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Despite the blatancy of FX traders within six major global banks in their open discussion via chat rooms and instant messaging during the high profile FX rate manipulation saga which resulted in over a year’s worth of international regulatory resources being poured into putting a stop to the practice, banks are still profitable.
Today, according to the Telegraph, British bank RBS, which is one of the largest banks in the world and accountable for a substantial proportion of interbank FX order flow, will take a £6 billion hit to its profit as a result of recent fines, however the most noteworthy word in that sentence is ‘profit’.
British, American and Swiss national financial regulatory authorities dedicated vast resources to investigating FX rate manipulation among six banks, an operation which span thirteen months, ended with a $4.3 billion collective fine and senior government officials including top level British barrister Lord Grabiner having been responsible for leading investigations. This was a lengthy process, and no doubt costly, however the banks settled these fines, before becoming the subject of criminal law investigations with regard to the conduct of individual employees, one of which was arrested in Billericay, Essex recently.
High profile coverage of bank misconduct, and indeed the misconduct of individual bank employees, along with nine months of low FX volatility has done little to dent the profitability of the operations of major banks, with RBS being no exception.
Analysts at JP Morgan predicted that the taxpayer-owned financial institution faces the biggest remaining bill for misconduct of the major UK banks, more than six years after its £45 billion bail-out.
In total, RBS, Barclays, HSBC and Lloyds face £15.1billion-worth of provisions for expected foreign exchange fines, PPI payouts and penalties related to US mortgages in the next two years, JP Morgan said.
JP Morgan Research Analyst Raul Sinha raised his provision forecasts by £2.8bn on Monday, after stating hat RBS and Barclays would have to put aside more than previously thought.
When including the £11.5 billion of unused provisions the banks already have on their balance sheets, this suggests £26.7billion-worth of remaining fines and redress for the banks.
The bank lost an appeal in the US Supreme Court on Monday this week along with three other banks seeking to derail lawsuits from the Federal Housing Finance Agency over the toxic loans.
The banks had argued that the FHFA had missed a deadline for filing the case. JP Morgan said RBS will have to take an extra £3.1 billion-worth of provisions over the case. Although it is unclear when any fine will come, it is expected as soon as the first quarter of this year.
In July 2014, half way through the investigation into FX rate manipulation, RBS reported its highest first-half profits since its 2008 taxpayer bailout, surprising the City and sparking a sharp rise in the bailed out bank’s share price.
The 10% rise in the shares which added £3 billion to the value of the taxpayer’s stake, took place after it was forced to issue its figures a week early because of the bigger than expected improvement in profits to £2.6 billion for the first six months of the year.
A year and a half ago, when Ross McEwan was named as CEO, the bank had reported a £1.3billion profit.
RBS is no stranger to controversy, most of which has not harmed its fortunes. During the financial crisis at the end of the last decade, incumbent CEO Fred Goodwin gained tremendous public attention by presiding over the bank at a time when his strategy of aggressive expansion primarily through acquisition, including the takeover of ABN Amro, eventually proved disastrous and led to the near-collapse of RBS in the October 2008 liquidity crisis.
The €71 billion (£55 billion) ABN Amro deal (of which RBS’s share was £10 billion) in particular stretched the bank’s capital position. £16.8 billion of RBS’s record £24.1 billion loss is attributed to writedowns relating to the takeover of ABN Amro.
Despite this, and the subsequent cost to the British taxpayer at a time of extreme recession, Mr. Goodwin retired from his position, garnering extensive media and government criticism due to the disclosure in February 2009 of the size of Mr. Goodwin’s pension.
The treasury minister Lord Myners had indicated to RBS that there should be “no reward for failure”, but Mr. Goodwin’s pension entitlement, represented by a notional fund of £8 million, was doubled, to a notional fund of £16 million or more, because under the terms of the scheme he was entitled to receive, at age 50, benefits which would otherwise have been available to him only if he had worked until age 60.
Sir Philip Hampton, RBS’s new chairman, stated that as a result Goodwin is drawing £693,000 a year which was later revised to £703,000 due to Mr. Goodwin working an extra month in the new financial year, and disclosed that under the RBS pension scheme Mr. Goodwin is entitled to draw the pension already, at age 50, because he had been asked to leave employment early, rather than having been dismissed. Although Mr. Goodwin kept his pension rights, and continued to prosper, attempts were made to have his professional status as a banker revoked, and his knighthood was annulled.
In the case of RBS, despite the litany of lawsuits, the taxpayer-funded bail out, regulatory censuring and fines which reach into the tens of billions, the firm continues to hold its position as a vast and profitable entity.