It is impossible to punish banking through fines. Regulators must know this. When one reads of the scale of fines in the financial services industry, it is often hard to conceive of the amounts that the firms are paying. Even more so when one considers that
these payments happen every year, and sometimes several times a year.
Bruno Bettelheim, the controversial American psychologist, once said, “Punishment may make us obey the orders we are given, but at best it will only teach an obedience to authority, not a self-control which enhances our self-respect.”
The history of banking is not littered with obedience of authority, it is littered with people selling products that are misrepresented e.g. dot com stocks, payment protection insurance; mispriced e.g. anything tagged to LIBOR, sub-prime asset-backed securities;
or do not work e.g. several derivatives at mitigating risk, credit cards ‘helping’ to pay for things.
The past scandals and the ongoing scandals are met with punishments that have no apparent effect upon the likelihood of reoffending. I will not single out a bank – none are innocent – but a Bloomberg report back in August 2013 found that the six biggest
in the US had amassed legal bills of over US$100 billion since the beginning of the financial crisis, which as “equivalent to spending US$51 million a day, is enough to erase everything the banks earned for 2012.”
Read that back. Throwing away US$51 million a day would only wipe out the profit they made in just ONE of the last six years. They would still be ahead for the other five years. As industries go, that would beat many others. Miners have had it hard since China
started to pull back from imports. Airlines are not doing well. How would they also cover US$51 million a day on legal costs? Well the answer is they do, in a way.
Costs are always pushed to the investor or the customer. As the customer cannot avoid the firms involved in the big scandals they are the easy target. Investors can always push for the dismissal of a board member.
The big banks in the UK and Europe as well as the US have been stacking up the fines, and with more LIBOR settlements to hit the books across the west, and the possibility of paying fines for FX rigging for some big banks on the cards, legal fees are set to
go up further.
So why do regulators and governments fine banks, if it does not change behaviour? I would have to speculate that a) fines are seen as a good way for authorities to raise funds; b) they do not penalise future business from which a country’s economy might
benefit; and c) authorities are not that imaginative when it comes to punishment.