking at whether some of its in-house traders were tipped by the traders from the banks who were manipulating exchange rates. Visible red flags, according to the article, are three messages to BP traders from known manipulators in advance of major currency trades.

Written by Jim Ulvog

December 31, 2014, 9:23 am at 9:23 am

Posted in Other stuff

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