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Banking fines - the ethics cost of doing business

LONDON: A new study by the London School of Economics and Political Science (LSE), estimates that 10 of the world's leading banks have incurred self-described "conduct costs" of £148.02 billion since 2008.

LSEThe research, led by LSE professor Roger McCormick, assessed bank misconduct costs between 2008-2012 resulting from, amongst other things, mis-selling payment protection insurance, manipulating LIBOR, and failing to observe anti-money laundering rules.

Top of the list is Bank of America at $54 billion followed by JP Morgan Chase and UBS at $24.65 billion respectively. The seven other banks have estimated liabilities of an additional $44.72 billion.

Commenting on the study professor McCormick said: "This league table allows the public for the first time to view an independent, objective set of figures which relate in one way or another to bank behaviour over the five years ending December 2012 (including provisions as at that time). The banks ranked here are all household names. The fundamental question is: can we expect these costs to start going down soon if these banks now have sound ethical cultures? If not, why not?"

McCormick compares the bank's contingency costs to the £150 billion GDP of Singapore and Greece; the world's 24 richest nations' annual aid budget of £80 billion; and the UK National Health Service budget of £100 billion.

"Banks are required by regulators to 'know your customer' and, in any event, they can't help knowing rather a lot about us simply by virtue of the fact that they know a lot about our finances and what we do with our money. But do we know as much as we should about them? Is it time for more 'know your bank'? Notwithstanding the ongoing scandals, they say they are trying to be more ethical than in the past and determined to 'restore public trust'. How can we test that? Is it just the latest PR message or is there some substance to it?"

The LSE study says that future levels of conduct costs in the European Union will, in part, be determined by the European Commission (EC) cartel settlement procedure. The LSE points out that currently banks can receive full immunity for revealing the existence of cartels. This allowed UBS to avoid a fine of approximately €2.5 billion. Also, under the EC's leniency programme, banks can also be granted a 10 percent discount on their fines by agreeing to a settlement.

2008-2012 (£bn)                          Total Costs      Provisions and Contingent Liabilities    Grand Total
Bank of America                             30.41               23.58                                                       54.00
JP Morgan Chase & Co                    18.52                 6.13                                                       24.65
UBS                                              23.69                 0.95                                                       24.65
Citigroup, Inc                                  8.71                 3.13                                                        11.84
Lloyds Banking Group PLC                5.87                 3.37                                                          9.24
HSBC                                             4.03                 2.22                                                          6.25
Barclays PLC                                   3.06                 2.00                                                          5.06
Royal Bank of Scotland                    1.73                  2.51                                                         4.24
Santander                                      2.70                  1.44                                                         4.14
Goldman Sachs                               1.76                 2.19                                                          3.95
Grand Total (£bn)                    100.48                 47.52                                                       148.02

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