Have we become blasé about misconduct in banks?

Keith Mullin fears fines for misconduct are such a standard part of the landscape for banks that they are now blithely factored in as an entry against operating costs


Alongside the standard market and geopolitical cacophony (a highlight of which was Turkey's 625bp rate hike), attention this past week has focused on the 10th anniversary of the collapse of Lehman Brothers.

In truth, media coverage was a bit predictable: a succession of ex-Lehman employees saying what they're doing now and what it was like at the time; a 'where are they now' round-up; and a merry-go-round of talking heads, bank CEOs and senior bank executives of the time, central bankers, academics, sages and luminaries who all saw the collapse and the ensuing global financial crisis coming.

Of course, they did.

One element that did set me thinking is the vexed subject of what has really changed in Europe. What has clearly changed is the amount of capital banks hold today versus 2008 – hundreds of billions of dollars more. Beyond capital, banks also have to comply with stringent leverage, liquidity and funding ratios and are under business model scrutiny. Prop trading has been pushed into the non-bank sector and there are skin-in-the-game rules for structure finance originators. Markets are still inter-connected but there's more transparency around who's exposed to whom.

So, the system is far more robust, but many concerns remain.

Here's the all-important question - are banks still too big to fail? Yes. With regulators and policymakers in Europe now banging the drum of cross-border banking consolidation and their narrative having seemingly fallen behind the mantra of bigger is better, the answer is likely to morph into yes-plus.

Are regulators in charge of the mad house? To a point. But the pendulum of deregulation is starting to swing and will alter the status quo - not in favour of the gamekeepers.

Have we seen the end of taxpayer-funded state bailouts of large failing banks in the EU? On paper yes. But not in Italy. Or Portugal.

Has the bank-sovereign doom loop been broken? No.

Has banking culture changed? Not really.

What about conduct risk and conduct risk controls? Now there's a question. Banks have slowly been drawing lines under legacy misconduct around Libor and FX manipulation, or US RMBS, interest-rate derivatives and other acts of serial mis-selling.

But European banks in particular seem to be dogged by continuing cases of misconduct that bring with them outsize fines; fines that just keep on coming. It's causing alarm in Brussels, where EU grandees are urgently working to give existing agencies more teeth to tackle what to all the world looks like rampant money laundering and financing of terrorists and rogue regimes.

Danske Bank's review into how its branch in Estonia was able to launder US$30 billion – potentially more – Russian and former Soviet money should make for good reading. This past week, ING's chief financial officer walked the plank after the Dutch bank was fined 775 million euro in the light of failures of anti-money laundering controls, which led to fierce political debate at home.

Earlier this year, ABLV Bank in Latvia was liquidated after a run that started in the wake of a suite of US allegations, including one that the bank was financing North Korea's ballistic missile programme.

Think about the past five or so years and who's been under the spotlight in Europe for instances of knowingly breaching US sanctions, paying bribes or allowing money laundering?

It's not just insignificant banks in wayward jurisdictions. It's been the likes of BNP Paribas, Deutsche Bank, HSBC, Societe Generale and Standard Chartered, which between them have paid out billions in fines. Of course, it's not solely European banks: other names in the frame have included Commonwealth Bank of Australia and US Bancorp.

Beyond the shock of having household name banks being caught with serious breaches of controls and laws – banks that in aggregate have tens of thousands of people working in compliance and budgets that should enable them to do better – what this does more broadly is condemn the entire banking sector. Furthermore, these transgressions by banks make the sector's rehabilitation in the eyes of the public and of government nigh-on impossible following a global financial crisis that saw banks demonised and vilified.

Time may be a great healer but not if banks are continually found to be on the wrong side of the rules.

That said, just three days after the ignominious departure of its CFO, ING Group tapped the capital markets with a chunky EUR3.5bn three-tranche senior holdco bond offering five-year fixed-rate, five-year floating-rate and 10-year fixed-rate tranches. Some saw it as a litmus test of sentiment.

They needn't have worried. Leads went out with +100bp-area talk on the fives and +125bp on the 10s; tightened in to 85bp/90bp/115bp respectively and ended up at 80bp, 85bp and 110bp on the back of rampant demand that flooded the book with orders of around 12.6 billion euro.

That would appear to suggest that negative banking news is at worst nothing more than an occupational hazard for investors; at best an opportunity to make money. Or that fines for misconduct are such a standard part of the landscape that they've been blithely factored in as an entry against operating costs; just another line in the cost of doing business.

Isn't it extraordinary how little stakeholders seem to react? I'm continually hearing that since the crisis, investors take revelations of wrongdoing extremely badly and will vote with their feet. Clients too. Not from where I'm sitting.

Have we become habituated to bad behaviour?


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