How to punish the banks?

Elections are coming so expect promises from politicians on all kinds of issues, including things that all parties failed to accomplish in power but are suddenly now strangely doable.

Banking reform may be one of them: at the start of this year, a YouGov poll found that 67% of people thought that current regulation was ineffective. Only 18% of those questioned thought the changes to the banking sector would stop a repeat of the banking crash.

The people running British banks were seen as bad at their jobs by 49% to 16%, and as people with fundamentally bad morals by 56% to 13%.

Punishing — or rather the lack of — bankers who go astray is another topic, because many people seem to think transgressors get away with it; thus a (relatively) recent podcast from the US Planet Money proved an interesting listen.

It focused on a speech by the superintendent of financial services for New York State Benjamin Lawksy, who expressed frustration at what he was able to do to banks.

He compared the banks’ behaviour, from tax evasion to money laundering, to the film Groundhog Day: banks keep doing the same things and getting away with it. “What are we doing wrong?” he asked.

He made his comments as one of the biggest banks in the world, BNP Paribas, was about to be punished for offences against trade restrictions.

Planet Money went through the punishments so far inflicted, deciding that most were ineffective.

For example, Credit Suisse was fined for tax evasion in the US, operating a fairly brazen scheme: hidden bank accounts in Switzerland for rich Americans. There was a Credit Suisse branch at Zurich airport so clients could fly in and out without the bother of leaving the airport. In total, 20,000 accounts were involved.

Credit Suisse was fined $2.6bn — that’s billion — equal to the total income of Credit Suisse for the previous year. Did the shareholders care? No, not at all. Fines are so common in banking and all banks are being fined: it had no effect on share price.

As fines have so little effect, the US has also looked at making banks publicly apologise. A bit of naming and shaming.

Credit Suisse had to do this and showed why this is also ineffective. Its CEO (who is still CEO, despite the massive fine) managed to apologise without actually apologising, saying his management team “regretted very deeply” that “despite industry leading compliance measures” “some” Swiss bankers had breached US law.

So no use of the word sorry, the blame pinned on a few members of staff and a plug for its world-class compliance.

A third approach is “time out” — stopping banks accessing part of the banking system. BNP Paribas is currently facing a ban from using dollar clearing, which means it will struggle to send money to other countries. It really isn’t happy about this.

The bank has roped in the French government to defend it, and appealed to other banks to transfer money on its behalf.

A time-out might be effective, but news of the dollar clearing ban caused BNP shares to fall a whopping 0.2% (though shares had dropped 13% throughout the entire legal process).

This is all in the US, but BNP’s global headquarters are in London and AXA insurance is a major shareholder.

London-based HSBC was also been fined $1.9bn (£1.2bn) on money laundering charges, a US Senate investigation finding that the bank was used by “drug kingpins and rogue nations”.

“We accept responsibility for our past mistakes,” said HSBC group chief executive Stuart Gulliver in a statement, who did at least say sorry.

The Royal Bank of Scotland, whose stupidity nearly brought the UK to its knees, avoided a multi-million pound fine from the European Commission only after it grassed up rivals on fixing the Swiss Libor rate.

There was a fine of £48.6m for JP Morgan but immunity for RBS, though as we own it as taxpayers we can’t grumble. (Credit Suisse was among the other banks fined).

(RBS was fined £325m for its role in the attempted rigging of the Tokyo and euro area equivalents of Libor, on top of £391m for the actual Libor rate-rigging scandal).

The bottom line is that fines don’t work: the banks have too much money and shareholders don’t care. Apologising doesn’t work as banks get lawyers to draft snaky phrases that sound good but express little remorse.

If politicians are serious about ending the dishonesty of banks, it seems clear that only jail for those in charge — not just those who commit the wrongdoing but those in charge — and restricted access to markets are the way forward.

Jailing the top man (or woman) might seem harsh but this already exists in other parts of the business world, not least newspapers: editors are ultimately legally responsible for what the paper prints, not the person who wrote it.

As well as restricting access to markets, perhaps we should also force banks to carry details of their fines on advertising. That way consumers can decide whether or not to invest with crooks.

It’ll be interesting to see what the main parties’ manifestos do to address this issue. Very little, we’d guess.

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