Guilty pleas to criminal charges by BNP Paribas and some other financial firms should put to rest fears that banks are “too big to jail.” Even so, that isn’t necessarily great news for the financial system or investors.
The reason some banks were perceived to be outside the reach of the law’s long arm was that a criminal charge would prove so devastating it could upend a firm and disrupt the functioning of the financial system. BNP Paribas shows why that is no longer the case, but also why that isn’t such a threat to the biggest banks.
True, BNP has had to pay about $9 billion to resolve charges related to violations of U.S. sanctions on doing business with countries such as Iran and Sudan. It also will have to reorganize some of the ways it does business in the U.S. And the bank has suffered a clear hit to its reputation.
Yet prosecutors and regulators worked to cushion the blow a guilty plea would have. Indeed, even a ban on BNP’s dollar-clearing operations was tailored so that it affected only a small part of its business. As well, the bank will have six months to prepare affected clients before the penalty kicks in.
What’s more, while authorities pushed for the bank to remove some staff, no individuals were criminally charged. That echoes other big settlements with U.S. and foreign banks. It also is telling that so far the banks charged are foreign institutions, not U.S. ones, which escaped a comeuppance for behavior that fueled the financial crisis.
The desire to not rock the financial boat, and possibly send markets into debilitating paroxysms, is understandable, especially for regulators. It is easy too to forgive prosecutors, as well, for keeping financial stability in mind.Still, their hesitancy to actually charge individual bankers, force banks to shutter or dispose of units at the heart of wrongdoing or make the buck stop at a CEO’s desk sends the wrong message.
Instead, actions to date let banks, and bankers in particular, think that criminal charges are now like huge financial penalties: a painful and embarrassing, but ultimately manageable, cost of doing business.
In other words, the deterrent effect of such charges is questionable. That already is the case with the seemingly enormous fines being assessed in cases. As big as the numbers involved sound, the banks that are paying out multibillion-dollar penalties are themselves gargantuan. While J.P. Morgan Chase, for example, was forced to cough up $13 billion last fall to resolve issues related to mortgage-backed bonds, it has assets of about $2.4 trillion.
Investors might take short-term relief from this. Indeed, in the wake of settlements, the affected bank’s shares typically rise as there is certainty about the costs involved. The reason: As long as a bank isn’t hit so hard that it is forced to raise new capital and dilute existing shareholders, investors tend to move on pretty quickly from such affairs. In that vein, Credit Suisse shares rose about 1% in the immediate aftermath of that bank pleading guilty in mid-May to a criminal charge of tax evasion.
But investors shouldn’t spend too much time cheering. Without true accountability, a new generation of bankers will be emboldened to take on risks, or engage in behavior, that puts the long-term viability of their firms at risk.The penalty for that will ultimately be borne by shareholders.