At the end of October, many big banks edited their earnings reports to reflect increased legal costs, indicating that the banks were close to reaching a settlement with regulators over foreign currency market manipulation.
The banks’ predictions of increased legal costs were confirmed earlier this week, as British, Swiss, and American regulators announced the results of their currency manipulation investigation. UBS, JPMorgan Chase, Citigroup, HSBC, and Royal Bank of Scotland were fined a total of $4.25 billion for conspiring to manipulate foreign currency markets. Barclays did not join the settlement over concerns that the agreement would not absolve them of future liability.
Most of the fines were less than the amounts that the banks had set aside for litigation at the end of last month. Citigroup set aside $1.5 billion for litigation in the third and fourth quarter, and was fined a total of $1.02 billion for their involvement in the foreign currency manipulation scheme. JPMorgan Chase added $2.4 billion to its estimated legal costs at the beginning of November, and was fined $1.01 billion by regulators. Royal Bank of Scotland set aside $640 million, and was fined $618 million. In general, banks’ legal expenses have been rising over the past few years. Since 2010, JPMorgan Chase has spent over $22.9 billion in legal costs, $13 billion of which went to last year’s mortgage securities settlement.
The banks may need to set aside even more money for legal costs in the coming months, as a criminal investigation is already underway. JPMorgan Chase lawyers recently met with Justice Department prosecutors to discuss the criminal case, while Citigroup and Barclays are expected to meet with prosecutors in late November. Prosecutors are looking into possible criminal misconduct on the part the banks and individual employees.
Many traders have already lost their jobs as a result of their involvement in the currency manipulation conspiracy, and could also face individual criminal charges. Potential criminal punishments are unlikely to be determined until next year. In the meantime, the banks say that they are working internally to correct trader conduct and prevent future investigations.
Big Banks’ Legal Costs Continue in the Face of Currency Manipulation Fines (PDF)