Banks hit hard with fines and new rules by zealous financial watchdogs
Banks are being punished for misdeeds with large fines and new rules, but financial watchdogs around the world may have gone too far
Another month and another volley of record bank fines handed down by regulators like they were writing traffic tickets.
Last week, United States, Swiss and British regulators dished out US$4.3 billion in penalties over allegations of rate fixing in the US$5.3 trillion-a-day foreign exchange market. Britain's Financial Conduct Authority imposed the biggest fines in its history on five banks: UBS, Royal Bank of Scotland, JP Morgan Chase, Citi and HSBC Holdings.
US authorities have now handed out US$56.6 billion in bank penalties this year, well above last year's chart-topping total of US$52 billion.
Regulators are clearly sending the message that they will not tolerate the London interbank offered rate and foreign exchange rate fixing schemes and, if they reoccur, will be accompanied by even larger penalties. Fines and penalties have become their own type of risk category for financial institutions.
The fines appear to be less motivated by a sense of justice than an attempt to appease resentment against banks. Unless there is proof the institutions' culture or organisation contributed to the alleged conspiracy, the individuals involved should become the prime targets.
At a time when governments are trying to encourage more business lending to avoid a global recession, a reduction in capital, discouraging bankers' confidence to conduct business and the inevitable increase in the burden of compliance and regulation will only hurt the economy. Will forex and any other traders need to seek clearance and approval from compliance officers before each trade?
Cries for "perp walks", criminal charges and arrests by the media and politicians sound valiant, but also show a failure to understand the difference between misconduct and crime. In this case, if criminal acts were committed by anyone, government prosecutors would have already laid charges.
However, after the disastrous consequences of Enron and Arthur Andersen, governments are reluctant to criminally charge companies and their boards. Companies collapse and innocent employees lose jobs under the weight of criminal charges, as banks and clients cannot do business with an organisation that has been charged.
World markets cannot bear another major bank failure today. So this is why quickly imposed stiff fines have become the easy remedy and alternative for institutions that are "too big to jail".
What part of trading that should be considered misconduct, too profitable to be morally acceptable or criminal is divided by a thin line that banks and regulators need to transparently define. Otherwise, they will suffocate or distort financial institutions' most important activity - risk-taking. Fines should only be directed to banks in the case of organisational culpability. In the forex-rigging case, individuals - not organisations - should be disciplined for misconduct.
In reaction to the regulatory crusade, banks have embarked on a recruiting spree for compliance officers in a desperate attempt to meet the rules. One bank has globally hired 4,000 officers over the past two years. But how is the new army of workers being supervised?
Even hiring and training 4,000 workers for a toy factory on the mainland requires stringent quality control management. One recruiter said the rapid growth of compliance officers has resulted in glorified administrators who possess questionable skills and understanding about their responsibilities.
Over-regulation of the financial system will create an industry where collectivism is valued and individualism criminalised. Banks work best when both are working in balance. Ultimately, clients are going to take the risks they want to take and if banks aren't allowed to handle their business, then another kind of financial institution, yet to be created and regulated, will serve them.
Traders, by nature, instinctively game any system or market. A process where there must be losers in order to create winners underpins the development of financial strategies and products. The best traders trade at the limit of legality.