Major Banks Reporting High Legal Expenses

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Summary: As government agencies continue to review evidence against banks for any wrongdoing committed during the financial crisis, these banks report setting aside more and more money for legal expenses.

In light of recent settlements with government agencies that reach billions of dollars, banks have reported higher legal expenses, according to the New York Times. UBS, Barclays, Credit Suisse, Citigroup, Deutsche Bank, and Royal Bank of Scotland stated that they put aside large amounts of funds in anticipation of legal expenses. Much of these banks’ legal costs are due to currency rate manipulation. Many predict that the nature of these legal expense funds implies that both American and British regulators may be moving toward a single settlement, a rare occurrence in the banking world.

  

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Read about the multibillion dollar settlement with Bank of America here.

Usually, government agencies will team up to censure or fine single institutions, or a subset of larger groups. For example, there are staggered agreements on many mortgage-backed securities, as well as manipulation of the London interbank offered rate (also known as Libor). Now, regulators are able to pull all parties involved into one proceeding.

Read more about Barclays here.

Many banks now have a better understanding of the penalties they may be facing than they did many months ago. Citi is confident that an additional $600 million, plus the $950 million it has already dedicated to legal expenses, will be sufficient for future claims. Barclays has set aside $800 million, and Royal Bank of Scotland has put $640 million in legal reserves. Both of these banks have emphasized that these funds are for the foreign exchange rate investigations.

However, the bank’s similar legal fund amounts are not necessarily significant. In the past, some banks were more insistent about maintaining legal expense funds. Plus, if penalties will be handed out based on market share, one would think there would be more differentiation between the amounts. Close to 80 percent of the $1.9 billion in legal expenses incurred by UBS from June to September may be for the foreign exchange inquiry. However, this bank ranks fourth in the most recent Euromoney benchmark annual currency survey of market share.

Read more about Citigroup here.

However, a single settlement with all involved government agencies may be an excellent plan. These banks may finally be able to move on from the settlement and would not have to worry about having their legal expenses dragged out. Such a settlement would also bring relief to these banks’ shareholders. Finally, a major settlement would signal that regulators may be able to cooperate in the event of a crisis.

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