The Cost of Risky Business: Total Fines, Penalties, & Settlements Assessed in 2015

January 15, 2016 at 7:39 PM

By Vanessa Mambrino and Shawn Jang

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Source: BCG analysis for the years 2009 to 2014. CPG analysis for the year 2015.

  1. Peer group of the 18 largest U.S. & E.U. banks includes the following 6 U.S. banks: Bank of America, JPMorgan Chase, Citigroup, Morgan Stanley, Wells Fargo, and Goldman Sachs, and the following 12 E.U. banks: BNP Paribas, Credit Suisse, Deutsche Bank, UBS, HSBC, Barclays, The Royal Bank of Scotland, Rabobank, Lloyds Bank, Standard Chartered, ING, and Banco Santander. Data only includes fines, penalties, and settlements of $50 million or greater.

Since the financial crisis, U.S. regulators and courts have been actively assessing fines and penalties against banks of all sizes. Last year, Boston Consulting Group (BCG) found that fines had increased 40% between 2013 and 2014. At the time, the Wall Street Journal reported that fines had likely hit a "high water mark"  (subscription required) and would decline now that penalties related to activities during the financial crises had been doled out. To test that theory, we built on BCG’s analysis and tallied up the bill for the largest banks in 2015.

In 2015, the costs to the largest banks came to $32 billion, or 51% less than the costs of 2014. To arrive at our total, we tried to mirror BCG’s methodology. CPG summed up the total fines, penalties, and settlements of $50 million or greater levied by U.S. regulators and courts against the 18 largest banks in the United States and the European Union. U.S. banks paid more in total fines and penalties than their European counterparts. The total bill for U.S. institutions was $20.2 billion, compared to $12.0 billion for E.U. banks. The majority of the costs for U.S. banks were related to settlements of financial crisis matters (mortgage-backed securities, allegedly misleading data, etc.), antitrust violations linked to foreign exchange activities, and federal bankruptcy law violations. E.U. banks ran into trouble with U.S. sanctions violations and LIBOR manipulations. From 2009 to 2015, fines levied against the largest American and European institutions amounted to a total of $215 billion.

This confirms the hypothesis that 2014 represented a peak in fines, penalties, and settlements (at least for the foreseeable future). Some particularly large fines were assessed in that year: Bank of America reached settlements in lawsuits alleging that the bank sold faulty mortgages that cost a total of $23 billion, BNP Paribas paid a $9 billion penalty for doing business with sanctioned countries, and six banks – Citigroup, JPMorgan Chase, UBS, RBS, HSBC, and Bank of America – paid a combined $4.3 billion to various regulators for foreign exchange price manipulation.

By contrast, some of the fines assessed in 2015 were relatively small. The greatest cost to a single institution was $9.3 billion, not $23 billion. That institution was Bank of America. In March of 2015, Bank of America’s $8.5 billion settlement to resolve claims related to legacy Countrywide RMBS was approved. The institution also incurred several other fines and settlements during the year. In total, only six institutions received an individual fine, penalty, or settlement that was greater than $1 billion in 2015.

Banks can expect litigation and compliance costs to remain substantial for the near future, however, there is some comfort to be found in our analysis – fines, penalties, and settlements do not appear to be on a steady upward trend and the worst may well be behind us. The question still remains: what will 2016 have in store? The FIFA corruption scandal, the U.S. Treasury auctions manipulation suit, and other items that surfaced late in 2015 have yet to be resolved. Check back each month for an update on the costs of risky business in 2016.

 


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