European Banks Pay for Their Sins

Bad behavior can be expensive. Since September 2008, the 18 European banks with the highest litigation expenses have set aside or paid out more than $77 billion, five times their combined profit last year, according to data compiled by Bloomberg. And the total is probably higher, because many settlements aren’t public. “Banks aggressively followed a very, very return-oriented business model before the crisis,” says Martin Hellmich, a professor of risk management and regulation at the Frankfurt School of Finance & Management. “Now they’re paying for the past with settlements and fines.”

Regulators are citing European banks for infractions including helping some clients launder money and avoid taxes; selling bonds backed by faulty mortgages; failing to disclose the risk of products designed to protect buyers from interest rate swings; and manipulating market benchmarks. Since late 2008 the 18 banks paid at least $24.9 billion to settle lawsuits and probes, set aside $31.5 billion to compensate U.K. clients who were improperly sold products including mortgage insurance, and earmarked $20.9 billion for additional penalties. The expenses have hurt banks’ profits and slowed their efforts to build capital. Future penalties may prompt them to delay boosting dividends or buying back stock, analysts at Keefe, Bruyette & Woods wrote in a November report to clients.