The fallout from the latest round of massive fines issued against some major Wall Street firms will continue to be felt for some time, says a new Fitch Ratings report issued on Thursday.
On Wed. May 20, six major financial services firms — Barclays PLC, Citigroup Inc., JPMorgan Chase & Co., Royal Bank of Scotland, UBS Group AG and Bank of America Corp. (BofA) — announced settlements to resolve allegations in connection with alleged market manipulation by, and lax oversight of, their trading in the global foreign exchange (FX) markets. In total, almost US$6 billion in fines were assessed against the banks, and all but BofA, which was not criminally charged in the case, received three years of probation after pleading guilty to felony counts.
From a financial point of view, all of the banks have fully reserved for these fines — and they will not depress these firms’ future earnings, the Fitch report notes. However, the report adds that the five global systemically important banks involved in the settlements will “face a further period of intense scrutiny” due to their guilty pleas and the probation period, which will be overseen by U.S. courts.
“We do not believe that admission of guilt will restrict the banks’ businesses materially as we expect them to obtain necessary waivers from the U.S. authorities,” the Fitch report says. “Restrictions on the banks’ ability to conduct business in the U.S. could have affected their ratings negatively.”
However, the guilty pleas do increase the risk of civil litigation against the banks, which can take many years to resolve and be costly, the Fitch report says.
“We expect banks that have been involved in a higher number of settlements and resolution agreements with authorities to be more at risk from severe penalties should further wrongdoings be uncovered,” the report says. “There could also be some depletion of revenue as customers move away from banks that have been subject to [Department of Justice] scrutiny.”
In addition to the fines and probation, the U.S. Federal Reserve Board also issued cease and desist orders requiring the banks to improve their policies and procedures in the wholesale FX markets — and the Fed is calling for improvements in senior management oversight and controls across all six firms, the Fitch report notes.
In the wake of the banks’ efforts to strengthen their systems and corporate governance to control conduct risk better, “any new instances of material misconduct would likely give rise to questions on the effectiveness of corporate governance and risk controls, which are important rating drivers,” the Fitch report says.
“The banks are resolving legacy conduct and litigation issues and uncertainty relating to the size of outstanding monetary fines related to these issues is decreasing,” the report adds. “Nevertheless, we believe that the banks’ exposure to misconduct and litigation risk will persist for a considerable period of time and at least for the three-year probation period for the five banks. This weighty administrative compliance burden to the business and management is now a ‘new normal’ for the world’s largest banks.”
These latest fines don’t represent the end of the investigations into FX trading, the Fitch report says, noting that that HSBC Holdings PLC and Deutsche Bank AG are also being investigated for alleged FX misconduct “and the resolution of these investigations could result in material penalties by the authorities.”