The possible fallout of a bank admitting to criminal conduct may be curbed by the fact that five of them confessed at the same time, says Moody’s Investor Services.
In a new report, the rating agency notes that the settlements between five global investment banks and U.S. and U.K. authorities, which were announced last week, “highlight the banks’ ongoing management challenges in controlling the regulatory, litigation and reputational risks inherent to their capital market activities.”
While the direct financial costs of the settlements are “manageable”, Moody’s says that the settlements, including guilty pleas to criminal charges at five banks, is credit negative for the banks as it highlights the “ongoing risk-control lapses at the banks that present material reputational and franchise risk.”
Moody’s says that the findings of misconduct, and the banks’ guilty pleas to criminal charges, “undermine trust and increase the risk of customer attrition, as well as opening additional avenues for litigation.”
Additionally, the banks that pled guilty to criminal charges have to obtain regulatory waivers to continue in certain activities. The U.S. Securities and Exchange Commission (SEC) has already granted waivers to all five banks, whereas the U.S. Department of Labor will not act until the banks enter their guilty pleas.
“Heightened congressional interest has led U.S. regulators to increase their scrutiny of such waiver requests,” Moody’s says, adding that if the banks can’t secure waivers, they could lose client business and revenues.
Moody’s also notes that by settling these cases the banks have eliminated the tail risk associated with their misconduct in the global foreign exchange (FX) markets. And, it suggests that, “because a number of large banks all agreed to criminal charges at the same time, the stigma of criminal charges may be diminished, containing the damage to their franchises.”
Banks that have not yet settled these investigations may face greater financial risk, Moody’s says. It notes that the penalties levied against the banks that have settled are more or less proportional to their market share in the global FX business; yet, the market’s biggest player Deutsche Bank AG wasn’t part of the settlements.
Moody’s says that Deutsche Bank “may have the largest exposure to FX litigation risk, given its leading 18.7% market share.”
The other major player that also remains under investigation, HSBC Bank plc, has already settled with a number of agencies, Moody’s says, and it “has a much smaller exposure to FX-related activities.”