Whipping Post and Stocks

The Boston Consulting Group has released its Global Risk 2017 report, Staying the Course in Banking. Buried in the report is Boston Consulting’s calculation of the amount of penalties paid by banks since the financial crisis:  $321,000,000,000. The report states,

Strict regulatory enforcement has now been place for several years, with cumulative financial penalties of about $321 billion assessed since the 2007-2008 financial crisis through the end of 2016.

About $42 billion in fines were assessed in 2016 alone, levied on the basis of past behavior. While postcrisis regulatory fines and penalties appear to have stabilized a lower level in 2105, with US regulators remaining the most active, we expect fines and penalties by regulators in Europe and Asia to rise in coming years.

As conduct-based regulations evolve, fines and penalties, along with related legal and litigation expenses, will remain a cost of doing business.  Managing these costs will continue to e a major task for banks. They will have to create a strong non-financial framework around the first, second, and third lines of defense — business units, independent risk function, and internal audit — to avoid continued fallout from past behavior.

*     *     *

[C]onduct risk and the prevention of financial crime remain high on regulators’ agendas. (16-17, references omitted)

Readers of this blog know that I have called for aggressive enforcement of wrongdoing in the consumer financial services sector. But I have also have trouble figuring out if the penalties assessed were properly scaled to the wrongdoing. Now that ten and eleven figure settlements have become routine, we may have forgotten that they were unheard of before the financial crisis. Many of these settlements were negotiated by federal prosecutors who were constrained only by their own judgment and the possibility that a defendant would call the government’s bluff and go to trial.  Now that post-crisis litigation is winding down, it makes sense to study how to make sure that the financial penalty fits the financial crime.