Popular wisdom declares “nothing ventured, nothing gained.” The government is doing its best to rewrite the saying as “nothing ventured, nothing fined.”
The push for harsh regulatory enforcement has reached the point where bankers at HSBC (and, we can safely assume, elsewhere) are unwilling to take even normal business risks, according to HSBC Chairman Douglas Flint, whose observation was reported in The Wall Street Journal. Flint blamed this regulator-imposed timidity, in part, for HSBC’s fall in net profits for the first half of 2014.
“We’re in a business that takes risk and manages risk and we have to avoid getting to a state where people believe there is a zero risk tolerance,” Flint said.
This outcome is a problem, but it is not a surprise. I have written many times about the negative consequences when traditional banking is unavailable due to low interest rates and overly aggressive regulation. When bankers are afraid to take even otherwise reasonable levels of risk due to the exposure to outsize penalties, homeowners are shut out of mortgages and businesses are shut out of credit.
Nor are the bankers’ fears unfounded. The London School of Economics’ Conduct Costs project found that the costs from fines and lawsuits at 10 of the world’s largest banks reached nearly $265 billion between 2009 and 2013. Some $43 billion of that was last year alone, as international regulators have followed the United States’ lead. The total does not include the $16 to $17 billion deal offered early this month in the ongoing negotiations between Bank of America and the Justice Department, which would outstrip the $13 billion deal Justice struck with JPMorgan Chase last year.
The regulatory crackdown has gone well beyond punishing clear misconduct, such as the Libor scandal. It has gone beyond deterring tax evasion, a crime in our country but not elsewhere. The crackdown is not even only about punishing allegedly negligent behavior, such as making mortgage loans to willing borrowers who ultimately couldn’t repay them.
Banks have been assailed for executing transactions that regulators, during the financial crisis, urged them to accomplish. The prime example is Bank of America, now facing huge penalties but at the time, actively encouraged - some claimed pressured - by regulators to close the Merrill Lynch acquisition. Merrill Lynch, along with similarly acquired Countrywide Financial Corp., has effectively saddled Bank of America with continuing legal exposure and pressure from the very regulators who blessed the deals in the first place.
Some banks have even faced regulatory penalties for their employees’ honest mistakes. The prime example of this is JPMorgan, whose shareholders faced not only the losses caused by the London Whale debacle to the tune of $6 billion, but an additional $920 million in fines at the Securities and Exchange Commission’s insistence. Far from protecting investors and shareholders, regulators have pushed far into territory that should have been a matter purely between a bank’s shareholders and its management.
This is not to mention regulators’ failed attempts, such as the witch hunt at Lehman Brothers and the futile effort to find a simple villain to blame for the 2008 financial crisis. The more settlements and fines regulators can collect, the better they can make themselves look, regardless of the merits of the penalties. But this behavior, over time, is training financial institutions to become so conservative that they can no longer effectively fill their role in a recovering economy.
The bank-hoovering-industrial-complex that has grown up in the law enforcement and regulatory community will be quick to tally the fines and claim credit for the scalps collected. The perpetrators will never count the cost, however. That job is left to bankers and economists and, in another way, to the millions of individual and small business customers who just won’t be able to do the things they want to do, and that the economy needs them to do. They are simply out of luck. Today, although the banking business is based on taking calculated risks, the only rational calculation a banker can make is to avoid risk at any cost.