After a series of financial scandals, including pre-crisis misconduct, the discovery of financial benchmark manipulation, and collusion in foreign exchange markets, litigation risk for the world’s big investment banks is finally declining, according to Moody’s Investors Service.
Global investment banks have “significantly reduced their exposure to the risk of legacy litigation” over the last couple of years, the rating agency says in a report published on Friday.
Stronger, stable earnings have increased the banks ability to absorb any negative shocks, the report adds.
Litigation costs for the global investment banks rated by Moody’s have been declining over the past two years, it reports. In 2016, their total litigation provisions were US$19 billion, down from US$33 billion in 2015. Since the onset of the financial crisis in 2008, banks’ total litigation provisions have been about $273 billion, the Moody’s report says.
“Provisions related to residential mortgage-backed securities (RMBS) accounted for around half of the total, followed by mis-selling and misrepresentation, representing around one third,” it notes.
Despite the recent decline in litigation risk overall, several large European banks remain exposed to a variety of legacy issues, the report says. For example, the Royal Bank of Scotland Group plc, Barclays plc, UBS AG, and HSBC Holdings plc have not yet settled their large U.S. RMBS litigations, it notes, “although they have already made related provisions or accounted for them in their capital plans.”
Resolving those cases would be positive for banks that have not yet settled, the report says, “because they would reduce uncertainty and tail risk, and would allow management to focus on executing restructuring plans”
Additionally, it notes that Deutsche Bank AG remains under investigation for “Russian ‘mirror’ trading”, and Barclays is also under investigation on disclosures related to a rights issue in 2008.
For banks that do face further litigation costs, most have bolstered their shock-absorbing capacity and increased their capital bases, mitigating the financial risk associated with legal actions, the report says.
Moody’s calculates that the average common equity tier 1 ratio (under Basel III rules) for the global investment banks was 12.5% at the end of 2016, up from 12.0% in 2015, and 10.6% in 2014.
“Increasing levels of stable shock absorbers and the [banks’] improved capital bases will help mitigate any negative impact from potential further litigation settlements and support these banks’ credit profiles,” the report says.