HSBC has claimed an unwanted crown. The $1.92-billion (U.S.) fine imposed by U.S. regulators for failing to enforce money laundering rules is the biggest ever for a bank, and two-and-a-half times bigger than the one paid by previous record-holder UBS. Yet HSBC is not alone: both Standard Chartered and ING have this year handed over a similar proportion of their earnings to settle U.S probes.
Once a relatively minor irritant, regulatory fines are becoming a major cost. HSBC's penalty amounts to about 8 per cent of the bank's expected pre-tax profit for 2012. By that measure, it's not even the biggest culprit: StanChart's cumulative $667-million fine for sanctions-busting is 9 per cent of expected pre-tax profit, while ING's $619-million payment for similar misdemeanours amounts to a 10-per-cent hit. Compare that to JPMorgan and Citigroup's 2003 Enron-related fines: 1.4 per cent and 0.5 per cent of that year's pre-tax profit, respectively.
Post-crisis bank-bashing partly explains the inflation: In recent years, U.S. authorities have whacked lenders for misselling mortgage-backed securities and structured credit products, and for rigging municipal bond auctions. But UBS's $780-million fine was for helping U.S. citizens avoid tax before the crisis. And most sanctions-busting offences, which account for the majority of big-ticket fines, were committed before 2007.
True, fines are only part of the picture. Civil lawsuits arising from Enron's collapse were far more expensive than paying off regulators: banks involved in rigging the London Inter-bank Offered Rate may find the same. The bill for compensating customers who were missold U.K. payment protection insurance exceeds already £10-billion ($15.9-billion). Meanwhile legal expenses for handling past misdemeanours – and the compliance costs of avoiding future ones – are a continuing drag.
As the crisis fades, political pressure on regulators to get tough on banks may ease. But until banks can safely be allowed to fail, the threat of indictment – an effective death sentence for a financial institution – is no longer an effective deterrent. That makes large financial penalties the only way to punish past bad behaviour and discourage it in the future. Even if giant fines like HSBC's are infrequent, the bar has been raised.