The wave of fines and lawsuits that has swept through the financial industry since the 2007-08 crisis has cost big banks $260bn, new research from Morgan Stanley shows.
The analysis, which covers the five largest banks in the US and the 20 biggest in Europe, predicts the group will incur another $60bn of litigation costs in the next two years.
Mr van Steenis said the fines, which cover everything from foreign exchange rate rigging to US mortgage-backed securities and mis-selling of payment protection insurance in the UK, are having a profound impact on the banks.
“Litigation not only takes a bite out of your equity but has a much longer lasting impact on the amount of capital you need to hold,” he said.
The figures include fines and penalties banks have already paid, plus any provisions taken by June 30 for issues the groups see coming down the tracks, such as US mortgage fines that European banks expect to pay.
The report also charts what banks have done to reduce the risk of future litigation, but concludes that “lack of disclosure means it has been difficult for us to say definitively which firms have developed the best practices overall”.
Bank of America is spending $15bn a year on compliance, Morgan Stanley said, while JPMorgan is spending $8bn or $9bn. Mr van Steenis and his colleagues said they “struggled to obtain consistent data” on extra compliance costs in Europe.
The impact goes beyond the financial. “A lot of management time and IT budget has been focused on rectifying malfeasance rather than being able to position the bank for the future,” said Mr van Steenis.
“Banks’ ability to respond to new technology and new challenges generally has understandably been slowed down.
“In Europe, there’s still a nervousness on some mortgage settlements because no European bank has yet settled with the DoJ [Department of Justice] on mortgage,” he added.
In depthForex trading probes
Actions taken by banks to prevent future litigation issues included everything from changing remuneration policies to a greater focus on “non-financial metrics”, adding compliance staff, to elevating chief risk officers to boards and using “robo surveillance” in trading rooms.