Crisis Related Bank Fines

Last week, the Federal Housing Finance Agency announced that it had reached a settlement with Bank of America over mortgages the bank sold to Fannie Mae and Freddie Mac.  This follows on the heels of a settlement reached with Credit Suisse the week prior, and Morgan Stanley the month prior, leading many market observers to wonder when the cycle of fines related to the Credit Crisis will end.  Six years after the onset of the crisis, it's a fair time to look back at how much banks have paid in fines related to their activity in the pre-crisis and crisis time periods.

There is no readily available source of information on fines and penalties, and the banks themselves do not provide detailed breakdowns of these expenses in financial reports and other announcements, so we will limit our search to fines involving either mortgage-related activity, or LIBOR-related activity.  As these two areas are the primary focus of most regulatory activity anyway, they should give us an idea of the level of penalties.

Back of the envelope analysis suggests that since 2008, banks have paid out at least $103 billion in fines related to mortgage activity within the United States.  During that same period of time, they have paid out approximately $6.06 billion in fines related to LIBOR setting activity.

Bank of America has been the hardest hit in the mortgage area (see chart below), which should come as no surprise, since their totals include fines related to both Countrywide and Merrill Lynch, which have been heavily scrutinized coming out of the crisis. 

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Despite the headline attention that Barclays got, UBS was actually the hardest hit by LIBOR-related penalties, with settlements totaling $1.52 billion (see chart below).

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On an annual basis, the vast majority of penalties related to mortgage activity have come since 2012, while most of the LIBOR related fines came in 2013.  While the numbers themselves may seem staggeringly large, just comparing them with U.S. financial industry profits can help put the numbers in perspective.  The financial industry remains immensely profitable, beating the previous high-water mark of $375.3 billion set in 2006 in each of the last two years ($456.5 billion, with inventory valuation and capital consumption adjustments, in 2013 and $422 billion in 2012).

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While the fines do not make up a significant percentage of overall profits, the financial industry clearly views this as an ongoing concern.  Banks are facing a wave of other litigation related to these two problem areas as well as many others, and have been continuously raising their legal reserves in each financial filing.  Using JP Morgan as an example, we can see that the bank has been facing increasing litigation expenses since the crisis.  Based on data from annual filings, reserves held for future litigation-related costs have also been increased substantially in each of the last three years.  While the bills have been large, the increase in additional reserves suggests that the bank itself forecasts more cost for years to come (see chart below).

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